Emergence of New Capital Providers – Exploring Alternatives to Traditional Expectations and Structures


The Capital Access Lab (CAL) is a national pilot initiative that aims to find, promote, and scale innovative investment managers who are providing new kinds of capital to underserved entrepreneurs and communities in the United States.

In July 2020, the Capital Access Lab announced its investments in 5 funds investing in underserved entrepreneurs through innovative investment structures: 1863 Ventures, Anzu Partners, Capacity Capital, Collab Capital, and Indie.vc. During the selection process of these 5 funds, the Capital Access Lab identified over 100 funds focused on underserved entrepreneurs. This report analyzes the approach of a subset of 20 funds that responded to our survey.

Through our analysis, we learned that funds investing in underserved entrepreneurs through alternative investment structures are often nimble investment vehicles that operate in the very early stages of the portfolio companies’ development, really enabling these companies to raise the first essential capital to fuel their growth. They do not invest exclusively in high growth sectors like traditional VCs; our study shows that they are often sector agnostic and have a wide range of return expectations and initial criteria for the investment that are much more flexible than what we typically see in traditional venture capital.

Whereas these funds face challenges related to covering the structural and operational costs of running an investment fund with relatively low Asset Under Management, they represent a nascent and very targeted approach to serving underserved entrepreneurs. Through this report, we hope to highlight their work, support their growth, and inspire potential funders and donors to invest in them. 


The Toniic Institute, through the Impact Terms Platform, developed this report about the work of the Ewing Marion Kauffman Foundation and the Capital Access Lab on investment funds adopting alternative investment instruments.  The Capital Access Lab is designed to provide risk capital to new investment models that do not resemble traditional venture capital or lending, spurring the formation of new financing mechanisms that increase capital investment to underserved entrepreneurs who have been historically left behind due to their race, ethnicity, gender, socioeconomic class, and/or geographic location.

The objective of this report is to review the lessons learned from the Capital Access Lab’s work and to share innovative ways investors can invest in entrepreneurs who are underserved by venture capital and traditional lending structures. Our goal is to describe emerging approaches to investments, liquidity, and risk/return profiles that can be more inclusive for entrepreneurs. 

The Capital Access Lab (CAL), formed in 2019, is a national pilot initiative that aims to find, promote, and scale innovative investment managers who are providing new kinds of capital to underserved entrepreneurs and communities in the United States.  The Capital Access Lab was created to help address this capital gap by creating a new vehicle to invest in alternative capital funds survive those entrepreneurs  That same year, the Lab’s lead investor and sponsor, the Kauffman Foundation, released a report, titled “Access to Capital for Entrepreneurs: Removing Barriers”, which observed that a surprisingly high percentage of entrepreneurs – more than 83% – do not access bank loans or venture capital. 

To source prospective funds, the Capital Access Lab created an online application process through which funds or proposed funds could apply for consideration for funding.  The CAL did not widely publicize the announcement of this opportunity and instead relied primarily on word of mouth and limited media. When the fund application was announced, responses far exceeded their expectation.  CAL had expected 20 to 40 funds to apply in the first year but ended up receiving close to 150 applications.  Of those, over 100 fit the requirements for application.  “One of the most positive signals to us – [was that] the submissions were mostly first-time fund managers and aspiring investors wanting to bring capital to their community” said John Tyler, Kauffman Foundation General Counsel. The CAL team was also encouraged and surprised by the diversity of the applicants.  Roughly 55% of applicants were women and 50% persons of color.  The large and diverse application pool reveals a significant demand for and interest in alternative capital structures.

The CAL had expected that many of the applicants would be larger funds that saw alternative capital structures as an additional opportunity. (Traditionally it is difficult for funds smaller than $10 million in assets to generate enough fees to cover their overhead.) Unexpectedly, the applicant pool included many smaller funds that would have traditionally been considered too small to rely only on traditional management fees, but instead many funds were a part of related organizations that could support the overhead.  These related organizations included nonprofit business accelerators, Community Development Financial Institutions (CDFIs), and other organizations that wanted to bring investment capital to their communities. For example, 1863 Ventures, one of the funds that received investment, already had an active business development program and wanted to start an investment fund as a means of furthering its mission.  

During their due diligence process, the Capital Access Lab identified over 100 funds focused on underserved entrepreneurs, eventually selecting five: 1863 Ventures, Anzu Partners, Capacity Capital, Collab Capital, and Indie.vc. 

The Capital Access Lab includes as one of its initiatives, the Capital Access Lab Fund which is a donor advised fund housed at Impact Assets. That fund was capitalized by the Kaufman Foundation. The Capital Access Lab Fund, and a separate funding source from Rockefeller foundation, have invested in the five funds that were selected by The Capital Access Lab. 

To ensure the preservation of a recognized charitable purpose under Section 501(c)(3), the Kauffman Foundation developed a charitability term sheet which it has made publicly available as an example of how a foundation structured a particular investment to further its charitable mission and ensure accountability thereto.

