Anne Field, Contributor
Marc Lane LAW OFFICES OF MARC J. LANE, P.C.
What do the Coronavirus pandemic and economic crisis mean for social enterprise and impact investing? Not Only for Profit is talking to a variety of key players for their insights.
Attorney Marc J. Lane has been a guiding force behind Illinois’ Low-profit Limited Liability Company (L3C) legislation, as well as an active player promoting such structures in other states. The business form allows companies with a greater emphasis on profit vs. social impact to tap foundations’ program-related investments. He’s a registered investment counselor, past director of Social Enterprise Alliance (SEA) and president and director of SEA’s Chicago chapter. And he chaired the state’s Task Force on Social Innovation, Entrepreneurship and Enterprise.
Social enterprises are no different from any other business in terms of their sustainability challenges. If they are counting on contracts in the pipeline to close, they shouldn’t. Most big companies, government clients and especially small and medium businesses will also go into survival mode. Unless they are supplying a product or service that could be considered absolutely mission-critical, they should expect that revenue will be deferred for at least six months and probably longer. If their existing contracts have cancellation clauses, they realistically should expect that some will be exercised.
But in addition, many of them employ people who are economically disadvantaged, so they have a responsibility to keep them safe and healthy. And social enterprises have always had special costs to their businesses. There’s an additional cost to operating a company which may not be primarily for purposes of maximization of profits. To address a social problem, it means your margins are going to be tighter. And in difficult times they may not survive unless others step up.
I just talked to a client who runs a large school for economically disadvantaged kids on the South Side of Chicago. It’s a nonprofit, but significantly dependent on earned revenue. He said students are all home, getting their lessons digitally. But they’re also on the wrong side of the broad band divide. So the school is scrambling to provide computers to them and looking for companies willing to fund those purchases. One obligation leads to another obligation.
Innovative for-profit social enterprises,
including L3Cs, don’t die for a lack of ideas.
They die because they run out of cash.
Innovative for-profit social enterprises, including L3Cs, don’t die for a lack of ideas. They die because they run out of cash. The smart ones are putting in place a plan to conserve cash, and they’re aggressive: Early action will be much more impactful than later action. They know they should have at least 12 months of cash on hand, because it is likely that is what they will need. Even if the COVID-19 crisis resolves itself much sooner than that, the turmoil left in its wake will persist, particularly for social enterprises.
Investment decisions tend to be slow decisions. But, if you’re going through a due diligence process, there’s no time for any of that. The impact investment community needs to step up and do whatever they can do. The one thing we don’t have is time.
But these enterprises know they need to forget about raising money over the short term. Angels in the impact investment space may continue to invest, but they expect smaller rounds, at lower valuation, in companies that don’t require large amounts of cash. What’s more, the sudden downturn in the market, coupled with the disruption of almost all business as usual, will cause funding to stall. Even some strong social enterprises won’t get financed.
If they’re lucky, they might get their existing angel investors to help carry them a bit, but expect it to be costly and only if they have a plan to make the money last a long time.
Companies now are looking for sources of cash that are non-equity. In addition to the various subsidies government has just provided, they’re thinking of other ways to get government grants. They’re exploring the SBA programs that have been put in place to help small businesses. They’re being creative about finding sources of cash to stay alive, including doing some short-term deals that help the immediate crunch. These are things they would never have considered doing three months ago.
Marc J. Lane is a Chicago attorney and financial adviser and vice chair of the Cook County Commission on Social Innovation.
Reprinted from Marc Lane's March 28, 2020 editorial which appeared in Forbes. Forbes permission is gratefully acknowledged. Copyright © 2020 by Forbes.
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