What is the investment demand from Canadian social ventures?
A deep scan of the demand- and supply-side of impact investment capital in Canada
4 minute read
In the face of myriad issues, ranging from rising sea levels, declining affordability and widening inequalities, social innovation has emerged as a key pillar in designing solutions for complex social, environmental, cultural and economic problems. Social innovation manifests itself in many forms, from energy and infrastructure projects to policies and advocacy initiatives.
Many new approaches to tackling these entrenched problems have been developed through social ventures. In British Columbia, the number of social ventures grew by 35% between 2010-2015, with the number of for-profit ventures increasing by 42%.
Growing in parallel with social innovation is the practice of social finance. Also known as impact investing, the deployment of capital towards assets that generate both a social or environmental impact, as well as a financial return, has increased substantially. The Global Impact Investing Network (GIIN) survey of impact investors indicates a near five-fold growth in assets under management earmarked for impact investing between 2014-2018.
These two trends – the growing adoption of social innovation in change-making, as well as the merging of investments with social impact – have coalesced into a surge of investments into social ventures. Private equity and debt investments into social ventures consistently represent 20-40% of impact investments - making them the most popular asset class.
Our research focuses on three questions:
Demand-side: What is the market for social impact investments in social ventures?
Supply-side: What is the appetite for social venture impact investing from investors?
What can be done to better support social ventures in Canada?
To create a database of social ventures in Canada, we found 410 social innovation intermediaries in Canada. These include incubators, accelerators, investment organization, and investment funds. We were able to prioritize 44 intermediaries that have a social innovation mandate and through their portfolios, we sourced 62,575 unique ventures. Using our Inclusive Impact framework to categorize social ventures, we found 698 for-profit social ventures.
Out of the 698 identified social ventures, at least 285 (41%) of the ventures received funding of some form. The 285 ventures raised an aggregate of 400 investment rounds, representing C$1.59 billion in financing between 2007-2018. The majority of the rounds were concentrated in the seed and angel stages (67%), while growth stage (Series A and B) and late stage (Series C) funding comprised 30% and 2% of the total number of rounds, respectively. These figures, compared to the market for traditional venture capital financing, show a slight bias towards early-stage investments.
The investment activity is mapped out throughout five main financing stages. The data identify two key friction points on both sides of the seed stage: (1) Firstly, we identified pre-seed investments as a pain-point for finding capital for social ventures. While ventures are aware of the numerous grants and related programs available to them, there remains a lack of flexible pre-seed capital that allows them to invest in their business as needed. Rather, most pre-seed investment programs have stringent policies to guide the funding recipient’s expenditures. For example, some grants prohibited them from hiring new staff, but must spend the funding on technology development. (2) Secondly, post-seed capital for ventures entering growth stages is lacking. Although the reason the data show a drop-off in financing at the Series A stage may be simply due to a high mortality rate for start-ups, our interviews with ventures at this stage also reveal a lack of patient capital to guide ventures through this “valley of death”.
Investment demand from Canadian social ventures
$159M
Minimum estimated annual investment into pre-seed, seed, and Series A rounds
$1.5B
Minimum estimated total investment into social ventures from 2007-2017
$48M
Minimum estimated annual investment into pre-seed and seed rounds
Our report continues to analyze the supply-side for impact investments in social ventures, as well as recommendations for targeting gaps in the market. The report and executive summary can be accessed at the top of this page.