Although CAL could not invest in all the funds, they recognized there was a lot to learn and share about their innovative investment structures. This report analyses the approach of a subset of 20 funds who responded to our survey.  


Toniic and the Impact Terms Platform conducted research for this study using a combination of interviews with the principals and a formal survey.  The survey participants consist of funds that had applied to the Capital Access Lab during their initial funding period. Twenty funds participated in the survey. The data below highlights some key takeaways from our review.



Fifty percent of survey respondents reported a target fund size of less than $10 million.  

This target size is consistent with the population of over 100 applicants who applied for funding from CAL – as 50% of those applicants also reported a target size under $10 million. If these funds were to use the traditional VC fee structure that means that they would expect to receive under $200,000 per year in management fees to cover management costs. These low fees are generally considered below the viable amount required by a fund management team without external middle and back office support.


Ninety five percent of participants report that they will invest in seed or pre-seed stage companies. Of those participants, 55% said they would also invest in Series A investments, leaving 45% who only target seed or pre seed stage investing. Only one fund participant would not invest in seed or pre seed stage companies targeting only post seed investments. 


Consistent with the small average target fund size and largely seed stage investing, 65% of the participants expect to invest less than $300,000 per investment. Only 10% of respondents would invest more than $500,000.


45% of the respondents have indicated that they are sector agnostic, and 25% of the respondents (among the open-ended responses) included Food and Agriculture as one of their funds’ focus areas.

While traditional VC funds often target high growth sectors such as IT, Health Care, Financials, Telecommunication, the survey respondents did not indicate a strong tendency towards these sectors.  


The following section analyses the financial instruments used by these funds to invest in underserved entrepreneurs. The classification process of these alternative investment structures is a challenging process  because there is not an agreed-upon vocabulary for many of the emerging investment structures, nor agreement about whether they should be broadly classified as equity or debt.  For example, respondents may have differing opinions about if the Demand Dividend Structure should be debt or equity, so we asked about that structure as both debt and equity then combined them when appropriate to our analysis.


To structure these investments, investors typically start with a target IRR, make a range of estimates of the company’s future performance, and then structure the other terms and features of the investments, including the repayment terms such as the percent of revenues and return multiple cap to achieve that target IRR.

The survey asked a series of questions about the details of the alternative investing structures used by that participant.  The questions were designed to get further details around what we anticipated would be the most common structures used: a variation of contingent payment structures.  Seventy-five percent of the respondents reported using some form of alternative investment structure based on contingent payments (revenue-based debt, redeemable equity, or Demand Dividends).  

These structures are flexible and can be designed to include a variety of features. The core feature of these structures is that they are contingent on something like the amount and timing of the portfolio companies’ revenues.  Therefore, the return to the investor will vary based on the features of the investment and the financial performance of the company. 

Basis of calculation

Of the 75% participants that stated they will or do use a form of contingent payment structure – 40% said they would invest using gross cash receipts as a basis of calculation, and 47% reported they would invest using net cash receipts.  Thirteen percent reported they would use either gross or net cash receipts. Demand Dividend structures did not seem to affect this ratio, even though Demand Dividends typically use net cash receipts as a basis of calculation.

Return Expectations

Respondents reported a wide range of target IRR for their investments ranging from 2% to 35% and averaging 15%. We did not specify if we were asking for the target IRR for the fund or individual investment, but we believe that most participants were answering at the fund level.

Minimum annual revenue required for investment

Respondents reported a wide range of minimum required revenues for the investees ranging from under $50,000 per year to over $5 million per year.  The median required revenues was $300,000-$400,000 per year.

Minimum annual revenue growth rate

Respondents reported a median required forecast annual revenue growth of 20-30% with only 16% requiring revenue growth of more than 40%.  This differs significantly from the kind of minimum revenue growth requirements you would see from traditional VC.

Half of those who are making revenue based (or similar) finance structures are investing in seed or pre-seed, and will invest into forecast revenue growth below 30%.  These characteristics are not common in traditional venture capital so this demonstrates the growth of new sources of capital, that are willing to invest with non-traditional approaches.

Minimum gross margin of target companies

Considering the role that revenues play in the calculation of repayment, we also asked about the minimum required gross margin in order to repay the investment. Respondents reported a minimum median target gross margin of 30-40%. At Impact Terms, our  expectation was that lower reported minimum revenue growth rate targets would result in higher the margin requirements.  We had this expectation because for an investor to receive a target return of X% on an investment in a lower growth company, that company typically must be able to support a higher percentage of cash flow paid to the investor which requires higher gross margins.

