So, what's the difference between crowd funding and impact investing?
At a family lunch recently, I was asked this very question. I fumbled a response and thought it warranted a better explanation. So, here goes...
Crowd funding is defined as "a collective resource-pooling practice used to finance individuals, companies, organizations, funds, projects, products or groups" (Toniic, 2013). Crowd funding is predominantly facilitated by online marketplaces, which aggregate the small amounts of capital within limited timeframes. There are four primary models for crowd funding: equity, debt, reward and donation-based. For this purpose, I will only look at crowd funding for equity and debt in social enterprises.
Impact investing has been defined as "investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return"GIIN (2016).
From this, it is clear that the two concepts are not mutually exclusive, but actually closely related. Put simply, crowd funding can be used as a way of raising funds (debt or equity) for social enterprises.
However, the confusion arises as increasingly the term 'impact investments' is being used to describe investments by either dedicated impact investment funds (such as the Impact Investment Fund) or specialist private equity groups that invest in social enterprises (such as Leapfrog Investments).
So, the question might be better put:
What's the difference between raising equity for social enterprises through crowd funding versus professional investors?
The simple answer is: lots.
First, there are significant financial differences. For a start, crowd funding uses an online platform for which there are different fee models (which can include the platform obtaining equity in the social enterprise). Cross-border equity crowd funding is also be governed by a set of complex international regulations, which often result in significant compliance costs.
There are also significant differences in raising capital from a small number of professional investors as opposed to a large number of small 'armchair' investors. One such difference is the extent to which the investor is able to be actively involved in the business.
In many cases, professional investors will provide access to skills and expertise to assist the social enterprise to grow and achieve its mission. For example, Leapfrog Investments has introduced a Value Creation Group which provides "deep specialist and management experience to enable our companies to achieve their ambitious visions." In addition, specialist impact investors will have specific experience in measuring impact - unlike crowd funding platforms.
However, at Pangaea Impact Investments, we believe that crowd funding can be used successfully in concert with investments by professional impact investors depending on the specific needs of the social enterprise. As noted by Toniic (2013):
Commenting on the pros and cons of different types of funding, Aparicio believes that “the expertise and network of impact angel investors is highly complementary to the enthusiasm and virtually unlimited resources of the crowd”... The crowd, for example, may be called upon to complete rounds of investment led by impact investors - a practice that is already commonplace among certain European equity crowdfunding platforms... The championing of deals by professional investors gives retail investors greater confidence in the opportunity. Such phenomena offer insight into desirable developments for this variety of crowdfunding.