In April of 2014 we stood outside TENA Recycling’s future plant in Arusha’s industrial area, and we struck a deal. Hooge Raedt Social Venture (HRSV), a private fund held by a family foundation out of the Netherlands, would provide TENA approximately a year’s worth of working capital for its site in Arusha once the first truckload of processed polyethylene terephthalate (PET) plastic left the plant and the municipality had constructed a small bridge over an adjacent open sewer to improve access to the TENA facility. A few months later, Morgan, TENA’s CEO, sent Joris a picture from his phone with a short message. It said that a truck had been loaded and “just departed for Nairobi … carrying six tons of hard plastic ... and two tons of baled PET.” Another eight days later, both parties signed a convertible debt note, and HRSV transferred money to TENA’s account.
Since that time, Morgan has pushed TENA from milestone to milestone, using HRSV’s investment to prove the viability of his business and impact model and laying the groundwork for the next step—opening a state-of-the-art recycling facility in Dar es Salaam. In the Tanzanian context, TENA is going from the minors to the big leagues.
TENA appealed to HRSV because it offered most everything the fund looks for in an investment: very significant potential for social—and in this case environmental— impact; an acceptably clear path toward financial viability; strong, driven leadership; and a business where HRSV’s investment would make the all-important difference. At HRSV we hold the need for additionality in high regard, and the investment in TENA fit the criteria—there was nobody else lining up to fund TENA.
Morgan’s commitment to develop an inclusive business model in which very poor urban-dwellers could earn an income is real—so real that the foundation of the business is dependent on building and maintaining a loyal network of recycling collectors who TENA pays a premium price for plastic. This network is important for both significant social impact and TENA’s success as an organization. Many collectors actually earn more than the average gross national income. This access to stable monthly earnings lifts them above national poverty levels. Furthermore, TENA is continuously seeking ways to provide additional value to their collectors, providing access to basic foodstuffs and valuable supplies at wholesale prices and soon microcredit services.
At the same time, TENA has proven its ability to generate revenue and shown the feasibility of a profitable recycling business in Tanzania. This has not gone unnoticed, and other investors have expressed interest in financing TENA’s growth. HRSV has successfully primed the pump and helped deliver one more investable business to the market.
When TENA closed a large investment deal at the end of 2014, Joris reminded Morgan of their earlier talks about HRSV’s desire to continuously seek to deploy its limited funds to promising businesses like TENA. These are businesses that are too risky, too new, too unproven for most impact investors, despite their obvious impact potential. For HRSV to continue to pursue this objective, it would have to find ways to take its capital out of successful investments and make a decent return at the same time. Joris floated this idea to others, but investees who felt that investors coming in later would never allow an early investor to cash out balked. While their fear is understandable and possibly justified, it shows the ever-conservative, risk-averse view of so-called impact investors. Others have written about the need for some investors to prime the pump and close the pioneer gap. But still others have noticed that a serious divide has opened in the landscape of social enterprise finance, causing a large, unmet demand for investment capital for deserving social enterprises.
TENA was different and agreed to take some of its new investments (which dwarfed HRSV’s original investment), along with some of the consistent revenue the company was now generating, to repay the loan and give HRSV a decent return on its investment. Both parties agreed that HRSV had played its role and taken TENA to the next level; it only seemed reasonable to Morgan that HRSV be rewarded for its contribution and the risk it took. Now HRSV can use the same capital to do it again.
It is not a very complicated story, but the time has come for impact investors who seek to fund growth to let others prime the pump and reward them for it if they are successful. Allowing early-stage investors to exit and earn a high percentage return (but by definition often a relatively small amount in dollars) on their high-risk investments.
Trucks now leave TENA’s plant in Arusha on a regular basis. Their collectors bring 50-60 tons of PET and high-density polyethylene to the site each month and earn a sustainable living. The municipality never built that bridge over the open sewer, but in the end, TENA did not need it to be successful. What it needed was early-stage risk financing.