The opposite was the case, as it turned out. The funds that were willing to take the lowest forecast revenue growth in seed stage companies were also willing to take the lowest gross margins. Like the wide range in target IRR, this demonstrates that there is a much wider range of return expectations and minimum requirements than we see in traditional venture capital.  One possible explanation is that the funds accepting lower gross margins for lower revenue growth companies are doing so as part of a strategy to provide the appropriate capital to the entrepreneurs.  That is, the entrepreneurs they are targeting may simply not have higher revenue growth and margins so the funds used alternative investment structures with return features that the companies could afford.

Percentage of revenue used to repay the investment

Thirty-three percent of respondents indicated that their average percentage of revenues used to repay the investment is 5%, and overall 66.6% indicated an average percentage of revenues lower than 10%. This is typically repaid by the portfolio companies monthly or quarterly out of minimum targeted gross margins of 30-40%.

Forms response chart. Question title: How much is the typical percentage of revenues used?. Number of responses: 12 responses.
Average return multiple cap

Thirteen participants use an average return cap – meaning the average cash-on-cash multiple of the invested capital to be returned to the investor over the life of the investment.  The industry average return cap is generally between 2x and 3x the initial invested amount. As an example – a cap of 3x on a $100,000 investment would mean the investment is complete when a total of $300,000 has been repaid.  This is a common structuring feature of alternative investments that are based on revenue, cash flows or similar contingent payments.  The total IRR of that investment would depend on the time it takes for repayment as well as the cap, so a 3x cap investment that takes 10 years to pay out would have a lower IRR than a 3x cap investment that takes 5 years to pay out.


It is clear both from the large number of applicants for Capital Access Lab funding and from the follow up research we conducted that there is a significant and underserved ecosystem of small funds that are leveraging alternative investment structures to invest in companies focused on underserved populations.  Many of the funds are sector agnostic and not many are targeting traditional venture sectors like IT, Health Care, Financials, Telecommunications.  It is also evident from the wide range of return expectations and the combination of investment structuring features that the funds are willing to invest beyond what we would expect from traditional VCs and that therefore that the funds in the survey can  serve entrepreneurs who fall outside of traditional VC requirements.  

These funds are nimble investment vehicles that operate in the very early stages, potentially being the first professional investors supporting companies in their infancy, effectively de-risking and capitalizing early-stage entrepreneurs.

They also have a wide range of return expectations, including repayment multiples, and initial criteria for the investment that are much more flexible than what we typically see in traditional venture capital.  It has long been a complaint that sources of capital are too fixated on structures designed only for companies with explosive growth, so it is encouraging that this research shows an emergence of new capital providers exploring alternatives to traditional expectations and structures.

Out of the 100 funds that applied to the Capital Access Lab, and more specifically out of the 20 survey respondents, we have observed that about 50% of the funds have a target raise of less than $10 million and 75% of less than $30 million; that 95% invest in seed stage, and about ~50% in pre-seed and Series A; and that 65% target an initial investment of less than $300,000 per investment.   

Toniic, the global action community for impact investing, has also identified the emergence of relatively small and nimble funds (less than 15M in target AUM) leveraging alternative investment structures to address the needs of underserved populations across different investment themes. These includes funds providing loans to farmers to be repaid through a revenue share agreement in order to allow time to the farmers to switch to organic and regenerative agriculture practices and align their cash flows from higher quality produce with the loan repayment, funds providing capital to minority owned businesses in geographies out of the radar of major venture capitalists to facilitate exits, but also funds providing loans to underserved students that can repay their loans only when they start generating income from actual employment. 

While this did not apply to the five funds selected for investment by the Capital Access Lab, these smaller funds are much smaller than typical venture capital fund and CDFI, so small in fact that many are unlikely to cover their operating costs as a fund, and instead use the fund as an addition to existing community service programs.  These funds primarily target seed stage companies and are using a wide range of alternative investment structures.  

In order to support these experimental but smaller funds, it is clearly important to find ways to lower their operating costs.  As noted in this review, important costs like legal, including the added costs associated with using new investing and organization structures, insurance and fund administration are high for these funds.  It can even be difficult to find fund administration services that will support alternative investment structures.  Companies like AngelList are starting to provide some of these services at lower cost but they are still expensive for small funds and they do not offer services to most alternative investment structures. Investors and foundations who wish to support these funds might consider funding start-ups that help provide these services at lower cost to smaller funds.

Agnes Dasewicz, Lead, Capital Access Lab observed that, alternatively, it would be worth evaluating if investments coming from foundations could, when legally allowed, be accompanied by separate resources and donations to cover some administrative expenses and technical assistance.  This is fairly common practice with large international funds who often have sidecar vehicles for technical assistance, and we agree that sidecar grants would help further the ability of small funds to continue to innovate.  

Purposes, Priorities, and Accountability in Social Enterprises

This article is a summary based primarily on a chapter in Hybrid Ventures: Advances in Entrepreneurship, Firm Emergence and Growth, Volume 19 titled “Purposes, Priorities, and Accountability Under Social Business Structures: Resolving Ambiguities and Enhancing Adoption”, written by John Tyler III, Evan Absher, Kathleen Garman, and Anthony Luppino.


