Editor’s note: This blog is part of ImpactAlpha’s series, “Seeding Impact,” authored by participants in the Catalytic Capital Consortium (C3) Seeding Learning Labs. Key insights have been published in a C3 Guidance Note (for more, see the executive summary and full report). C3 sponsors ImpactAlpha’s catalytic capital coverage.
Catalytic capital is essential for funding the most innovative transactions with deep developmental impact that serve vulnerable populations that would be otherwise left behind.
The importance of catalytic capital in pushing the needle on high-impact transactions cannot be underestimated.
I believe that as catalytic investors, we have a responsibility to work collaboratively to ensure a more efficient process for our clients. This is especially critical for earlier-stage clients that are often juggling aggressive fundraising goals along with managing business operations. With a spirit of partnership, we can be engaged, proactive, and creative in efficiently supporting the most impactful projects.
I have jotted down a few ideas that I have learned through my experience at the U.S. Development Finance Corp., or DFC, and as a part of the C3 Seeding Learning Labs.
- Connect as a community. Each catalytic investor brings its own strengths, resources and idiosyncratic requirements. To leverage each investor’s ‘superpowers’, we must know each other and proactively build a catalytic investor community that knowledge shares and coordinates in critical areas such as business development, transaction structuring and capital deployment.
A strong and engaged community can increase the number of transactions supported and amplify our collective impact.
- Encourage investor leadership: In some of the most efficient investor consortiums, there are typically one or two investors that emerge as the effective lead for the investor consortium. Typically, the lead investor is one of the larger or earliest investors and they lead by how they help drive the transaction forward.
When catalytic investors coalesce around a lead investor in the spirit of partnership, this can result in a more efficient engagement process for clients as they avoid a duplication of efforts, lead to consistent investor to client messaging, resulting in a smoother origination and closing process.
- Think big and start small: Many of the initiatives supported by catalytic capital are truly innovative and may initially stretch the limits of some of the larger institutional catalytic capital providers. Typically, it is easier to get started with a smaller group of investors that have more flexible capital mandates to support a proof of concept or pilot.
Once proven, the pilot can more easily scale over the longer term, provided it is structured with an appropriate framework for scaling.
At DFC, we utilize this strategy with our Portfolio for Impact & Innovation Program (PI2), which supports early-stage social enterprises and funds with innovative solutions to developmental challenges. Through the PI2 program, DFC has committed over $300 million in earlier stage financing to over 50 high-impact investments.
- Stage investor involvement: With a connected and committed community, catalytic capital investors can work together to sequence their funding in alignment with their investment mandate. Staged investor involvement can make the fundraising process easier for managers and entrepreneurs to navigate and ensure that investors are starting the process at the appropriate point in time based on their investment thesis.
Catalytic capital is unique in its ability to support game-changing transactions. As catalytic investors, we have a vital role to play in ensuring that we push the envelope on sustainable and equitable investment.
To maximize its potential, we should build investor communities that are pragmatic, collaborative, and creative in supporting the efficient deployment of catalytic capital.
Dia Martin is managing director at the U.S. International Development Finance Corporation.