Joe Evans Share Facebook Twitter LinkedIn Email As social investors, we don’t talk enough about decisions that must be made after investments close. These post-funding decision points are common in social change work, and how we react might determine not just whether our dollars will lead to the positive impact we intended, but also whether we will get millions returned to the foundation to lend or grant out to other groups. This year, our Social Investment team will share a few examples of pivot points that came after closing. We’ll walk through our initial thinking and investment structure, how things changed and how we reacted or restructured investments, in the hopes that the sharing may benefit other impact investors. The original investment First up is a program-related investment loan we made in a for-profit company, PosiGen, in June 2020. Kresge doesn’t frequently invest in socially motivated start-ups, preferring instead to partner with nonprofits. But in this case, we saw the incredible potential and mission alignment between Kresge’s Environment Program and the work of PosiGen, a New Orleans-based solar start-up. There were many reasons to be excited. PosiGen focused on the communities usually locked out of the solar market, communities of color, and communities with low- and moderate-incomes, which are the places we work. New Orleans, its home base, is also a focus city of the foundation. PosiGen got our attention because it had deftly identified and crafted a solution to rectify a major barrier to the availability of solar systems for single-family homes. Most solar companies focus on custom systems for larger homes in affluent neighborhoods and rely on credit scores as the primary approval lever. In that traditional model, almost all communities of color or lower-income communities are assumed to be unviable markets. PosiGen’s approach combines four elements to help it serve these communities: it uses a standardized approach to system design and sizing, a combination of energy retrofitting with every installation, a community-based sales approach, and reliance on monthly customer savings instead of credit scores. Of course, traditional investors perceived some things that we saw as exciting innovations as risky, and PosiGen’s capital stack was littered with onerous terms and unduly high interest. But we know that without bringing green energy solutions to low-income communities, there’s no way to meet our climate mitigation and resiliency goals. PosiGen had a great track record, an innovative model that worked for these communities, and exciting growth potential. It needed cash to bridge to an in-progress equity round, and we decided to extend a $5 million loan to serve as a bridge and help draw in other investors. The first dilemma In the weeks after our investment, the company hit a few roadblocks, related to its previous debts. Even more cash-strapped than we expected, it became clear that the company would miss milestones we had built into our investment structure. We hit the first decision point as they worked to ride through those bumps – should we adjust our milestones and release the second half of our commitment? Coming to a decision proved easy because of our belief in the promise of the PosiGen model. Even with this added risk, we got to yes pretty quickly, but not before we used the leverage of our commitment to encourage other investors to disburse earlier than planned alongside us, to both share risk and ensure PosiGen had additional cash available. A lender or equity investor? A few months later, we hit a second inflection point as the series D funding round got closer to closing – should we convert our loan to equity? We decided, at that time, the answer was no. Our senior position in the capital stack and the leverage that can come with that played a role in our decision. As a lender, you might be shut out from the board room and its inside information, and from the chance for significant return, but lenders have certain rights that equity investors do not. These rights can prove helpful and important during turbulent times, not only to protect an investment but, more importantly, to protect the programmatic intent. For example, if the company failed, we would have been better positioned to influence how the company was broken up, how its existing customers were serviced, and what would happen to the families who had signed contracts but had not yet received their systems. Swift changes Then last year, we hit another decision point. PosiGen managed itself through the swirl of the fall of 2020 and closed its series D funding round in December. That enabled the company to clean up and exit from some of the worst of its earlier financing agreements and secure new financing facilities. As it gained more traction and breathing room, it attracted more attention from investors and started to raise a series E, targeting $100 million, a true growth round. Once again, we faced a decision. We could be paid back early out of the proceeds of that round and use that cash for other investments. Or we could convert to equity as a part of the new round. Again, we chose the latter primarily for programmatic reasons, but a different set this time. This time it was about supporting the program goals if things go really well. We are not the only socially motivated investor at the PosiGen table. But converting to equity allows us to speak up in favor of the people that other solar companies leave behind and for hiring local people and BIPOC-owned companies as installation partners. We also are learning a tremendous amount from the company and its board and new investors, learnings we have more access to as an equity investor. Takeaways With the benefit of hindsight, we know that if we had converted at the first opportunity, we would have enjoyed much stronger appreciation of our investment – but that was not the right answer from the program point of view, and maximizing financial return is not one of our driving aims. At Kresge, when we hit a crossroad, we ask ourselves two questions: How can we best ensure fidelity to the original programmatic vision with our dollars (whether already invested or dollars waiting to disburse). And, secondly and usually of less importance, how do we best ensure we will recoup our investment to recycle it into future opportunities. Keeping the program question at the forefront helped us to navigate tricky spots and make the critical pivots needed. Joe Evans is Kresge’s Social Investment Practice portfolio director and a social investment officer. Follow the team on Twitter @kresgesocinv and sign up for its bi-monthly newsletter to get posts like this in your inbox.