One of the main criticisms of social enterprises is that there is a lack of substantive accountability for prioritizing social mission over other purposes, especially profits. Prioritizing and imposing meaningful accountability for social mission, however, is vital for the proliferation of, and engagement with, social enterprises. There are certain business forms and strategies entrepreneurs can utilize to compel their social mission, although this article explains that no existing framework ensures prioritization of social mission for the longevity of the enterprise. 

To better understand social enterprises, an exploration is needed into prioritization of purposes and accountability to those purposes. These two elements are what distinguish a social enterprise, and the thought process of its decision makers, from traditional businesses. Proper prioritization of purposes and the appropriate legal form to hold decision makers accountable to those priorities are essential to the success of a social enterprise from a social impact lens. This article seeks to explore the gaps in social enterprises’ abilities to effectively prioritize their purposes and utilize form in a way that solidifies accountability to social and environmental impact. As a way of illustrating the gaps and a means to address them, this article suggests consideration of a new form: the “social primacy company.”


  • What are the underlying purposes? 
  • How are they prioritized, especially when they collide? 
  • How do they withstand changed minds and circumstances or new people with different priorities?

These are questions that founders must answer and clearly provide for in their founding documents because it will shape the thought process of decision makers for the lifetime of the company. Every company has priorities, and they provide a degree of consistency when directors and managers are inevitably faced with a choice among the entity’s purposes. 

Let’s take a look at priorities of purpose in existing business forms:

Traditional Businesses (C corporations, LLCs) 

On one end of the spectrum are businesses that prioritize maximizing shareholder value, i.e., traditional for-profit businesses. It is debated whether prioritizing shareholder value is a fiduciary mandate; Morrison & Foerster partner Susan Mac Cormac would argue that it is not via the Business Judgment Rule which protects decision makers from liability if considering social and environmental factors in good faith.1 However, in practice, managers and directors of traditional businesses rarely elevate social mission over shareholder value for a variety of reasons, including pressure to have strong numbers for quarterly reporting, stock option compensation, public perception of stock price as the ultimate measure of success, and the risk of being sued for breaching fiduciary duty. Hence, even when traditional businesses operate to produce public benefits, it tends to remain within the constraints of pursuing financial gains for their shareholders. When a conflict emerges between competing purposes, the view is that the law supports the primacy of enhancing shareholder value.

Traditional businesses can, however, embed social mission into their corporate form by explicitly changing the order of priorities to uphold social good over shareholder value through shareholder/voting agreements and charter provisions. The downside to this approach is that those contractual agreements are permissive rather than mandatory, they can be renegotiated, and are dissolved when ownership change occurs. Additionally, the ability to hold decision makers accountable to social good via these contractual agreements is negligible, which will be discussed in the accountability section. 

Charitable Organizations – 501(c)(3)

Charitable organizations are on the other end of the spectrum, and to obtain and maintain tax exempt status they must be organized and operated exclusively for charitable purposes and with no more than incidental private benefit (I.R.C. §§ 501(c)(3) and 170(b)). Charitable organizations have a statutory obligation to certain priorities under state and federal law that allow for tax exemption and deductible charitable contributions. Charitable organizations cannot contract around priority of purposes, and therefore decision makers are bound to upholding charitable purposes. 


A still fairly new social business form in the United States, the L3C (low-profit limited liability company), is mandated by its authorizing statutes to significantly further one or more charitable purposes within the meaning of Sec. 170(c)(2)(b) of the US Internal Revenue Code and does not permit production of income or the appreciation of property as a significant purpose.2 Thus, although the L3C is tolerant of multiple purposes, it legally prioritizes the furthering of charitable purposes over owner value. 

Social Business Corporate Forms – Benefit Corporation and Social Purpose Corporation

A benefit corporation is legally required to have the purpose of creating general public benefit, i.e. “material positive impact on society and the environment, taken as a whole, as reported against a third-party standard” (Model Benefit Corporation Legislation, § 102). Directors of benefit corporations must consider how their decisions affect shareholders, employees, subsidiaries, suppliers, customers, community, and environment in the short and long term (Model Benefit Corporation Legislation, § 301). However, directors need not give priority to a particular interest.

Social Purpose Corporation statutes require that directors consider identified social and environmental effects in addition to, or together with, the financial interest of the shareholders (Cal. Corp. Code § 2602). This ensures that directors have flexibility to choose between purposes given different circumstances, so social mission may not be prioritized. 

These two corporate forms promote flexibility more than anything else; nowhere in the statutes is a mandate to prioritize social mission or shareholder value. Rather, directors can prioritize or dismiss social good or owner value as long as the impact of a decision on other stakeholders is considered. 

