How impact investors can prepare for the next crisis
As investors struggled to respond to the Covid crisis in early 2020, countless priority impact companies had to wait six months or more to secure funds as investors used this precious time to set up procedures to emergency, protocols and criteria during the pandemic. . Because they weren’t prepared, many impact investors who recognized the need for emergency funding stumbled in actually responding. Emergency financing requires different criteria, due diligence, even investment theses, and the implementation of these systems takes time. Here’s the impact investors need to make to react differently to future crises.
In early 2020, Rising Academies, one of Africa’s fastest growing educational companies, faced a double crisis. The company was set to expand into Ghana when an unexpected short-term delay from its main capital sponsor threatened the deal. Soon after, the Covid-19 lockdowns plunged the entire education sector into chaos. To keep their impact – and their business – on track, Rising Academies needed emergency funding – fast.
Rising Academies is far from the only one. In the first six months of the pandemic, the demand for emergency grants and loans from my organization, the Open Road Alliance, increased by more than 1,000%, but still was only a fraction of global needs. In nearly a decade of working in emergency finance, I have never seen so many organizations grapple with such a range of threats: devastated revenue streams, delayed pledged investments, and limited capacity, so even as the demand for many services was skyrocketing. An incredible number of businesses have needed the money. Fast.
As investors struggled to react in early 2020, countless priority impact companies had to wait six months or more to secure funds as investors used this precious time to put in place procedures, protocols and emergency criteria as the pandemic unfolded. A multi-million dollar relief fund that was launched in the spring of 2020 didn’t make its first âreliefâ investment until more than a year later.
Because they weren’t prepared, many impact investors who recognized the need for emergency funding stumbled in actually responding. They may have learned what we’ve learned at Open Road over the past 10 years, working with over 300 companies: that emergency funding requires different criteria, investment theses, and due diligence. In addition, setting up these systems takes time. If these emergency funding structures had already been in place, the response would have been faster, decision-making more efficient and the financial damage caused by Covid lessened. Here’s the impact investors need to make to react differently to future crises.
Identify structural constraints and areas of flexibility.
Impact investing includes a wide variety of legal structures with associated capacities and constraints. Self-sorting into one of these three categories ahead of time can save you time in a crisis by moving away from emergency strategies that ultimately don’t work.
These investors are only constrained by their own choices. They have access to multiple vehicles or legal entities, which allows them to modify their criteria, conditions or even investment products. For example, an individual impact investor making equity investments to date may choose to take out debt, grants, or collateral, with minimal restrictions.
These are institutional investors and other organizations whose operating documents may limit the type of investment, sector or other investment conditions. These investors will want to look for options within their existing structure. For example, an investment fund cannot suddenly start making loans. However, its structure may give it the flexibility to speed up due diligence times, delay pricing by offering convertible notes, or provide non-financial technical support.
Impact investors in this group cannot change their investment strategies and face significant constraints due to their legal and tax structures. This includes organizations such as pension funds with strict fiduciary responsibilities. In these cases, emergency preparedness may not involve launching a direct internal response, but rather identifying third-party actors specializing in emergency financing and who can serve as outsourcing for more flexibility. .
Develop a system to sort requests quickly, efficiently, and on an ongoing basis.
Emergencies don’t wait for deadlines, and organizations in crisis can’t wait for your board meeting in three months. This means that to be effective you need to know how to make quick decisions. This may mean creating a smaller investment committee with the power to approve emergency investments or to give similar authority to senior managers. It is essential to do this before the crisis so that you don’t waste precious time trying to get your board or investment committee together to get the necessary approvals to change or create protocols in the moment.
Focus on future cash flow and accept the ambiguity.
When it comes to dealing with a crisis of external origin (such as Covid), it is more important to analyze the projected cash flows than the previous audited financial statements; you want to focus on the survival of the business rather than dwelling on what went wrong.
At Open Road, one of the frameworks we use to quickly assess this risk is the concept of âa bridge to somewhereâ. When reviewing a business situation, ask if the emergency funding would help bridge the identified future cash flows or if it is just a matter of extending the trail to give the business time to find a solution. While you’re ready to invest in the latter, building a bridge to maybe nowhere is a much riskier proposition.
Finally, while the default investor mindset centers on externally validated documentation, in times of crisis, phone calls, shared spreadsheets, and real-time conversations can give you enough information to make a decision on a company’s cash flow situation and help prioritize who is most in need.
Choose what you are prepared to lose.
In large-scale crises, like Covid, the need usually outweighs the offer. This means that those in the privileged position of providing emergency funding must take responsibility for clearly identifying – and communicating transparently – who or what they will not spare.
Preparing these emergency funding criteria before a crisis hits is not only the best way to ensure that you will actually do what you intend to do, but it is essential to ensure that decisions you make under pressure respect your DE&I standards and values.
As impact investors, it is essential to weigh the opportunity cost of impact loss. For example, during Covid, supporting a slightly profitable health clinic was arguably more important than ensuring that an electronics recycling company didn’t put its staff on leave. Likewise, supporting a less profitable business in your portfolio can have more of an impact, as the stronger businesses in your portfolio are likely to come out on their own. Ideally, an investor can support both, but this outcome is not always realistic. Ultimately, resilience isn’t just about overcoming a crisis today, it’s about preserving the impact for the future.
In a post-Covid world, resilience is the new ROI. Those who do not adapt their practices before the next emergency will be left behind. Those who take the above steps to be ready to respond will reap the rewards.
In the case of Rising Academies, a loan from Open Road allowed them to close the deal with Omega Schools and then quickly iterate a low-resource distance learning solution that they extended to 25 countries and 12 million children through 35 partners, all within the span of 150 days. As a business, they are stronger than ever.