Forget SAFEs. Impact investors are incentivizing growth and impact with SAFIs

An experimental idea by the impact finance experts at Roots of Impact is ready for prime time. The German advisory firm is out with a twist on the simple agreement for future equity, or SAFE, that aims to help founders and their investors align on impact ambitions.  

SAFEs, a staple of Silicon Valley, allow a very early-stage company to raise equity without an immediate valuation. The “simple agreement for future impact,” or SAFI, enables entrepreneurs to raise early funding tied to their impact objectives without immediately setting impact targets. 

The flexible funding mechanism is its latest addition to a suite of products Roots of Impact is championing to build the field of impact-linked financing and embed impact clarity, goals and standards in all facets of finance. 

The Roots team can vouch for the model because they first tried it for their own fundraise.

“Our investors asked us, ‘How should we structure this round? It should help you achieve the impact you want, and you are the experts’,” recalls Roots of Impact founder Bjoern Struewer. 

The first SAFI was finalized last year when Roots of Impact closed its investment round with Delta Fund, the European Social Innovation and Impact Fund, BMH and the Swiss Agency for Development and Cooperation.

Roots of Impact inks impact-linked investment… for itself

Early roots

It’s a fantasy for most entrepreneurs to design their own investment terms. But that’s exactly what Roots of Impact has been doing for others in the impact field for the past decade. 

Struewer launched Roots in 2015 with a mission of making entrepreneur-friendly financing more prominent and rewarding to founders with social impact goals.

“Traditional finance does little to encourage better impact. What drives me is making finance work for radical ideas and bold entrepreneurs who create meaningful benefits for society,” says Struewer.

Roots’ earliest and most widely known product, social impact incentives, or SIINCs, was designed to offer bonus payments to companies as they achieved specified impact milestones. The purpose of the mechanism is to ensure that businesses stay true to their impact missions as they grow. 

The first SIINC was launched in 2016 with Mexican diabetes care provider Clínicas del Azúcar. The Swiss Agency for Development and Cooperation came on board as the SIINC’s funder, paying Clínicas as it expanded access to low-income patients and demonstrated improved patient outcomes. 

Another SIINC to agribusiness lender Root Capital successfully proved that lending to farmers other financiers deemed too small and “risky” enables those farms to grow and access new channels of capital.

A little incentive goes a long way to change lending for small farmers in Latin America

With a portfolio of dozens of social impact incentives and counting, Roots of Impact became known as “the SIINC company,” says Struewer. The company has also worked on the design of impact-linked loans, which contain favorable repayment terms for companies that achieve impact milestones, and incentives for entrepreneurs to set up impact management and measurement systems.

The company’s broader vision is to see impact incentives baked into every type of financing structure. 

“When we came up with the SIINC, the term impact-linked finance was not yet defined in the market,” recalls Struewer. “Three years later, we coined this term and changed the narrative. We said, ‘You can link finance to impact in all instruments.’ This is not a product, it’s an approach.”

With incentives, Roots of Impact helps companies link impact and finance

IOU for impact

Most practitioners of finance don’t think in “approaches,” however; they think in products. In that sense, Roots of Impact is pragmatic about how to accelerate impact-linked finance. 

“You know how tricky it can be to plant the seeds of a new practice,” Struewer says. “It helps with adoption when you can say, this is a SIINC, this is a SAFI and this is how you use it.”

The SAFI is a new spin on revenue-based financing – a type of debt instrument that allows companies to repay their investors based on their revenues, rather than in fixed installments. Revenue-based finance provides flexibility for businesses that need time to build their income streams or have seasonal or irregular income patterns. 

The SAFI assumes that new companies also need time to figure out how to achieve the impact they want. 

When an investor and entrepreneur sign a SAFI contract, they establish financing terms that reward the entrepreneur for reaching their impact goals, such as partial loan forgiveness. But those goals don’t have to be set immediately. That gives impact entrepreneurs a chance to test and build their business models to determine what metrics are suitable and what outcomes are achievable. 

The analogy to the SAFE is intentional. “The SAFE is a templatized version of an IOU on a napkin. The SAFI works the same way – it’s an agreement to agree on something in the future,” explains Aunnie Patton Power of the Innovative Finance Initiative, which supported Roots of Impact in workshopping SAFI’s design. 

“SAFI’s innovation is that you agree to agree on the impact later on, rather than what everyone else has been doing, which is trying to figure out the impact targets upfront,” she continues.

Navigating the metrics and management of impact incentives

The second component of SAFI is that it offers a discount for entrepreneurs that invest in their impact management processes from the start. 

“We don’t need to push the entrepreneur. It’s up to them, and that’s really where the responsibility belongs to propose meaningful and ambitious targets,” says Struewer.

Market infrastructure

The SAFI wasn’t a crystallized concept when Roots of Impact started fundraising. Investors drawn to the company’s mission, however, saw an opportunity to do more than fund its work; they could be a proof point.

The Roots team looked for a simple way to bundle the successful impact-linked financing features it had used in the past to spur its own impact mission forward. 

“Because our round was all about building the market infrastructure [for impact-linked finance] and helping others, we consequently agreed that as an outcome, we are creating our competition,” explains Struewer. “That is metric number one: volume and traction of impact-linked finance deals implemented by all practitioners.”

The second metric is about the quality of impact-linked finance deals that Roots’ supports. It’s measured based on “how practitioners perceive the role of Roots of Impact in achieving minimum quality standards,” Struewer adds.

The terms of its round, which closed last June, now give Roots of Impact between seven and nine years to reach its milestones.

Keep it simple

The simplicity of SAFI’s structure allows it to be adapted to any type of business in any context, says Struewer. Roots has piloted the SAFI with Purefresh, a water distribution company in Kenya. 

Purefresh sets up water kiosks to make clean drinking water accessible to low and middle-income households. A $200,000 SAFI from nonprofit impact investor Aqua for All will enable Purefresh to expand its network of distribution points. 

The terms of the deal give Purefresh the flexibility to test out a new cashless service-point model that could help the company expand in lower-income, higher-need areas. Purefresh has 12 months to experiment with its new service points before deciding whether to scale them. 

When the company develops a scaling plan, the terms reward Purefresh with partial forgiveness of the loan if it exceeds its impact targets. The loan is capped at a 1.32 multiple if it doesn’t.

“It’s probably the most flexible tool in the family of instruments,” says Struewer.

Impact investors need more accessible structures and tools, adds Patton Power. “This is where the SAFI is useful. Someone can ask, ‘How can you do impact-linked finance for a real estate business,” and SAFI offers a template. Scaling is all about templates.”

It’s also easy to build in additional features that give impact founders maximum odds of success, says Struewer. Investors can build in additional incentives to compensate companies for potential foreign currency losses, for example. 

Indeed, Roots of Impact is looking down the line to new products, including an impact-linked foreign exchange hedge. 

“Our investment round gave us back the flexibility to go back to the drawing board and create new things,” says Struewer.

Most immediately though, Roots of Impact’s attention is on helping impact investors understand and adopt the SAFI. 

“We were known as the SIINC company,” Struewer says. “Three years from now I assume we’ll be known as the SAFI company.”