Owners in any of the traditional or social business corporate business forms can agree to modify director duties and allow interests beyond shareholder value to be considered or prioritized. Utilizing contracts to prioritize social good relies on owner agreement to pursue non-owner interest. However, depending on contracts to promote social good has significant limitations, which will be discussed in the next section. Ultimately, decision-makers in businesses will at some point or another have to choose between shareholder value and social good, and accountability to those purposes is fundamental in giving purposes actionable priority.


  • How are enterprises and their decision makers held accountable for staying true to those priorities? 
  • Who can enforce accountability? 
  • To what end is accountability enforced: outcomes or process?

The answers to these questions vary among available organizational business forms, differentiate accountability to priorities, and influence how owners, investors, employees, directors, and regulators consider decisions to fulfill their respective responsibilities. There are three main forms of accountability: public, practical, and legal, all of which vary in who can invoke the accountability and the effectiveness of enforcing consequences on accountable persons and entities.

Public Accountability 

Public accountability exists to some extent for all business forms and has become a more powerful mechanism as social media has developed the ability to reach large numbers of people very quickly. Anyone can invoke public accountability by undertaking a campaign that influences some aspect of a business, but its effectiveness in delivering consequences relies on persuading enough people to act. Benefit corporations and social purpose corporations, through their requirements to report purpose and performance to the public, are predisposed to public accountability. Their reports are generated internally, and therefore the information may not always be reliable. There are degrees to which certified B corporation status facilitates public accountability as well. The media, arguably, has the most pivotal role in empowering public accountability, highlighting the importance of media understanding priorities of purpose and accountability to those purposes.

Practical Accountability

Practical accountability refers to the power of owners to remove and replace directors and managers. All the business forms previously discussed, except 501(c)(3) organizations which cannot have owners, suppose that a certain number of owners, normally a majority, have the authority to hold decision-makers accountable for decisions, outcomes, and efforts related to the priority of purposes. Only owners can invoke practical accountability, and the ease of doing so correlates with the number of owners with fewer owners being easier (fewer people to convince to take action) and increasing difficulty as the number of owners increases.

Benefit corporations circumvent dependence on owner accountability by including statutes that allow designation of a public benefit director (MCBL, § 302(a)(1)) or a delegated authority to a third party to enforce its purposes (MCBL, § 305(c)(iv)). Benefit corporations are not required to do either of these things, and even so, usually a majority of owners can overturn those appointments and delegations thereby returning to practical owner liability. There is also a statute that allows for benefit enforcement proceedings, a proceeding for failure to create general public benefit or violation of duty (MCBL, § 102). However, these proceedings are voluntary, and any imposed consequences are prospective rather than punitive, and therefore may not be an effective deterrent of acting against social mission. 

Practical owner accountability is vital, however it is important to keep in mind the limitations of imposing consequences. It may be difficult to gather enough votes to remove a director or manager, or the prioritization of flexibility may inhibit the ability to pursue legal action.

Legal Accountability

The last approach to accountability, legal accountability, is exercised through contracts, fiduciary duties, and regulatory mechanisms. 


Utilizing contracts to allow consideration or prioritization of social mission has been used in practice for some time now, and it can be effective, especially for enterprises that are simply socially tolerant. However, for those that wish to prioritize social mission, relying on contracts comes with certain difficulties that may prove to make those contracts ineffective at enforcing social mission as a priority. The first difficulty is that the parties bound by a contract can change their minds. The contract can be amended or dissolved, or all parties can breach the contract in agreement. What once was a commitment to social good can change to something completely different as the preferences of owner changes. 

Two additional difficulties that diminish the reliability of contract law to enforce commitment to social good is proving damages and causation. Enforcing a contract requires that the plaintiff prove financial, economic damages. If the plaintiff made money from the contract breach, proving damages will be extremely difficult. Even if the plaintiff suffered financial loss from a breach of contract, contract law requires proof of causation, and a defendant can blame the business model for financial losses rather than the breach of contract. 

Legal accountability through contracts can and does work in some scenarios, especially as a moral matter, but it is not reliable as a mechanism for legal enforcement for the reasons mentioned above. 


Fiduciary accountability allows anyone who is owed fiduciary duty to pursue claims. Although damage still must be proven, damages need not be only monetary. If a manager of an enterprise that prioritizes a particular social benefit over owner value prioritizes profits for owners anyway, anyone to whom a fiduciary duty is owed may pursue claims. This, however, can be problematic when plaintiffs seek financial remedies, which would be hypocritical in the event of a financial windfall. Ideally, recovery should benefit the prioritized social benefit or the social enterprise as a whole without punishing the plaintiff for seeking to enforce the duty.

