“Catalytic capital is investment capital which seeks a return on capital while accepting disproportionate risk and/or concessionary returns relative to a conventional investment. Catalytic capital aims to generate positive impact and enable third-party investment that otherwise would not be possible.”
— TIDELINE (2019)
It offers investors the opportunity to support solutions while delivering impact where it matters most.
TYPES OF CATALYTIC CAPITAL
Convertible Notes are short term loans that eventually convert to equity under certain predetermined circumstances. Investors loan money to an organisation and rather than get their money back with interest, they get a discount in valuation during a subsequent financing round. The price at which such notes convert to equity is usually capped making this a founder-friendly instrument.
A whopping 92% HCMs see catalytic capital as a great fit
favour Purchase Order Financing
favour Unsecured Loans without Collateral
favour Supply Chain Financing
Since they compete with mainstream businesses for limited capital, HCMs are open to innovative solutions that solve their financing gap.
favour Social Impact Bonds
favour Impact-Linked Financing
favour Revenue-Based Financing
HCMs would prefer interest rates to stay under 15%
Interest from banks and NBFCs are capped at 24%. But, some enterprises are willing to pay up to 25% interest to address working capital needs, access emergency funds to keep the business running or capitalise on a lucrative order, assuming the money is available immediately and with limited red tape.
HCMs would prefer to receive debt, in staggered tranches, as and when they need it.
The fragmented nature of the CMH sector presents a massive opportunity for catalytic capital to galvanise value chain development.
Seeding + catalysing innovation pipelines
Repairing broken escalators of HCM growth + scale
Fostering SDG impact
Incentivising additionality i.e 'extra good'
Facilitating participation of mainstream startup actors
De-risk innovation by supporting newer ideas / proof-of-concepts across the diverse value chains that operate within the CMH sector such as farm-to-fibre models, bamboo + other sustainable raw material pipelines, tech-enabled approaches, etc.
De-risk the enterprise growth trajectory by enabling HCMs to replicate approaches, build track records, and gain proof-points for scale making it easier for third-party investors to step in.
Build an enabling environment for inclusive and sustainable industrialisation by supporting HCMs’ SDG-specific goals across climate action, gender equality, decent work and economic growth, and responsible production and consumption.
Build accountability for impact generation by offering “better terms for better impact” to market-based HCMs and incentivising additional social and environmental outcomes.
Empower HCMs to drive formal inclusion and economic mobility of first-mile artisan communities, making it easier for mainstream startup actors in health, education, financial inclusion to actively participate in the CMH ecosystem.
“India has a lot of resources but they are not being put to good use. I would encourage the government to think about de-risking the artisan sector by providing catalytic capital, and creating a fund that can support technical assistance for their own state-owned banks, to lend to this space.”
— AAKIF MERCHANT, ASSOCIATE DIRECTOR, CONVERGENCE BLENDED FINANCE