Co-author: Nadya Pryana
7 minutes read
Across 6 sessions, hosted from July to August 2024, fellows in the AVPN’s Impact Investing Fellowship 2024 discussed many pressing questions, surfacing rich insights into the opportunities for impact investing in Asia.
This article highlights one question which emerged as part of this fellowship: “How can impact investors successfully fund early-stage enterprises, limiting risk while achieving the impact and financial return of such investments?”
Investing in early-stage enterprises, a much-needed practice in rapidly growing Asia[1], requires equal doses of cautiousness and boldness. The risk and hands-on engagement that early-stage investments demand from their investors is not to be underestimated. Yet, it is precisely these types of investments that have the biggest potential to create a transformative impact. Here are three key roles that impact investors could play as they close the funding gap of early-stage businesses while maintaining alignment with their impact goals.
Influencing high-potential solutions
Early-stage enterprises are in the process of finding product-market fit and building systems for the businesses. This offers an exciting opportunity for investors to actively participate in shaping the development of a potential high-impact product or service. Even where there might not be a pre-existing proof-of-concept yet, the process—while challenging—can be invaluable, especially for targeting untapped markets or underserved communities. While it requires investors to be more deeply involved with the enterprise, by influencing the impact strategy and business direction in its development, impact investors can amplify the impact and financial potential of the business and their own investment as the enterprise scales. As a unique investor, impact investors have an important role in giving direction and guidance to entrepreneurs to ensure impact goals are kept front and centre whilst the business model is strengthened.
Strengthening impact measurement systems
Consequently, Impact investors can contribute to strengthening the practice of impact measurement within the business community. For businesses addressing social issues, having a rigorous impact strategy and an impact measurement and management (IMM) system is essential. Though early-stage enterprises may not have the capacity to measure complex metrics, these systems are crucial for ensuring that the business is on the right track. Impact investors can support businesses by implementing simple, pragmatic measurement approaches that track progress without overburdening resources. For investors, this approach offers insight into the enterprise’s development and allows them to adapt strategies as the product evolves. A well-established IMM strategy helps businesses build a track record of impact alongside financial returns, positioning them for scale or attracting larger investments.
Providing more than financial capital
As such, investing in early-stage enterprises goes beyond providing financial capital; it involves helping entrepreneurs professionalise their operations, particularly in governance and strategy. These businesses often lack the resources and experience to partner with established investors and large-scale companies, making tailored guidance and mentorship essential. Impact investors have the opportunity to support entrepreneurs by teaching them governance practices and helping them professionalise their startups, thus enhancing their long-term sustainability and success.
Important to note
While investors can play a crucial role in guiding early-stage businesses as above, the founders and employees of the enterprise ultimately own this process. The entrepreneurial journey is full of necessary pivots, and sometimes a product or service may shift significantly from its original mission. By acknowledging this uncertainty, impact investors can identify when the evolutions of the enterprise no longer align with their own impact goals at which point they must decide whether to continue to support the new direction of the business or exit the venture.
The challenge of maintaining alignment can be even more pronounced when investing through a fund, where each investor may have different goals. In these cases, maintaining open communication and working with founders and co-funders that you have a high degree of alignment with at the start can be key. While founders must ultimately lead their ventures, strong alignment on the mission and impact objectives can allow investors and entrepreneurs to evolve together without compromising the original mission of the business.
Further resources
As Asia’s largest network of social investors working across the continuum of capital, AVPN aims to scale the impact investing ecosystem, support the impact investing ecosystem in Asia to be informed on emerging approaches and insights, catalyse meaningful investments, and equip the network to tap into the impact investing opportunities across Asia.
To learn more about impact investing, visit these pages:
- Accelerating Impact with Catalytic Capital
- Impact investing in Asia: Overcoming barriers to scale
- How to do Impact Measurement and Management
[1] Richter, F. 2023. The Next Big Trend: Asian Impact Investing
