IB require investments not grants: IB business lines is typically done medium sized enterprises with high commercial viability. Such firms need funding in larger sums ($0.2-5 million or more) and are able to repay the money form their gross profit. Hence, grant financing is only relevant for start-up purposes or for special investment schemes in the poor. An interesting study by the Asian Development Bank shows where commercial opportunity and sustainability converge. Another study by the International Finance Corporation IFC under the World Bank analysis practices and operating principles of impact investing.

Investing in IB comes from various sources. Unlike financing of social enterprises which is mostly from philanthropic giving, government grants, and some (small) impact investing, IB companies would meet their funding needs mostly through commercial and impact financing. There are different avenues for addressing IB financing. These are:

• -Self-financing (say up to $0.2 million) and sources from family and friends constitute the majority of the financial needs of IB companies, especially at the beginning of their operation.
• -Start up financing (of say up to $0.1 million) is also provided by so called angel investors, most of it in the form of rants.
• -Other sources of financing come from commercial banks, financing programs of government (such as SME financing schemes) and development partners (such as IB, SE or start up grants), guarantee programs, venture capital and private equity funds, as well as financing from development banks.
• -IB investments are often also coming from impact investors.

Impact investing is a shallow term. It typically includes all investments in companies that claim to create impact for the bottom-line (profit) along-side other social, environmental or innovative purposes. Most impact investing is not for achieving results for the BoP, but for the use by better-off income groups or for environmental purposes. Impact investing is mostly provided in form of equity. Sometimes impact investors also provide concessional loans with longer repayment and sufficient grace period, as well as favorable interest rates.

In Cambodia, there are only a few impact investors with seats in in the country or servicing the market from neighboring countries. IB relevant impact investors are – among others – Bamboo Finance, IIX, Insitor, NEXUS, responsibility, Uberis Capita, among others. While their investments are mostly small (($0.2-$3 million per deal), development banks like the IFC and the ADB have invested in (mostly larger sized) IB case, especially in agrobusiness and in microfinance.

Key constraints for impact investments in IB: Impact investors complain that the funding of more IB deals is mainly restricted by the lack of good proposals (with sufficient commercial viability and quality BoP targeting) and the need to reduce the commercial or social risks of the proposed investment, while funding is readily available (although it may not materialize). Hence, to unleash funding for IB, more important than creating a new fund is to set up a risk reduction mechanism and provide good business coaching. This is reflected in the IBeeC strategy.

The proposed risk reduction facility would be a convertible debt fund, where the IB risk reduction fund would co-invest equity and other forms of patient capital as seed funding in the initial growth stage (not start-up) of a company (say 10%-15% of costs) to kickstart the investment, while the impact investor would finance the remaining. If the investment is a financial success, the investment from the government would be converted into a loan, had to be returned to the government, and would then be re-invested in other companies (revolving fund mechanism). If the total investment does not meet the agreed financial results criteria, the IB-RRF share would serve as a grant. It is assumed that any investment which qualifies as IB has sufficient social impact so that impact for the public (society) is given. Hence, in any case the joint fund investment is successful, as it would yield social results, even if the financial performance may not fully meet the initial expectation. There are many business models, where such risk reduction facility would help unleashing funding and investments, which otherwise would not mature. Because the facility would work with pre-identified investors who actually do the due diligence (and invest 80-90% of the capital), and a fund board would make the final investment decisions, the facility does not need a fund manager and can be established within a government agency (e.g. Ministry of Finance, a development bank, or MISTI). For Cambodia a fund sized $20 million was proposed; this would need to be sourced either by the budget or a concessional loan from a bilateral or international development bank.