A new guide developed by Pipe.Social with Palladium's support outlines the key factors that lead to successful investments in social enterprises in Brazil.

Through their work connecting investors and entrepreneurs, Pipe.Social founders Lívia Hollerbach and Mariana Fonseca witnessed the challenges experienced on both sides of the social impact investing relationship and were inspired to investigate the key areas of performance used by investors to evaluate impact investment opportunities. The study, co-authored by the economist Pedro Hércules, focuses on the motivations, expectations and challenges faced by investors, and businesses that are prepared for investment but have not yet managed to attract external funding.

“The goal was to develop a road map for impact-driven entrepreneurs detailing what really matters, from an investor’s point of view, when making investment decisions,” explains Aldo Labaki, Market Director for Palladium in Brazil. “The resulting report, Impact Investing Scoring, serves both potential investors and entrepreneurs.”

Transparency is crucial

One of the key findings and recommendations for improving the social enterprise sector is the urgent need to improve communication and alignment of expectations between entrepreneurs and potential investors. For both sides, the roles and responsibilities of each party need to be clearly defined.

The study found that entrepreneurs have difficulty understanding their role, certain financial language, and true expectations of investors. Conversely, investors are surprised by the demands for greater-than-expected participation in the day-to-day business, and also by the reality of the Brazilian impact market, where the majority of businesses seek support in the early stages of their journey.

Relevance matrix

Detailing 22 key performance indicators across three areas – entrepreneur / team, business (model and structure), and social impact – the study presents a weighted approach to indicator importance throughout the investment process.

Perhaps unsurprisingly, impact metrics emerged as a key consideration amongst investors; while these metrics are highly desired, the majority of investors are willing to work collaboratively with entrepreneurs to identify the best impact metrics, allowing entrepreneurs to implement metrics later in the investment process. In contrast, while finance and management-related practices were also found to weigh heavily on the minds of investors, there is less flexibility around establishing these practices during the investment process.

According to Hércules, “Entrepreneurs must become familiar with investors’ language and jargon at the outset. Understanding the numbers that need to be monitored and reported by a growing business, and the frequency to support investor comfort, is critical.” Entrepreneurs proactively addressing these topics stood out when it came to attracting investments, even when their businesses were in pre-operational stages.

Business is booming

In addition to providing critical insights for both investors and entrepreneurs, this study proves that the impact investing market is expanding in Brazil – as it is around the world – and, considering an economic outlook characterised by low interest rates, is likely to experience a significant increase in the number of new social entrepreneurs and impact investors in the coming years. With financial resources to support this projected growth available, as well as a rich pipeline of commercially viable solutions and new technologies focused on the creation of positive social and environmental impact at scale emerging, the future looks bright.

Click here to download the full report in Portuguese. Contact info@thepalladiumgroup.com to get in touch with Pipe.Social or Palladium’s team in Brazil.