Fiduciary duty, when purposes are appropriately prioritized, can be a powerful mechanism to ensure the prioritization of social good, however it is not clear when fiduciary duties apply to social good in existing business structures. Decision makers have a fiduciary duty, perceived or actual, to owner value in traditional businesses, and to charitable purposes in 501(c)(3) organizations. Traditional businesses that modify priorities with contracts seem to displace fiduciary duties with contractual duties. Since benefit and social purpose corporations prioritize flexibility, a breach of fiduciary duty would be difficult to prove unless certain interests or stakeholder were not considered in the decision-making process. Fiduciary accountability exists more prominently in L3C entities which explicitly prioritize charitable purposes over shareholder value. Given these observations, fiduciary duty through existing legal forms does little to provide legal accountability, except for in charitable organizations and arguably in L3C entities. Even then, the fiduciary duty is to specific charitable purposes rather than broader social good more generally.


Social enterprises still have to adhere to the myriad of laws that apply to traditional businesses such as consumer protection, IP, employment discrimination, environmental, securities, tax, etc. Regulators may be able to enforce future actions, undo previous actions, dissolve the entity, and/or hold owners personally responsible for the enterprise’s liabilities if a breach is egregious enough. Unfortunately, when flexibility is prioritized, when purposes are prioritized through contracts, or when fiduciary duties have room for interpretation, which is normally the case in social enterprises, regulators will likely not be able to enforce social good as a priority unless there is an intentional misleading of others or a pursuit of personal interests over others who are owed a fiduciary duty.

Accountability with Regard to Process vs. Outcomes

Legal accountability, in all business forms previously mentioned, is only enforceable to decision-making processes, and not to particular outcomes. This is justified given that if it was the other way around there would be a disincentive for people to participate in organizations that prioritize social good. Legal liability can be enforced if an outcome provides evidence for a decision maker wrongfully prioritizing purposes, but poor outcomes themselves are not grounds for legal accountability. 

Outcomes do, however, matter for public and practical owner accountability. Owners expect certain outcomes, and the people they entrust to deliver those outcomes are held to account accordingly. A majority of owners can replace decision makers that do not meet expected outcomes or impacts. Public perception of an entity is affected greatly by outcomes and impact. The behavior of employees, customers, contractors, the media, suppliers, etc. can all be shaped by outcomes.


Different business forms prioritize purposes in different ways, and accountability, whether public, practical, and legal, applies to each form in unique ways. If the ultimate goal is to ensure that an enterprise is committed to social good over owner value, it is not clear that any existing business form and accompanying strategy is sufficient. The emergence of new social business forms that prioritize flexibility of purposes have provided an alternative to shareholder value maximization, however there is still no business form that formally prioritizes social good over owner value with consistent, meaningful accountability to that priority. The “social primacy company” discussed in the article could be one way of addressing that gap, in part by statutorily imposing a fiduciary duty to prioritize social good over shareholder value when they come into conflict. 

References & Additional Resources

  1.  Susan Mac Cormac. “Corporate Forms for Social Enterprises.” Morrison & Foerster. https://www.mofo.com/resources/video-audio/161019-corporate-forms-for-social-enterprises.html.
    • For an in-depth summary of the positions pro and con regarding profit maximization, see John Tyler, Evan Absher, Kathleen Garman, and Anthony Luppino, “Producing Better Mileage: Advancing the Design and Usefulness of Hybrid Vehicles for Social Business Ventures,” 33 Quinnipiac Law Review 235, 274-278 (2015) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2585755.
  2.  Feldman, Sandra. “What Is an L3C (Low-Profit Limited Liability Company): An Entity for Entrepreneurs Who Value Purpose and Profits”, Wolters Kluwer. March 3, 2020. https://ct.wolterskluwer.com/resource-center/articles/what-is-l3c-low-profit-limited-liability-company

Related Resources on ImpactTerms.org


Stakeholders vs. Shareholders

The terms shareholder and stakeholder can oftentimes be confused or improperly used interchangeably. Every business has shareholders and stakeholders, both of which are essential to the success of a business, but their relationships to the organization are different and therefore it is important to understand the difference between the two. Identifying and understanding the needs of all stakeholders, whether individuals, organizations, or the environment, is crucial for business leaders to understand how their enterprise will impact the greater community. Misaligned interests between stakeholders and shareholders is not uncommon and can threaten the fulfilment of an enterprise’s mission, but fortunately there are measures entrepreneurs can take when forming the legal structure of their enterprise to reduce the chance of misalignment between the two groups. This article defines shareholders and stakeholders, identifies their key differences, and begins to explore how entrepreneurs can consider all stakeholders during the conception of an enterprise to compel their mission.


As defined by Investopedia, “a shareholder can be an individual, company, or institution that owns at least one share of a company and therefore has a financial interest in its profitability.” Shareholders earn a return on their investment when a company increases shareholder value by growing, becoming more profitable, and/or increasing free cash flow. Here are some key characteristics of a shareholder:

  • Own at least one share of the company
  • Are not liable for the company’s debts 
  • Have voting rights to affect the management of a company
  • Receive dividends (if paid by the company)
  • Can sue the company directors or senior officers for violations of fiduciary duty


As defined by Investopedia, “a stakeholder has an interest in the performance of a company for reasons other than stock performance or appreciation.” Stakeholders can be people, organizations, or the environment, and are affected by the activities of a company or its projects, and therefore tend to have a long-term relationship with the company. Here are some examples of stakeholders:

  • Employees
  • Owners and shareholders
  • Customers
  • Program beneficiaries
  • Suppliers
  • Employees in supply chain
  • The environment
  • Communities
  • Bond holders
  • Creditors
  • Competitors

As you can see, shareholders are listed as stakeholders; it is important to remember that shareholders are always stakeholders, but not all stakeholders are shareholders.

