So you’re looking for investors for your social enterprise? Fantastic! Here’s what early stage investors really look for in a social enterprise or startup idea.
Do you have what it takes to get funding? Keep reading!
Many investors are now considering the social and environmental benefits (or drawbacks) of potential investment opportunities.
Some funds and investors have even been set up specifically to fund social entrepreneurs, such as the TOMS Social Entrepreneurship Fund.
Other organizations, such as Investor’s Circle, will support any entrepreneur but will give socially and environmentally business special consideration.
It can be difficult for startups to get started without some initial capital. Sometimes, social entrepreneurs can fund their own efforts. Other times, they may have friends and family who are interested in investing. However, it’s often necessary to reach outside of personal networks to find funding. Good news is: angel investors, seed funds, and accelerators are willing to invest in startups and ideas.
Consider the Investor’s Point of View
Every time you want to work with or pitch anyone about anything, consider the audience and their point of view.
What is an investor looking for?
The primary concern for most investors is producing a profit. They invest and assume risk in anticipation of making money. Some investments will go sour, that’s a fact of life. Other investments will go on to make money. Early round investors will “take gambles” and assume high amounts of risk.
However, no investor wants to lose money. Early round investors accept that they are investing in high-risk ventures. They will accept that risk if the long-term pay off looks big. Many young companies fail, but those that succeed and eventually reach either an IPO or a buyout can produce massive profits.
Data suggests that angel investors average returns of 2.5X their initial investments. However, while some savvy angel investors manage to turn a large profit, many fail to make much if any. In fact, angel investors are actually more likely to lose money than making money on a deal. When they do make money, they tend to make a lot.
Of course, investors who invest in social enterprises are looking for more than profits. Just like social entrepreneurs themselves, social enterprise investors looking to make a positive impact. Some investors will favor certain types of change. Bill Gates, for example, just announced a $2 billion investment in sustainable energy.
What Early Stage Investors Look For In Social Enterprises?
Early stage investors in the social entrepreneurship space will look at the same things as other investors.
- How does the team look?
- How about the chosen leader or leaders?
- What is their vision?
- Any financial plans, projections, revenues, or other numbers?
However, for investors looking to invest in social enterprises, these numbers won’t be enough. And sometimes, they might overlook gaps in the business plan, product, or team if they believe in the potential to make a positive impact.
The most committed social enterprise funders will go even further and prioritize social and environmental benefits. These funders are more concerned with making a positive impact rather than producing profits. If the enterprise produces small profits but generates a lot of change, that’s not only acceptable but great.
Many social enterprise investors are looking for a mix of making an impact and producing a profit. Profits are important for two reasons. First, yes most investors are looking to generate a return.
Secondly, profits will help the business sustain itself and expand. Self-sustainability is one of the key differences between a social enterprise and a charity. Charities rely on donors. They have to run donation drives, find big money donors, or convince corporations to give them funding. A social enterprise can rely on funds revenues generated by selling products and services.
Understanding What “Early Stage” Investment Means
Investors look at different factors at different stages.
The earliest round of funding is usually called either “seed” or “angel” funding. Angel investors may not expect to see revenues and sales. In some cases, early-stage seed funders will even provide funding when the product itself hasn’t been clearly defined.
One accelerator, Startup Bootcamp, “simply” wants you to have identified your market and the “why” behind what you’re trying to create.
Of course, having sales or at least a defined product certainly helps. Yet early stage investors will invest in entrepreneurs and teams that they believe have potential. The more proof that your product or service will be a smash success, the better. Often, it makes sense to “bootstrap” and produce some results before you even look for funding. A pilot test or soft launch can go a long way towards providing that your business will be a success.
Let’s look at a case study.
Pilot Projects Are Fantastic For Proving Viability
Talk is great. Business plans are fantastic. A strong team and a great vision can go a long way. But do you know what gets investors really excited? Results. Of course, it can be hard to produce results without funding. However, you may be able to set up a pilot project, even a small-scale one on a tight budget or just plain old sweat. If so, you should get that rolling before you even approach investors.
Take Blue Ventures, for example. The company rebuilds tropical fisheries in coastal communities. Many fisheries have been overexploited, and either has collapsed or are at risk of collapsing. The environment itself is damaged and communities that rely on those fisheries have been adversely affected.
Blue Ventures started in one small village in Madagascar. The company ran an experiment, closing off a small section of an octopus fishery to see if it would rejuvenate. It was a small test project, the type of thing angel investors might fund even if the risks are high.
The experiment worked. The local fishery became far more productive. As news spread among other villages, Blue Vision found itself in hot demand. The market already proved that their idea would work. These early results helped Blue Ventures expand its efforts locally. It also attracted funding and resources. Blue Ventures went on to win the Tusk Conservation Award, a Skoll award, and other accolades.
Now, the Blue Venture’s impact has reached a viral phase.
Investors Invest in People (But That Probably Means Something Different Than What You Think)
There’s a common saying among venture capital firms: they invest in people, not ideas or even businesses.
This saying is very nuanced, and quite frankly, many aspiring tech geniuses and would-be social entrepreneurs misinterpret it. Venture capital firms don’t invest simply in “people”, nor do they invest in savvy salesmen who make great pitches. Venture Capital firms invest in people who they believe can get sh** done. Potential investors will spend a considerable amount of time evaluating management teams.
