Episode 9 (season 2) Frederik Matthijs on Impact Investing as a Lever for Inclusion

And these smaller amounts, may I call them "seed capital" in the venture capital world, or is it a bit further along?

Our standpoint is quite clear: from the moment you have your first paying customer, you can come to us. So, we don’t invest in research and development. There are other avenues for that, like VLAIO, but as soon as that first customer is there, a typical use of our capital might be for your first hire of a salesperson, marketing budget, and so forth.

And do you provide this capital in the form of loans or participations?

Both. They are subordinated loans. This means that if things go wrong, the bank gets its money back first, and then Trividend. We also don’t require collateral, so for the bank, it acts as a lever to create additional financing.

Our intention is to invest for 5 to 7 years and then exit. This means that the loans are repaid. We are there to support the initial growth, and then it’s up to the next investor to provide additional or other capital.

And how important is profitability for you? And for impact investors in general?

For impact investors, you start with your analysis: is this genuinely a product or service that will contribute to solving a societal challenge? That’s your starting point. If that’s not the case, we’re not interested and won’t go any further. Of course, the financial aspect is also important. But the question is: are you willing to make a trade-off?

To continue with the example of social housing: if you can clearly demonstrate that this societal need—a home for everyone—is being met, but you have to sacrifice a bit of financial return, then we notice that this becomes a much more challenging discussion.

For Trividend itself, when it comes to social employment, we can also lower the expected return (interest) slightly because we can rely on an external fund managed by PMV, where we have drawdown rights and where we can also cover part of our risk.

The trade-off today: you have to consider the context today. And one of the goals that we have set is exactly to delve deeper into the trade-off between impact and financial return. Can we integrate that more into our decision-making structures?

Because you want to mitigate your risk. Can you say something about whether, after more than 20 years of Trividend’s existence, you’ve noticed that the projects or companies you finance carry a higher risk than what a traditional bank finances? Risk in terms of non-payments, defaults on loans, or participations that have to be written off… Is that significantly higher for you because you choose impact investments compared to a traditional investor?

Compared to the bank… You have to look at the phase in which you’re investing. The bank won’t invest in the phase where we invest.

Compared to other investors, I think it’s a double-edged sword: the ambition of a start-up or entrepreneur is to solve a societal problem, and the focus is also somewhat there, while as an entrepreneur, you have to juggle many plates to make it work. So, besides your classic reasoning for realising your business model and financial plan, you also want to maintain that focus on the impact story. So, it’s a more complex narrative to realise.

However, the good news is that it usually goes hand in hand. And it’s essential to look at where you measure your impact’s success. How do you do that? What indicators do you set to achieve that?

In the early stages of a company, it should focus as much as possible on things that also contribute to their profitability. But, for example, if you say ‘I want a mindshift’—there are several projects that say ‘I no longer want beverages to be transported according to the classic models on the road, but directly from the tap’—these are new models, but you also need a mindshift for that. If you then think about what percentage of people will start drinking directly from the tap (with or without additives), it’s a long-term story. In the short term, you have to look at where profitability lies.

So it can be more complex to achieve that. I also think of certain sectors… For example, if you’re producing circular products: you impose a set of criteria that, today, usually aren’t cheaper. And your raw materials or design for your product may also be a bit more complex or more expensive than if you say you’ll outsource production to low-wage countries, or if you produce it locally in a social enterprise that also considers an inclusive workforce. There are some trade-offs that sometimes make it more challenging to achieve profitability.

So that means you have to dare to have a longer-term vision as an investor, so that profitability might take longer to realise than with more traditional investments.

Over Trividend’s history, our failure rate is 1 in 6, which isn’t bad for an investment fund. So, I think, depending on the model and how you approach it, in the long term, it doesn’t necessarily have to involve more risk.

Now, I’m spontaneously reminded of a book my daughter-in-law gave me: Invisible Women. I don’t know if you’ve read it, and if not, it’s highly recommended. It provides countless examples of how our world is filled with solutions, tools, services, and products designed by men, never considering them from a woman’s perspective. And when you read that, you’re stunned by how foolish we all are to continue mass-producing such things, so to speak… That involvement, that participation from different angles in looking at a solution or an entrepreneurial idea, is indeed something to be encouraged.

I’d like to add to that because when we talk about traditional investment committees, but also still somewhat within Trividend, it’s about what you measure your success by. And yes, if that’s primarily driven by male success factors… If you just look at who works in the financial sector: it’s largely men driven by financial success. And if you look at the care sector, for instance—like at Uilenspel—it’s mostly women who work there. Fortunately, we’ve managed to hire one man, but the connection with that solution, the drive to derive energy from it and say ‘I’m successful if I can solve this’… There really is a difference there.

