Risk, Return and Impact

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From the course by University of Cape Town

Innovative Finance: Hacking finance to change the world

18 ratings

University of Cape Town

Innovative Finance: Hacking finance to change the world

18 ratings

To address global poverty - do we really not have enough resources or do we not have the right tools to allocate our resources? The tools of finance, when applied correctly, can be an enabler of social and environmental outcomes. This course is designed to give you the ability to build innovative financing strategies that work towards outcomes such as financial inclusion, access to energy and access to education. The innovative finance process has five key components. It starts with identifying the outcomes you are looking to achieve and next moves on to due diligencing your issue area using techniques like design thinking to make sure you are designing with the end user. Next you must map all of the resources available for your outcome and then discover opportunities to augment these through business model innovation, multi-stakeholder partnerships and innovative financial structures. Finally, the last step is to put all of these pieces together to design an innovating financing strategy. Each week dives into a component of the process using examples and real case studies from social entrepreneurs, non-profits, development funders, impact investors, governments, foundations and more. Over five weeks you’ll learn about new types of revenue creation, financing approaches, business models and partnerships. By the end of the course, you’ll have the ability to hack finance for social change. Watch the course trailer https://www.youtube.com/watch?v=tSMUoCJgqkw

From the lesson

Discovering Opportunities

So now that you’ve had engaged with resources, let’s consider the opportunities and risks that you may face when dealing with your issue area. First, you’ll learn how to look for specific types of opportunities outside of your issue area. We’ll draw on the best practices of other sectors or geographies to create new approaches to achieving your outcomes. We’ll then dive into the darker side - the risks that you’ll need to understand and address with your innovative financing strategy. For your assignment, you’ll need to identify the risks and opportunities associated with your issue area.

Risk, Return and Impact4:57

Real vs Perceived Risk3:55

Impact Risk3:38

Early Stage Risk and Scalability5:00

Manager Risk2:37

Liquidity and Exit Risk4:00

Social Impact Insurance2:03

Meet the Instructors

Aunnie Patton Power
Innovative Finance Lead
Bertha Centre for Social Innovation and Entrepreneurship
Tsakane Ngoepe
Investment Analyst
AHL Venture Partners

[MUSIC]

One of the important elements in innovative financing is understanding how

to adjust a risk/return/impact profile.

Let's start with what a risk/return/impact profile is.

A traditional financial risk/return axis looks like this.

The risk is that the investment might fail and

the financial return is what is required to offset that risk.

The higher the risk, the higher the required return to offset that risk.

For instance,

an investment in a US government bond is a very low risk investment.

So its return is quite low.

A private equity investment on the other hand, is much riskier.

So investors require a higher return to compensate them for taking that risk.

One of the reasons that impact finance is so interesting is that we add

an additional element to the risk/return axis, impact.

This impact dimension is measured using some of the metrics that we

discussed in impact measurement, such as percentage improvement in income for small

holder farmers or the number of additional women graduating from high school.

Unfortunately, the impact axis is not yet standard.

Although there are industry efforts like the Impact Management Project,

that are trying to get some sort of standardization.

For now, funders have to determine levels of impact using their own priorities,

estimations, and projections.

Which in reality is what we have to do with the risk/return axis.

We just have more information and standardization on those lines.

In order to use an axis that has three lines, we need to connect the lines and

look for a way to create the greatest area, based off of our tolerances and

preferences.

Here is an example of an early stage impact investor that has a high risk

tolerance and is impact focused.

They would probably be looking for significant financial returns to

compensate them for the risk they are willing to take, and

will require the project to demonstrate significant impact.

Here is what a development funder whose mandate is to build a market could

look like.

They would be looking at high impact and high risk.

But might be willing to take lower return in exchange for

crowding in more capital into the market.

This would be measured in their impact category.

Here's a pension fund that is just getting into impact.

They have a low risk appetite and are interested in moderate returns and

moderate impact.

Now, these axes aren't perfect.

There are ways to split the matrices and actually make them more complex.

There are resources this week to read if you want to dive a bit deeper.

The important thing to know is that different funders

come to the table with different profiles.

As the person that is responsible for creating your project, it's important to

understand your project's risks, return and impact potential.

So you can match your project with the right funder or set of funders.

The advantage to taking an innovative financing approaching

is that you can use this knowledge to create financial structures

that help to address some of the risks in your project, and

create different risk/return scenarios for different funders.

For instance, you might have discovered a source of revenue that is quite stable,

like rental of a building, that we talked about previously.

If you have funders that are looking for a low risk investment into your work,

you could have them fund the debt to buy a building and

pay them back by renting it out to partner organizations, and

potentially yourself, hopefully at a discounted rate.

You might have another funder that has a much higher risk/return impact preference.

They might be a good funder for incubating start-ups inside this building.

Instead of funding debt, they would take equity in the start-ups.

So if they scale, they will get the upsides in return in impact.

And if they fail, they'll lose their capital.

Now, I'd like to draw attention to the fact that the type of impact is extremely

important.

If you are approaching a pension fund for South African retirees,

they're likely going to be interested in things like affordable housing and

access to healthcare in South Africa, the area where their beneficiaries live.

If you bring them a deal that is impacting low-income communities in China and

has a similar risk/return profile to an investment in South Africa,

they're likely to pick the South African investment.

If an impact investor is focused on financial inclusion and you approach them

with an opportunity in conservation, you likely won't get in the door.

The resource mapping that you did last week is essential to understand

who is interested in your outcome area and actively looking to provide resources.

You can always pull in new types of capital by making the investment

attractive enough.

But innovative financing is not a magic trick.

It doesn't make money appear.

[MUSIC]

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