A savvy investor isn’t going to be convinced by a great smile or wowed by the most intricate investment proposal. Sure, these factors can make a great first impression; however, the world is full of savvy people and fantastic ideas. In the long run what separates titans of industry from intellectual tinkerers is the ability to execute.
Investors also prefer to invest in established and skilled teams. A lone entrepreneur can’t build a company on his or her own. Sometimes, seed funders will provide resources to a lone founder. However, it is important to build a team.
This team needs to be balanced. Let’s look at a quick excerpt from our magazine:
“The social enterprise startup is unique because it requires both social development and business acumen to be successful. In my experience very few people are experts at both. Some are development visionaries- they can see what needs changing and which ideas would help. Others are business gurus who can find the perfect price point, financial model, and business development strategy.”
In addition to having a social development expert and a business whiz, it also helps to have the technical/skilled staff on the team already. If you’re looking to launch an app, it’ll help if you have the app developer already on board.
Great Ideas Are Great But Not Enough
Here’s a fact: the word is full of great ideas. If you head to a conference, incubator, hackathon, or other event packed with bright, ambitious minds, and you get everyone to open up, you’ll hear tons of great ideas. I’ve been to quite a few of these events, and without exception, I’ve come across a ton of great ideas.
So what will make your social enterprise startup idea attract the big fish in silicon valley? You will need more than just a great idea if want to attract what early-stage investors really look for — a great idea and a great investment.
Here’s another fact: accurate, reliable futurologists are hard to come by. The brightest analysts at the best Venture Capitalist firms, the biggest banks, and the most elite consulting firms don’t know what the future holds. Sure, they might publish confident reports predicting future “certainties”. However, if you go and dig up past reports, you’ll find that the experts themselves are often wrong.
The inherent uncertainty of the future is one of the several reasons that early stage investors will invest in people rather than businesses or even ideas. The future might change, markets may not react the way that you think. However, great business leaders will adjust. They will anticipate markets, look for opportunities, and when necessary, abandon or change ideas up.
No one can predict the future. Further, an idea that seems like a sure-fire could flop once it hits the market. And that’s assuming that the product ever reaches the market. Fact is, many startup ideas remain ideas and never become actual products.
As Lowercase Capital puts it “ideas are cheap and execution is the cat’s pajamas.” A great team will bring great ideas to life. A proactive team will adjust when products are failing. The wrong team, however, will simply waste money.
Scaling Up: Every Early Stage Investor Wants to Go Big
Early stage investors know they are taking on risks. However, they also want to go big. Scalability is very important for every investor. They don’t just want to hear buzzwords about how you’re going to change the world or save the fish in the sea. They want to see an actual plan with steps and considerations.
Your plan to achieve scale doesn’t have to be micro-detailed. You don’t have to know every person or organization you will reach out to, or the exact structure of projects you haven’t even started working on. However, you do have to prove that you’re serious and that you’re thinking ahead.
You need to have a clear vision for how you plan to scale, and you need to have a general idea of who you’re going to contact and who can help you achieve your plans. For social enterprises, that often means the local community. Take Blue Ventures, for an example. The company rebuilds aquatic habitats, working with local fishers to make local fisheries sustainable.
A Quick Case Study: Using Profits to Drive Change
A social enterprise can rely on the products and services it sells to fund its operations. Often, simply the act of selling a good is creating impact. Consider Patagonia, a company that sells active lifestyle gear, including rock climbing equipment. When founder Yvon Chouinard founded the company he wanted to do more than just produce profits. In fact, he was already producing profits but realized that the steel pitons he was manufacturing were permanently damaging rock faces. So he started producing climbing equipment that wouldn’t hurt the environment.
Patagonia grew, and every time the company sold a product, that meant that customers were choosing a sustainable product that wouldn’t damage the environment. At the same time, the company was producing profits, which it could then reinvest in new product lines. Now Patagonia produces over a half billion dollars a year in revenues. Patagonia now produces a lot more than climbing gear. It is a full lifestyle company that produces a range of products. However, it has never lost sight of its social ambitions.
Patagonia was a stunning success, but it started small. The company reached its tremendous heights by utilizing the market and turning profits into sustainable change.
So Where Can I Actually Find Resources?
Enough talk. It’s time for action.
There are many opportunities for finding resources.
Consider your own social and family network. Do you have a “rich uncle” who might be willing to provide some funding? Do you have friends who could contribute some free sweat labor?
Explore these opportunities first, because if you can get the ball rolling now, it’ll help you when you apply for external funding.
If your company is very young, then you should consider accelerator programs. Resource and funding packages vary from accelerator to accelerator, however, most will offer somewhere around $120,000 dollars in exchange for 6% of your company. Most will also offer office space, mentorship, and business advice. They may also be able to link you up with venture capital firms.
Many angel investors are also very active. In 2011 angel investors seeded some 65,000 different startups with roughly $22 billion dollars. Finding angel investors can be tricky. Often, it takes a personal connection. By attending trade shows, conferences, and hackathons you might rub shoulders with potential angel investors.
Crowdfunding is also growing in popularity. However, securing funding is a bit of a crapshoot. Some projects stick and go viral, many simply fade away. If you go for crowdfunding on Kickstarter or another platform, make sure you explain the value of your project, why it’s different, and why people should care.
No matter who you approach for funding, remember to consider their perspective.
What are their motives? Profits, sure. But what else? How can your business generate both profit and good for the world?
Put your presentation in terms that your audience will understand and relate to. There’s no way to guarantee that you will secure an investment, but aiming your pitch at your audience will help.