Key Differences

Shareholders can generally sell their ownership or buy more shares at will, whereas stakeholders are usually bound to the activities of a company and the related impacts regardless of choice. This tends to make the relationship stakeholders have with a company more long-term, while shareholders have no long-term need for a company. For example, if a company has to shut down a plant due to a chemical spill, a shareholder may sell their stock and invest in a better company, but members of the community the plant was in will feel the effects of job loss and environmental degradation for years to come. A good way to think about this is that stakeholders are inherently tied to the benefits and burdens of a company’s externalities, while shareholders opt-in to have their finances linked to the financial performance of a company.

The interests of stakeholders and shareholders can conflict as well. Shareholders may want a company to outsource certain production to boost growth and profitability even though many stakeholders like suppliers, employees, and the environment will be negatively affected. Shareholders are typically concerned with stock price, dividends, and financial health, whereas stakeholders are concerned with the impact of a company’s activities. 

Shareholder Theory vs Stakeholder Theory

It has been debated whether a company should primarily consider its shareholders or stakeholders when making business decisions and adhering to fiduciary duty. Historically, shareholder theory has been widely accepted and used, noting that a corporation’s duty is to maximize shareholder returns. However, the emergence of corporate social responsibility (CSR) and environment, social, and corporate governance (ESG) has begun to shift the public view of the duty companies have to their stakeholders. Stakeholder theory argues that a firm should create value for all stakeholders, not just shareholders, because of the interconnected relationships between a business and its customers, suppliers, employees, investors, the environment, communities and others who have a stake in the organization.


Making decisions to maximize shareholder value at the expense of other stakeholders is a dangerous principle; its application, although it has benefitted many shareholders who were positioned effectively, has contributed to climate change, systemic inequities, and many of the world’s other problems. The idea that a company’s sole purpose is to make money for shareholders threatens social enterprises and fails to recognize that businesses are part of the very fabric of our society and affect the livelihood of all people and the health of our planet. Appeasing stakeholders is important for securing the capital needed to run a business, but aligning interests with all stakeholders is vital to the overall success of a business. 

Entrepreneurs creating a social enterprise can strategically utilize the term stakeholder(s), as well as other impact terms found on the ITP platform, in their governing documents to ensure that the enterprise’s fiduciary duty compels its social mission rather than conflict with it. Representing all stakeholders in the legal structure of a company is an important step towards aligning social enterprises with capital markets, and will help dissolve the myth that fiduciary duty and social mission are mutually exclusive. See the related articles below for strategies being used by entrepreneurs to advance their missions through the legal structuring of their enterprises.

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Catalytic Capital

In essence, catalytic capital is investment capital (debt, equity, guarantees, etc) with which the investor accepts reduced financial expectations in order to bring about a greater social or environmental impact.  Lowered financial expectations refers to not only higher risk or lower return profile, but also a longer liquidity window or subordinate position in the investment structure than a more conventional investment. Other terms for this type of capital include concessionary capital, patient capital, and flexible capital, among others.

Catalytic capital fits in the middle of the spectrum of capital, which demonstrates a gradation of investor return expectations, from 100% loss (a grant) through commercial returns at rates set in accordance with conventional financial benchmarks that do not price in “externalities” (conventional equity investments). It can work to fill critical gaps for social entrepreneurs, particularly in early stages of development. It can also encourage third-party investment that may have not been otherwise possible (e.g. a development finance institution taking a subordinated position to entice private investors). 

Tideline, an impact investing consulting and research firm, warns: “Capital willing to accept disproportionate risk and/or concessionary returns is in short supply and can have market-distorting effects if not deployed appropriately. Evaluating potential positive and negative impacts of catalytic capital (including its built-in financial concession and the activities it supports) is essential to its effective use.”

See also:

Would you like to add to this article? Do you have examples of how to deploy catalytic capital appropriately? Please reach out to the Impact Terms team about contributing.

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Social Enterprise

A social enterprise is typically understood to be a for-profit business or a business within a non-profit organization that has a specific social or environmental mission included in the business plan. U.S.-based Social Enterprise Alliancel defines social enterprises as:  “Organizations that address a basic unmet need or solve a social or environmental problem through a market-driven approach.”

