At Innovation Edge, our commitment to creating lasting impact in the lives of young children is the driving force behind our investment strategies. We believe in leveraging both philanthropic and commercial investment approaches to support a wide range of innovative opportunities. As an impact-first investor, we ensure that all our investments have the potential to generate meaningful impact. Here’s a closer look at the instruments we’ve used to achieve our mission so far.
1. Grants (Catalytic Capital)
Our grant investments are strategic. Grants are awarded where there is a high chance of impact, both in terms of the number of lives impacted and the depth of the impact achieved. We specifically target established NGOs with a proven track record and significant traction in Early Childhood Development (ECD). We provide catalytic capital rather than donor grants, supporting ventures to de-risk, build, test and launch new innovative solutions. The innovation component in our grants is crucial; we fund organisations that introduce innovative solutions in the ECD sector. Unlike other instruments, grants do not offer a return on investment. Instead, they focus solely on driving impact and fostering innovation.
2. Outcomes-based Lending
We use outcomes-based lending instrument where funds are provided to achieve specific impact targets. We have implemented this model for initiatives focusing on measurable impact targets that can be achieved over a short to medium term. We bring in external players who typically do not work in ECD but can extend their expertise to create meaningful impact within this sector.
The process involves setting clear, achievable impact targets. For example, funding is provided to reach a certain number of ECD practitioners. If the partner falls short of their target, they must repay the proportional amount of the funding corresponding to the impact they did not achieve. However, if they successfully meet their goals, they do not have to repay the money, effectively converting the loan into a grant. This ensures that we are only paying for the actual impact generated.
Outcomes-based lending works best for ventures with the potential for short-term impact, encouraging them to aggressively enter the market and sustain their efforts. Another crucial point we consider is ensuring that the ventures we invest in using this instrument have the capability to generate income. This ability allows them to repay any unmet targets, making this instrument suitable for commercially oriented ventures.
3. Equity
Equity investment involves providing funding to a venture in exchange for ownership shares. By owning these shares, we gain a portion of the business, becoming stakeholders in its success. This type of investment is about long-term impact, holding the business accountable for making a meaningful impact over time. By being part of their journey, we help them generate sustainable impact while supporting their growth and success.
Unlike loans, equity investments do not have a set repayment plan, and we remain invested until the business either ceases to exist or we decide to sell our shares. Our approach to equity investment is long-term, supporting ventures as they grow and develop operational capabilities.
Some of the key deciding factors for equity investments include the operational status of the venture, evidence of paying customers, and potential for growth. A business must demonstrate some level of traction and attractive market dynamics to be considered valuable. We need to be able to determine the value of the business to ensure a return on our investment.
4. Convertible Loan
A convertible loan functions as a flexible instrument that transitions between debt and equity based on predetermined targets. When we use this instrument, we provide funding depending on the partner’s achievement of specified targets within a set timeframe. If the targets are met, the loan converts into equity. This allows us to join them on their journey, supporting their efforts to make a positive impact and contribute to their growth and success, while also receiving the return on investment.
However, if the milestones are not reached within the specified period, the loan remains as debt, which the venture is obligated to repay under agreed terms. Convertible loans, offer our partners a hybrid investment option that incentivises achievement while providing initial capital without immediate equity dilution. This helps us foster a collaborative approach between us and our partners as we work together towards mutual success.
5. Hybrid Instruments
Hybrid instruments are a flexible funding instrument that allows us to tailor investment solutions based on the specific needs of a venture. When a funding request comprises distinct elements, we break down these components and match them with the appropriate types of financial instruments. For instance, commercial activities may be supported with a commercial instrument, while non-commercial activities might be funded through concessional instruments like grants. This allows us to provide customised support for different aspects of a venture, such as training, piloting, or operational costs.
A key example of hybrid instruments we’ve used in one of our ventures is grants and SAFE (Simple Agreements for Future Equity). For this venture, we provided a grant for setup costs for a pilot, such as travel and teacher training workshops. When utilising hybrid instruments, grants are typically used for activities not directly related to income generation. SAFE, on the other hand, offers the flexibility to convert to equity once the venture becomes operational and has evidence of paying customers. This flexibility is beneficial when the partner needs time to reach operational status.
Hybrid instruments are advantageous because they reduce pressure on the venture by ensuring that the instruments used are fit for their specific purposes. By combining elements like grants, equity, loans, or working capital, we can provide comprehensive support that aligns with the venture’s needs. Most of the time, one component of a hybrid instrument will be a grant, especially when there is a high chance of impact. This approach allows us to maintain a focus on impact while providing the necessary financial support to help ventures grow and succeed.
6. Bridging Finance
Bridging finance is a vital tool we offer to our current partners who are experiencing temporary cash flow gaps. It acts as a short-term financial bridge, helping them cover essential expenses such as salaries and rent until they receive expected payments from clients or complete fundraising efforts. This type of funding ensures they can keep operations running smoothly until anticipated revenues or funds come in.
The process is straightforward: we provide funds to meet urgent financial needs, with repayment typically happening once they receive expected income or reach their fundraising targets. By bridging the financial gap between expenses and revenue, this support plays a crucial role in helping our partners manage short-term financial challenges without disrupting their day-to-day activities.
7. Working Capital
This type of instrument is essential for covering daily expenses and acquiring inventory that drives revenue. Through the working capital, we help our partners to manage their immediate cash flow needs, especially when it comes to handling inventory and stock. We provide them with the funds they need to purchase goods for resale or production, ensuring they can maintain operations and grow.
After selling the goods and generating revenue, the borrowed funds are repaid. This short-term solution ensures that the venture can seize sales opportunities and manage their finances effectively without interrupting their ongoing operations. Working capital financing supports our partners’ stability and growth by facilitating timely inventory management and revenue generation.
IE is committed to making a lasting impact in the lives of young children in South Africa. Through our investments and collaboration with our partners, we can enable our country’s youngest citizens to thrive.
Learn about our investment process.
Author: Dimpho Lephaila – Communications Associate at Innovation Edge