Advice From Impact Investors For Social Entrepreneurs Seeking Funding
Last week at the Indian Institute for Human Settlements (IIHS) campus in Bangalore, entrepreneurs gathered to discuss impact investment with two experts in the field: Vikram Raman, Vice President of Unitus Capital, and Snigdha Rao, Senior Investment Manager at Aavishkaar Venture Management.
The presentations were packed full of information on the process of receiving investment, what an investor looks for, and how an entrepreneur should approach potential funding. Aside from the technical information, a few important themes emerged from the dialogue that are particularly relevant to the social entrepreneur thinking about approaching an impact investor. Below are two general but noteworthy bits of advice from the dialogue with Vikram Raman and Snigdha Rao.
Understand what kind of investor you are looking for, and don’t just go with the highest valuation.
Many entrepreneurs are turned off by the idea of conceding any amount of authority over his or her company. After all, the entrepreneur is often attached to a very distinct vision for the venture. This attachment results in unwillingness to compromise on decision-making, and in turn deters many entrepreneurs from seeking investor support. At some point, however, an entrepreneur might have to come to terms with the fact that if he wants to achieve any sort of vision for the company, he is going to need additional capital, and that anyone willing to offer that capital will most likely want a say in how it is managed.
“You should expect that any investor coming in will have a certain mindset,” said Vikram. “Most investors, depending on their philosophy, their behavior, and the amount of money being put in, will look to influence the company moving ahead, especially if they want a board seat. They will try to offer solutions, or even at a board level influence the long-term strategy of the company.”
Still, bringing in external capital is often in the best interest of the company, even when it means losing some control of the business to the investor. If the entrepreneur truly cares about his or her company, it is important to recognize when this is the case. In fact, if an entrepreneur is honest with himself, he might find that forfeiting some control to an investor might, in itself, be a smart move for the company. Many social entrepreneurs have a great product or service with high potential for impact, but do not know how to turn that product into a successful business. Investors come equipped with experience and manpower to fill certain gaps that might exist within the venture, and that prevent it from utilizing its maximum capacity.
In order to know what sort of investor you want to work with, both Vikram and Snigdha agree that it is essential that you know yourself: what kind of entrepreneur you are, what kind of company you are running, what kind of funding you are looking for, etc. Different entrepreneurs will have different management styles; some are businessmen that like to have complete control, while others might not necessarily know how to bring their product or service to market. Knowing where you fall will help you understand who to approach, and how to get the most out of the investment.
Entrepreneurs should also understand that the development stage of the company plays a large role in determining not only what kind of funding he or she receives, but also what sort of involvement investors will want to have. With seed stage (Rs. 25 lakhs – 1 crore) and early stage (Rs. 2.5 – 15 crore) funding, for instance, investors will typically want a more hands on approach to ensure the product or service reaches the market and the funds are utilized responsibly. Growth stage funding, often in the range of Rs. 15-50 crores, will require less of a hands on approach since these companies are typically more mature and have exhibited strong management practices through historical performance.
Understanding what kind of investor you want to work with can dictate how far the capital you receive will go. Thus, choosing the right investor is far more important than choosing the highest valuation, according to Snigdha.
“If you end up getting offers from multiple VCs then I would suggest that you don’t just go for the highest valuation. That’s top down thinking, because you might end up with an investor who sits in your head every day, trying to steer your company. Different investors have different philosophies on how much involvement they should have in a company… If you are somebody who hates involvement, then don’t go with a guy who thinks he can continually add value to your company. If you are somebody who thinks, okay, I lack skills in marketing, or business strategy, and I really want somebody to help, then go to the investors that can spend that time with you.”
Be able to articulate your social impact, but remember, at the end of the day it is about your ability to turn a profit.
The value that impact investors place on social impact sets them apart from other mainstream investors. As a social entrepreneur approaching an impact investor for funding, it is important that you have clear understanding of the impact your product or service has and that you are somehow able to quantify that impact.
Many social entrepreneurs are placing increasing emphasis on impact assessment as a way to do this. However, given the wide range of metrics and the variability across sectors, it is extremely difficult to standardize impact assessment in a way that resonates with impact investors. “It’s very difficult to compare one investment to another when you factor in the qualifiable impact,” Vikram explained. “What can be quantifiable is the number of people using your product or service. So, for instance, if you’re an ambulance company, then you know how many people are using your service, how many people are from the bottom of the pyramid, etc… these are things that are important to an investor.” In other words, do not get caught up on what cannot be easily quantified.
Of course, while impact is, by name, a central concern of impact investors, they are, like any investor, focused on earning money. Thus, if you are hoping to receive capital from an impact investor, extensively assessed impact is not enough; you must be able to show that your business is or has the potential to be profitable.
According to Snigdha, one of the most common mistakes of social entrepreneurs is sacrificing the commercial value of a product or service for the social impact of it. “Do not sacrifice the commercial for social,” Snigdha said. “There is no social impact without the commercial aspect.” Her claim is a candid expression of the most common argument in favor of for-profit over nonprofit social enterprise: profit means sustainable and scalable business, which in turn means sustainable and scalable impact.
The line between profitability and impact is a delicate one to walk, particularly as an entrepreneur considers capital from a third party investor. The scalability argument, that as profit expands your business you are able to impact more and more people, certainly carries weight. At the same time, we saw what happened when microfinance institutions were opened to commercial capital and became increasingly pressured to achieve high rates of return. The resulting mission drift was not pretty.
The main takeaway from this point, however, seems to be not that you should focus on profit over impact, or vice versa, but rather that in order to receive funding from an impact investor you must be able to demonstrate dexterity in walking that delicate line. No matter how strongly you feel about a certain issue or how badly you want to make a change, if your avenue of choice for addressing the issue is sustainable business then you have to give considerable weight to how you will sustain in the first place. And if your desire to change the world is contingent on the amount of people your business reaches, then investor funding might be the most effective way of achieving it. Just make sure that when it comes to finding that investor, you choose one that suits your entrepreneurial needs.
