“What do impact investors want? Sustainable social impact with financial return”
“What are board meetings for? To take policy decisions and ensure organization is on track”
How can one disagree with the above answers? Yet, that is what I did! Because, practically there is something more every new entrepreneur should know beyond these text-bookish answers.
I was speaking at a Villgro Unconvention workshop in Bangalore to a group of aspiring social entrepreneurs. Now with a little bit of experience on both the social entrepreneur and investor sides I, it seems, am one of those uniquely qualified to talk on the topic, ‘What I wish I knew of impact investors’!
Preparing for the talk my thoughts went to the days when I started as an entrepreneur. What I knew of investors then? How my perceptions of a social enterprise, investors’ role and working with investors in a startup changed since then? I also thought of the many early stage entrepreneurs I met and the several practical and conceptual questions they had asked me about investors in general and impact investors in particular. Then there is the experience of working with a few of them over the last few years in the capacities of an investor, board member or adviser. Drawing from all these I wanted this session to be interesting, specific and practically relevant, with useful tips!
The session went well and was very interactive. There were few interesting questions from the audience. All those are compiled here. Hope it makes a good reading especially for early stage social entrepreneurs.
1. How important is impact for impact investors? It is important. But, impact for most impact investors is an entry filter. They use impact potential of the business model, nature of the impact and impact intent of the entrepreneur as criterion for investing. If those are established, then the assumption is that as the business grows the impact also grows and as business becomes sustainable impact also becomes sustainable provided the company sticks to its business model.
2. What comes first, impact or finance? Once you pass the entry filter on impact, path to scale and profitability comes first. Team’s execution capability comes second. Impact investors are interested in you because you are building a commercially viable and scalable company that creates social impact. Otherwise, there is nothing new from charity or a commercial business that you are doing. In addition, in a capital starved country getting more capital for impact investment funds depends on proving that commercial success and impact can co-exist.
3. Investors invest to exit! Details like when, with what return, what impact all vary from investor to investor and company to company and depends! But, they must exit within a time frame. Startup entrepreneurs better keep this in mind that it is your journey and they are not here to be part of your roller – coaster ride and share its emotions. If you are thinking of getting out of a trouble or a business down turn, chances are they are thinking of exit!
4. Raise capital when you don’t need it! You are most likely to find investors when you are doing well and don’t need their funds immediately. Every business goes through ups and downs irrespective of the stage of the business. The trick is to think ahead and raise capital when you are still on an up-curve before reaching the peak. Once you reach the peak, start coming down and don’t have enough cash you are desperate for funds. Investors don’t like the desperate!
5. Only scalable is investible! India is big and magnitude of any problem you try to solve is large. Impact investors look to create a significant impact and thus back models that can solve problems at scale. Growth and expansion are also what attract follow-on investors, increase valuation and help investors find an exit. If you don’t want to scale or can’t scale then be profitable fast, be cash-flow positive and/or look for debt to finance capex and working capital.
6. Delivering an effective elevator pitch! I have not seen or heard of any investment decision made based on an elevator pitch. They are over rated and over used! It is just a way to gauge how focused the business model is. The best way to make an elevator pitch is to do this the way you do with your customer. With a customer, you come straight to the point of what your product or service will do to them and how it is better than the other options in front of them.
7. Missing sales! You passionately spend most of the time in the investor presentation explaining how big the problem is and how impactful your solution is. Your argument that half the world is your market is convincing! But, if a product has to sell everyone in between it goes through must make money out of it. All channel partners, intermediaries and other stakeholders involved in selling must not just make money but make more money than what their time and capital is currently doing for them. They should have a compelling reason to push your product or service. That forms your sales plan. Investors know this and look for a sales plan and unit economic model that works for all the intermediaries and still competitive
8. Nothing is non-negotiable in a deal! If something is mentioned as non-negotiable that is just to block a negotiation. You take a calculated risk in every negotiation and are responsible for its outcome one way or the other. Having understood this everything is up for negotiation in an investment agreement, especially the ones they say are non-negotiable!
9. No surprises, shocks, surgical strikes (!) or first time sharing of an important information in the board meeting unless it just happened on your way to the board room! If you are waiting for the board to convene to share an important information or to discuss a new strategic direction or your key challenges, then that is exactly how a board should not be handled. One of my biggest learning as an entrepreneur is the importance of managing the board outside the board meetings. Talk to the members before the meeting, appraise them of the agenda, give them a chance to hear your side and express their thoughts. Gravitate each of these individual discussions towards the decisions to be taken. Then use the board room to formalize them. This process will also improve the quality of contribution from the board.
10. Whose company is this? A startup is always an entrepreneur’s company and it does not matter what the percentage stake he or she holds. Investors are part of your journey for a brief period and are clear that they do not want to be held accountable or responsible as co-owners. Their suggestions and comments are to make your initiative successful or to protect their interest. They do not want to see you depending on them for running the company or leaving all decisions to be collectively taken at the board level in which case there will be indecision or delayed decision. Sure, they want to be consulted, taken into confidence and listened to. But, they surely want you to be in control and be decisive and that is how it should be!
11. Cash flow is the reality and P&L is, well, the theory! If there is one key piece of information that is most critical and one that investors want to track keenly it is the cash flow – a very clear cash flow status and a cash flow estimate. Cash-flow speaks the truth about a company. It covers and throws light on several critical indicators of business health like the burn rate, receivables and payables, working capital efficiency, sales realization, sales forecast, customer conversion and most importantly effectiveness of your planning and control.
12. Finally, intent makes a social enterprise! There is no definition of a social enterprise and it is not a legal entity either. A social enterprise becomes and remains as one in the intent of the entrepreneur/s in solving a particular problem or creating a particular social impact in a sustainable manner, that intent being explicit and clear in the company’s mission and the entrepreneur being committed to build and stay with a business model that achieves the mission while being profitable.