The effects of upfront payments as a de-risking tool on follow-up investments

This study investigates whether upfront payments provided to impact enterprises in Social Impact Incentives (SIINC) transactions serve as a de-risking tool for investors, thereby increasing their likelihood of investment. Using a deductive approach, the research design incorporates stratification of investors based on key criteria: Type of Investor, Investment Thesis, and Average Investment Ticket Size. Two balanced cohort samples, Cohort 1 (control) and Cohort 2 (treatment), are randomly assigned to receive either the standard SIINC without upfront payments (Start-up A) or a SIINC with a 20% upfront payment (Start-up B). The hypothesis posits that the inclusion of upfront payments in SIINC transactions will enhance investors' propensity to conduct due diligence and pursue investment opportunities by 25%, effectively serving as a de-risking mechanism.

Investors are asked whether they would engage in due diligence for potential investment and to rate the influence of the SIINC contract on their decision. Stratified investor segments include commercial venture capitalists, and impact investors, considering their varying degrees of impact orientation and risk perception.

The findings are anticipated to reveal a significant increase in investment likelihood for Start-up B, especially among impact-oriented investors and those with investment theses aligned with health tech. This study aims to provide insights into how upfront payments in SIINC transactions can strategically reduce investment risk, thereby facilitating greater investment in early-stage impact enterprises. The results are expected to have significant implications for the design of SIINC transactions and the broader field of impact investing.