Here’s how impact investors are responding to COVID-19

As the world braces for a deep and lengthy economic downturn, of a scale we may have not seen since the 1930s Great Depression, impact investors are working out how best to respond and play a role in recovery.

Like traditional companies, many social purpose businesses are struggling for cash, seeing their revenues drop through the floor, and having to make very tough decisions about cutting costs and laying off staff.

We’re seeing business leaders being forced to make decisions, trade off things like the health of their staff and impact on society with what’s right for their business.

But before this crisis, recent years have seen an increasing number of these companies set up to both make a profit and to have a positive social or environmental impact. An impact investment community has grown around them: in Canada, social finance assets under management grew 81% in two years up to year-end 2017.

Now in the COVID-19 crisis, all companies are having to make decisions about their role in society, said Alexandra Baillie, President of Good & Well based in Toronto, which invests in early stage social purpose businesses. “We’re seeing business leaders being forced to make decisions, trade off things like the health of their staff and impact on society with what’s right for their business,” she said. “I feel like this whole response is social finance.”

As Future of Good covered in a recent article, calls for government action from impact investors and others have forced Ottawa to step up in support. Yet, even with the help of measures like wage subsidies and federal loans, many social purpose businesses are still fighting for their survival. 

We asked what impact investors are doing in response. What are they doing to help social purpose businesses survive, and how are they working with them to support Canadians who’ve been worst hit by the crisis? 
 

Staying afloat

Jeffrey Cyr is Co-Founder and Managing Partner of Raven Indigenous Capital Partners, which invests in Indigenous social purpose businesses. Although he is open to new investments, Cyr expects these to take a backseat amongst all of the uncertainty. “Do we need to keep some of our powder dry, our capital, so we can provision on helping our existing investees?” 

Lina Bowden, Founder of VERGE Capital, which provides loan funds to social purpose organizations across southwestern Ontario, is also expecting investors to be conservative when it comes to supporting new businesses. She expects to lend more capital “when we have a little more clarity about what the exit is from this COVID-19 crisis,” she said.

“I don’t feel like we know yet a true assessment of the damage,” Bowden said. “I feel like we’re at risk of having a number of our companies default.” In response, VERGE Capital, along with its investing partner Libro Credit Union, has been making initial basic concessions to pre-existing loans, such as delaying principal payments for three months.

Impact investors are working to support their portfolio companies more holistically, too. “Are there non-financial supports we can provide to help them through these difficult times?” Bowden asks. “Are they making prudent, fast decisions that they need to make to be able to stay alive?”

Impact investors are essentially in crisis management mode, said Baillie. “The first thing we’ve done is look at our portfolio and try to help each of the companies in their response,” she said.

That includes helping businesses to build new strategies, prepare for different scenarios, and get hold of all necessary information about available supports and initiatives from the government and other sources. Good & Well invests in early-stage companies that often have little extra cash or resources at hand and count on business development opportunities, which have been put on hold by the crisis, to meet their growth targets, she said.

Cyr has been conducting “COVID-19 impact assessments” with his investees. Through these detailed conversations, they go through “the heart and guts of the business questions,” he said, such as ensuring the health of supply lines. 
  

Tooling up

Like other impact investors, Good & Well is looking into how they can support the broader response to COVID-19, said Baille. Though a minority, some social purpose businesses are actually seeing a surge in revenue, and need financial support from their investors to meet that demand.

“Fresh City Farms, which is an organic food delivery service, is receiving far more demand for its delivery service than it has ever experienced,” said Baillie. “So how can we support them in order to meet that demand in a responsible way that keeps their employees safe?”

A mental health platform called Inkblot, which Good & Well is also invested in, has experienced a sudden increase in customers. As the Ontario government calls for virtual mental health solutions for vulnerable populations, said Baillie, they are working with Inkblot to work out how to make that happen.

Some social purpose businesses are actually seeing a surge in revenue, and need financial support from their investors to meet that demand.

There are various other ways in which social purpose businesses are tooling up. Sustainable fashion designers, for example, are volunteering their services to create face masks and other medical protective clothing.

Indigenous businesses, which Raven Capital Partners invest in and work with, are looking for ways to support their communities, which are particularly vulnerable during the crisis. Indigenous populations tend to have greater underlying health risks, poor access to healthcare, and, in some regions, live in overcrowded housing. Many of the businesses are looking to discount their services and products, he said, to help ease financial pressures on their customers and clients. 

One of Raven’s investees, Virtual Gurus, connects businesses with remote workers, and has experienced a surge in demand as people look for alternatives to physical staff. With venture capital funding raised just before the crisis hit, the social purpose business is looking to boost hiring in Indigenous communities. 
 

Resilience

Although many social purpose companies find themselves in a precarious position, businesses that have a positive social and environmental impact could be more resilient. Research in the United Kingdom has suggested that social enterprises are more likely to survive in a time of limited economic resources than ‘traditional’ businesses. 

“Our companies care about something more than just a paycheck, and so the employees will fight harder, and stay longer, and be willing to work for less,” explained Mike Winterfield, CEO and Fund Manager of Active Impact Investments, a social purpose venture capital firm in Vancouver. “I expect that customers will be more loyal,” he said, and “that our portfolio companies will be more loyal to their employees.”

Social finance is more resilient, because it’s more patient, it is not seeking 10, 20x returns on things, which means that it is not extractive of the value of the company as much.

“I hope to prove that our portfolio is more resilient,” Winterfield said. And we’ll likely be able to find out, too: compared to the 2008 recession, there is now a huge number of social purpose businesses, which means “we’ll have the most comprehensive study of what happens under these conditions,” he said. “The goal of start-ups with this COVID recession is to find a way to stay in business. That’s the world we’re navigating right now.”

Cyr also believes social finance is more resilient, because “it’s more patient, it is not seeking 10, 20x returns on things, which means that it is not extractive of the value of the company as much,” he explained.

“I think there’s a lesson here about how to build and sustain communities,” Cyr said. “There are ways to build resilient local economies that can still act in marketplaces, that are more responsible to the human beings around them.”

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