This chapter will provide an overview of impact investing and how to finance social entrepreneurs. Social entrepreneurship is emerging at the intersection of three sectors: the public sector, the private sector, and the third sector (including non-profit organizations and civil society). It challenges the perceived boundaries between sectors and provides innovative solutions for social needs that are not adequately dealt with by public authorities, businesses, or traditional non-profit organizations. We view social entrepreneurship as a field of practice and social entrepreneurs as the individuals who set up and manage social enterprises. Social enterprises can adopt various legal forms and can be characterized by pursuing a social mission while competing in the market economy. In this chapter we refer to social enterprises as the organizations in which impact investors invest. They can pursue social and/or environmental objectives.

Investments in early-stage ventures are characterized by being private and by their ‘equity nature’, as discussed in the previous chapters, stressing the mutual dependence between investor and entrepreneur. Moreover, the investment is typically temporary and done between so-called ‘perfect strangers’ – that is, both parties have large information asymmetry and are faced with agency challenges yet will be condemned to one another because of the illiquid nature of the investment.

Investors, such as venture capitalists and business angels, should have the exit and return on their investment in mind from the outset. The main goal of this chapter is to discuss how investors in entrepreneurial firms time the exit of their investments and choose between different exit routes.

This chapter will provide insights on an alternative path to entrepreneurship: entrepreneurship through acquisition. Rather than starting a company from scratch, you can acquire an existing company through a management buy-in or management buyout, or even buy a company in distress and use that company as a platform to pursue your entrepreneurial ambitions. Given the number of companies that change ownership every year and the risks involved in starting from scratch, for many individuals this might be a worthwhile route to consider when aspiring to entrepreneurship. The process of buying a company requires a special skill set and mindset that differ from the traditional startup method. We also describe the situation whereby the entrepreneur would acquire a company in a distress situation, having experienced hard times, whether self-inflicted or the result of external conditions not entirely managed or manageable. The main goal of this chapter is to provide you with a step-by-step guide to the key questions to consider when buying a company.

Corporate venture capital (CVC) is defined as equity investment by an established corporation in entrepreneurial ventures. CVC investors play an important role in the entrepreneurial ecosystem, accounting for one-fifth of total funding disbursed and a substantially higher fraction in specific sectors and geographies. As the name suggests, the practice consists of established corporations that set out to act as venture capitalists and fund entrepreneurs who develop and scale innovative technologies and solutions. Similar to venture capital (VC) investors, CVC investors receive an equity stake in return for the provision of capital. A major distinction concerns the motivation and structure of corporate investors. Financial returns are an essential consideration for CVC investors, yet often strategic objectives motivate the parent corporation and its CVC activities. Moreover, there is substantial variation in the structure of corporate investors. While most VC investors follow a limited partner–general partner (LP–GP) structure, different corporate investors have different structures.

This chapter will go deep into the process of searching for a business to acquire as a way of becoming an entrepreneur in an existing business. Similar to Chapter 17 on management buyouts and buy-ins (MBOs and MBIs), the entrepreneur is not starting from zero, but looking to acquire an existing business that they can then run and enhance as an equity-owning CEO. Unlike what we saw in Chapter 17 with MBOs/MBIs, in the case of a ‘searcher’ the company to acquire has not yet been identified and most of the process is devoted to the search for the ‘dream’ company. In both cases, and as we have seen for startups looking for financing from external investors, the idea is to search for a business, acquire it, run it for some years, and then sell it, allowing the investors and the searcher to have a healthy internal rate of return (IRR), in general of around 30 per cent.

This chapter will act as your guide as you begin your journey in entrepreneurial finance. It will serve as a roadmap, allowing you to choose between reading the book from start to finish or, if you are looking for specific advice, to jump directly to the relevant chapter or topic. We will look at the differences and similarities between entrepreneurial finance and more traditional fields of finance, such as corporate finance. Finally, we will discuss the different stages that a new venture may go through as it grows, and some of the financial challenges that both the founders and investors in the business might meet along the way.

The logic is simple: you can be as thorough as you like with your due diligence or portfolio strategies – in the end, none of this will help you to reach attractive investment returns if your process is flawed from the very beginning. If the selection process was carried out poorly, then you will most probably either lose some money or lose a lot of money. You will lose some money if you find out in the course of due diligence that your target is not really a target. You may lose a lot of money, however, if you find out after the investment has been made that your portfolio company is unlikely to succeed. Thus, the process of deal sourcing and the screening process are of utmost importance. Let’s get started!