So, you’d expect that more female entrepreneurs would approach you than men.

Unfortunately, that’s not the case. What we see—and these are broader figures—is that only 10% of start-ups are founded by a woman.

And you don’t exceed that yourself?

We’re at 17% today. It’s better than average.

But still far too low?

Yes, absolutely.

I know from experience that many investors, when they invest in a young company, tend to support that company not only financially but also with advice and guidance. You also take on a board position or a mentoring role in some way. Probably out of self-interest, because if you help guide it, there’s a better chance of success for the company, and so on. Do you do that too? And if so, do you also coach on themes like inclusion if the projects you support are related to that?

In about one in two of our investments—just over half—we effectively bring someone on board in the governing body or advisory board. Sometimes it’s a requirement, as you pointed out, where we say, ‘look, we believe in these two founders’—it’s usually one or two founders in a start-up—‘but there’s a particular competency or network we want to bring in’. Honestly, today, it only happens in a few cases that it’s about bringing that impact vision in. That impact vision: sometimes it’s very much about inclusion, and we notice that for certain start-ups that are growing, it can be tempting to, for instance, look to another country for outsourcing and not continue working with a social enterprise.

We try to embed that in the contract. The reason we invest is that you create jobs in a social enterprise. If you stop doing that, well, we might withdraw. Or you might have to pay more interest, for example. So, we embed that, and sometimes we also bring someone on board to continue pushing that.

In many of the start-ups, the drive is precisely inclusion itself: tackling poverty, social housing, and so on. In such cases, we’re more likely to bring in a financial profile or a marketing expert.

Finally, Frederik, what advice would you give to a start-up entrepreneur today? Or maybe even to an investor?

I have a lot of advice I’d like to give. To begin with, I think what’s very important is that people who have an idea, who, for example, can develop a product, sometimes fall in love with the product or solution and might take too long to ask whether it’s really the right way to solve the problem. Is there a need for it? Will it genuinely solve that problem? They keep developing it, but sometimes it’s better to say, ‘hold on a minute’. And then advice comes into play in the next phase. Surround yourself with other people—be open to that.

You might be great at coming up with a particular idea or solution, but maybe less good at the financial aspect, the marketing side, or really understanding whether this aligns with people’s needs. How do you test whether this is indeed the solution? So, surround yourself with people. And what I also definitely want to stress is that when we talk about inclusion, these are sometimes difficult adjustments to monetise. But if you can map out from the beginning that through this specific way of working or HR policy, you can actually save certain societal costs, that you offer people opportunities and employ them through activation—that has a positive impact on society. Try to map out as early as possible what that entails.

Because the newer, innovative financing methods will also focus on that. Namely, what positive societal externalities do you create with your intervention, or what costs do you save? If you have a clear picture of that, you can position yourself more as a service provider to a local government or the Flemish government. While today, you might still be dependent on subsidies. And those subsidies are going to disappear. But if you can demonstrate, ‘look, through my intervention, you can achieve your government objectives more efficiently’ or ‘I can train and prepare people so well that a traditional company will welcome them and they’ll quickly become productive’. You need to be able to demonstrate that. And then a company might be willing to pay for that. So, it’s a bit of a mindshift towards other types of business models that were perhaps previously funded by subsidies. Today, that’s called ‘outcome funding’. Or you have social impact bonds and the like, which are more designed as a test to see if something works and, if so, you can perhaps start offering services.

For investors—and this applies equally to entrepreneurs—I think it’s essential to surround yourself with a diverse range of financiers. Depending on the phase you’re in, you need different financing. Classic start-ups or even larger companies engaged in innovation, developing new projects, are also often subsidised for research and development. There are many types of subsidies you can use from VLAIO. It’s nothing to be ashamed of.

Sometimes people say, ‘subsidies…?’ No, it’s going to allow you to innovate, experiment, and prove that something works. And then you need to look in the next phase at what other types of financing you can combine with that. If it’s something more challenging—like social housing, for instance, and it generates less return—if you can combine that with a government guarantee or a foundation that also contributes a bit of philanthropy, it might generate sufficient financial return to attract larger investors to the market.

Bring them all together. I think that’s also the future: combining different forms of financing, different perspectives, and that way, you can achieve just enough return.

I feel like we could continue this conversations based on the things you’ve said. Very interesting. And I hope it was interesting for the listeners as well. It probably provides points of departure for further questions, but I assume people are always welcome to contact you? Or Trividend if there are specific investment issues or related matters?

Absolutely: www.trividend.be, and you’ll find all our contact details.

Fantastic, thank you for being here.

Thank you for inviting me; it was a real pleasure. Thank you very much.