A “unicorn” has come to describe businesses – often start-ups in the technology world – with exponential growth, massive success, and enormous pay outs to investors. But just like the mythical creature, these types of businesses are few and far between and are more likely to crash and burn than find success. Nonetheless, they remain attractive to investors who are betting on a very low probability of amazing success.
In the impact investing world, the unicorns have a very real cousin that often flies under the radar – the ‘zebra’. Impact zebras are businesses whose purpose is to solve a social or environmental problem in their communities, generating impact alongside financial returns. They often face greater barriers given the challenging markets they operate in and need access to the right type of capital in order to succeed. But what makes them different, and often less attractive to venture capitalists, is that the risks and potential upsides of investing in them are less understood and often require a different type of capital.
Unlike Silicon Valley technology start-ups, impact zebras operate in underdeveloped markets, in more nascent industries, with products that aim to reach and better serve populations that are difficult to access or are marginalised. They require upfront investment into assets such as equipment and working capital to scale their business and might take longer to validate their business model or find an exit pathway for investors. However, with the right type of capital, these businesses can generate revenue and get to profitability quicker than unicorns and grow steadily, providing healthy returns while making a big difference along the way.
Many organisations branded as zebras have an ethos that goes against the typical start-up zero sum mentality, with an eye only to ‘hockey stick’ growth and an IPO. Instead, zebras focus on a financially sustainable business model that creates impact and generates financial returns in parallel.
So, why do so many of these zebra businesses struggle to get funding?
Not only do they work within more challenging markets, but they’re also perceived to be riskier business models due to the nature of hard to reach customers they may serve. Beyond the risk factors of the markets they work in, zebra businesses are also often unfamiliar to investors. They don’t know or understand how the business will grow, what challenges they may face, and how to best support them.
The combination of these factors adds up to significant funding gaps for zebra businesses and stifles growth simply because they can’t access that critical early-stage capital.
The solution? We need more first movers. But we also need more innovative investment structures that provide patient capital, structured exits and first loss protections that reduce some of the risks for investors.
Blended finance is key to creating investment funds that provide first loss protection, making zebra investments less risky, and in turn, more appealing for commercial investors. But there always needs to be a leader who makes the first move in providing catalytic capital, otherwise it’s very difficult to push forward and attract other investors. This is where Development Finance
Institutions have played an important role – providing capital to more creative investment vehicles with subordinated layers and guarantees that help to absorb potential losses and increase investment appetite for more investors.
At Palladium, we’ve seen how important it is for entrepreneurs to raise capital from investors that are aligned with what they’re doing and how their business grows. Taking money from a VC firm that’s accustomed to start-up’s exponential growth may hurt a zebra in the long run. That type of investor is often incentivised by valuation growth rather than commitment to impact or financial sustainability, and they’re looking for a quicker exit and opportunity for IPO, which often does not align with business needs. Many founders of zebra businesses aren’t looking to sell right away, they’re in it for the long haul to continue running their business and creating impact in their communities.
A critical part of what we do at Palladium Impact Capital is working with entrepreneurs to not only raise capital that’s best aligned with their work but help investors understand the return expectations and exit opportunities so that these zebras can focus on their mission through a viable and sustainable business model.
The truth of the matter is that we need to stop looking at Wall Street for solutions and models to copy. Zebra companies are different and Wall Street type solutions aren’t always applicable. It’s imperative that we look at an organisation’s ultimate goal and work on solutions tailor-made for those goals.
Zebras may be unusual, but they are far less rare than unicorns. In fact, they make up a bigger percentage of businesses, and they create more jobs and more collective revenue (small and medium enterprises make up 95% of companies and upwards of 70% of jobs in OECD countries). They’re a critical part of global economies and with the right funding, can continue to grow, catalysing not just financial returns but social and environmental impact.
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