In this article, we will address why the current due diligence and loan management processes of traditional funders (foundations, family offices, and CSR) and impact investors are unsuitable for evaluating companies that fall within the Pioneer Gap.
A large part of the reason for this is because many current funders provide ticket sizes that tend towards two extreme ends of the market, below $10,000 and above $250,000 (it could go down to $100,000 in some cases). This was highlighted in our earlier article on the Pioneer Gap. Here, we will look at the current due diligence and loan management processes (simplified for this article) of a typical funder.
Current due diligence processes are designed to evaluate a few companies a year, with large ticket sizes – much like venture deals. Because of the necessary comprehensiveness associated with the ticket sizes of these deals, these processes are generally costly and include things such as site visits, audited financial statements and more.
This onerous process is not only limited to impact investors. Foundations’ due diligence processes for donations in the hundreds of thousands of dollars are equally onerous. For example, they might require a logic model and a randomised controlled trial (RCT) which proves causation for impact (this means funders want proof that their money is creating impact). A typical RCT costs $20,000 and lasts 3 years for small-to-medium impact organisations. For larger impact organisations, this goes up to millions of dollars – firmly out of the reach of most social enterprises within the Pioneer Gap. It does not make economic sense either, to spend $20,000 in a RCT to gain $50,000 in debt or grants.
Due to the relatively low number of deals completed by most funders (usually on the lower end of 1 to 30 deals a year), many typically do not have nor require a dedicated platform to manage their donations or investments. Instead, most organisations use project management or productivity tools such as Excel or Google Suite to manage their portfolio. These systems are not suitable for us in managing a portfolio of thousands.