This definition is left intentionally vague, as it must cover a wide variety of approaches and structures. Some operate within traditional structures and follow traditional exit paths, whereas others opt for alternative structures

See also: 

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  1. Social Enterprise Alliance

Traditional Exit Strategies for Social Enterprises

An “exit” is one of the methods an equity investor uses to get a return on investment.  Companies should consider exit strategies at an early stage of the company lifecycle, as it will shape the strategic decisions made along the way, including how and where to grow. 

This is especially true for social enterprises which must also consider elements such as mission and the impact of an exit on customers, not only profit and investors. Some social enterprises will find an alternative exit structure more appropriate, but many may be able to utilize an investment structure that relies on the traditional exit. The best strategy will depend on business type, company size, financial value, investor profile, and mission alignment. 

For investors, exits are important for a number of reasons including having the option to recycle funds to other investments. 

This article explains the types of traditional exits and corresponding considerations for social enterprises. 

Key Considerations for Deal Structuring


In addition to financial and operational considerations, social enterprises must also consider how an exit strategy affects their mission/impact. Some strategies may amplify the depth or breadth of the impact, whereas others may distract or detract. Founders/Managers should consider this early on, as miscommunication or confusion early in the enterprise life cycle could result in higher multiples and over-valuation, which could force the enterprise to be more aggressive in growth and sacrifice the mission. 


Different exit strategies will affect not only the company and investors, but also customers. In the case of social enterprises, the company may be the only provider of a basic good or service in the area of operation. When considering exit options, consider questions like “Will an intense focus on scaling or profitability shift the business away from poor or rural customers?” 

Common Exit Structures


Definition: Integration of entities or takeover of one entity by another entity.  The exit to the equity investor comes from the assets used to purchase the entity.  If the assets used to purchase the entity are illiquid, then the acquisition has not resulted in an exit.

Common Motives for Acquisition 

Strategic Acquisition

When the acquirer comes from a different business sector than the entity acquired

Benefits: Strategic acquirers can come from a wide range of sectors but share similar motivations. Strategic acquirers and investors often want to either increase their presence, or gain greater insight into the emerging markets where social enterprises operate. They may also be interested in exploring a complementary product or service to expand the reach or impact of the enterprise. 

Challenges: Social enterprise business models can be complex and differ from the core capabilities of potential strategic investors. Overcoming this requires time and resources from the strategic investors for them to understand the sector and theory of change.

Sector Merger & Acquisition 

Integration of entities or takeover of one entity by another in the same sector

Benefits: A sector merger or acquisition leverages existing synergies between companies, which could also mean amplified impact for a social enterprise. This would extend the reach of both companies to access new geographies, customer segments, products, distribution channels, etc

Challenges: Misalignment of mission is a risk in mergers or acquisitions of social enterprises. Even if they are aligned, other (even though larger) social enterprises may not have the capital to purchase other companies, particularly if investors are seeking a high valuation. Other companies may want to create their own tailored solutions in house instead of buying another company.

Secondary Sales 

The sale of existing equity shares to a secondary investor (such as VC funds, private individuals, private equity, investment banks, or dedicated secondary sales funds). This does not occur during full acquisition.

Benefits: Secondary sales, even those resulting only in partial exits, are a vital source of liquidity for investors. Existing investors may choose to buy the shares, which simplifies the capitalization table and gives them more control over the company. Secondary sales can also attract new investors. Strategic investors have shown a willingness to make secondary investments as a way of getting a foot in the door to better understand the sector without taking on the risk of early stage investment in an unfamiliar area.

Challenges: Secondary equity sales sometimes occur at sizable discounts to primary capital raises, resulting in cases where early investors may be unwilling to accept secondary purchase offers when they do materialize. Social enterprises must also be aware that perceived share price volatility can deter later-stage investors, such as PE firms. 

IPO, or initial public offering 

Process of offering company shares to the public through the issuance of new stock

Benefits: An IPO provides access to a large pool of capital for the company and gives earlier, private investors a chance to realize gains, particularly for social enterprises in industries that lack many potential acquirers. 

Challenges: IPOs are generally uncommon for social enterprises, especially in emerging markets. Depending on the enterprise and industry, there may not be a significant pool of potential buyers to make exchanges liquid. An IPO can also be taxing on a company due to the costs to execute and the stringent reporting and budgeting systems required to be publicly listed.

Share Buybacks 

The sale of existing investor shares to company management or founders.

Benefits: Share buybacks restore greater control over the company to its founders or management, allowing them more flexibility in decision making, especially when it comes to mission (in the case of social enterprises). 

Challenges: Social enterprises may be overvalued and therefore lack the cash for share buybacks. 

Case Studies

Download four case studies of Traditional Exits in African off-grid energy companies by Acumen and Open Capital Advisors:

Additional Resources

This content has been developed from Lighting the Way: Roadmap to Exits in Off-Grid Energy. The full report can be accessed at https://acumen.org/energy-exits-report/


  • Original report was published by Acumen and Open Capital Advisors, a regional ITP partner organization. 
  • The report was adapted for this site by Melody Jensen from the ITP team.