This morning I attended the SOCAP11 “The Long View: What Institutional Investors Want Every Social Entrepreneur to Know”. It was a very popular session with roughly two hundred and fifty participants. The moderator and panelists represented institutional investors: Laura Callanan from McKinsey & Company, Mike Dorsey from The Westly Group, Will Rosenzweig from Physic Ventures, Dipender Saluja from Capricorn Investment Group, Nancy Rosenzweig from Trillium Assest Management, Amit Tiwari from Invesco Private Capital, and Doug Ferguson from 5 Stone Green Capital.
The group presented an overview of the institutional investments scene and provided advice to social entrepreneurs seeking support from institutional investors. At the end of the discussion social entrepreneurs in the audience were invited to take the mic and ask the panelists for specific advice. Some common themes emerged from the discussion, as well as specific advice for social entrepreneurs. I have done my best to summarize the points here, from the point of view of someone new to this particular conversation.
A panelist said that market infrastructure does not exist in the social impact investing space. However, it seemed from the discussion that at least some institutional investors are playing by the market. Ventures must produce a revenue stream, in addition to producing impact such as job creation. A panelist commented that an entrepreneur should expect to provide 12-15% return on investments. Another commented that his fund carefully evaluates the potential for a market rate of financial return; if it does not look like the fund will get that, then it will not fund the venture.
Given this scenario, it seems all the more important that a social entrepreneur seeking institutional funding seriously consider the advice provided to the attendees of this panel! Fortunately the panelists were very specific. A few of their key suggestions follow.
Many social entrepreneurs launch their ventures with friends and family financing. The panelists seemed to agree that this is acceptable, as is beginning your venture with a grant and subsidy mix, which has become more and more common. The panelists also said that they are hearing from social entrepreneurs who initially launched a nonprofit, but are now looking to transition into a for-profit for the sake of scale. One panelist said that he has no problem with that. Another remarked that social entrepreneurs in this category can now seek out non-diluted financing, which is provided to organizations operating in post-conflict zones with high risks, to take some of the risk out of it for the social entrepreneur. Perhaps this could enable some social entrepreneurs to remain as a nonprofit.
However if a social entrepreneur is going to seek financial support from an institutional investor, then the panelists all seemed to agree that an institutional investor likes to begin their relationship with a social entrepreneur early on in the process. One panelist said a mistake that social entrepreneurs make is to think of their relationship with an institutional investor as purely transactional, when the social entrepreneur should really be thinking of it as a long relationship. This makes sense when you consider that as stated by a panelist, a social entrepreneur should not expect to receive a check from an institutional investor during the first six months to a year of the relationship. Sometimes the relationship lasts 1-2 years before the institutional investor commits to funding the venture.
One of the reasons institutional investors like to get involved early is so that they can map out a pathway for the social entrepreneur. The institutional investor wants to determine how much capital will be needed. They also need to anticipate, and plan for their exit.
During the time before an investment decision is made, the institutional investor will also be evaluating the social entrepreneur – looking for vision and execution, the ability to see what is on the horizon, and the social entrepreneur’s ability to work with that. They are looking for a social entrepreneur who will not only grow and generate a profit, but will also come back and do it again.
Yet I was under the impression that the panelists did not want to be working with social entrepreneurs who only have an idea – the institutional investor wants the social entrepreneur to have a venture that is already working before the social entrepreneur approached the institutional investor. A panelist said that he sometimes says “no” to a social entrepreneur fifteen times before saying yes. A social entrepreneur must have a proof of concept. He said “there’s a lot of vision and brilliance that can be disruptive” but people must be able to see how this can transfer into returns. He suggested that social entrepreneurs look to high net worth individuals and foundations for funding, to start. Use that funding to show that you can make returns, and then approach institutional investors. Another panelist reminded the audience that institutional investors are working with other people’s money, and have made promises to someone else that they must uphold such as the societal issues (focus) the funds will be used to address, and how quickly the funded venture will start producing returns. She referenced Guy Kawasaki’s blog post “The Nine Lies of Venture Capitalists“ and suggested everyone read it.
In addition to evaluating personal characteristics, the institutional investor will also look to see if the social entrepreneur will be able to measure their impacts. Regarding impacts, a panelist suggested that a social entrepreneur present an institutional investor with ideas about impact and performance that are not as obvious. Another panelist stated that an institutional investor must be able to follow a straight line between their investment and the results of their investment, or the institutional investor will not invest in the venture.
The social entrepreneur should be prepared to provide the institutional investor with institutional reports, which can be distributed to the investor’s board of directors, to demonstrate that the venture is making progress. Additionally a social entrepreneur should seek out and develop relationships with all influencers who might have a say over whether or not the institutional investor decides to invest in the social entrepreneur’s venture.
The panelists also suggested that social entrepreneurs identify like-minded partners outside of institutional investors, early on in the process. Collaboration with like-minded partners reduces risk. It also allows ventures to scale more quickly and will therefore enable social ventures to produce financial returns sooner.
One panelist also suggested that social entrepreneurs develop relationships with strategic partners interested in the social entrepreneur’s success, such as wealth managers who are adding philanthropic services to their offerings. Another panelist suggested working with venture capitalists, as well as institutional investors. Venture capitalists might not be investing money in now, but they can provide guidance, and might provide funds later if they see that there is money to be made.
The panelists provided some specific advice on how to identify appropriate institutional partners to approach for funding. This ranged from identifying institutional investors to how to make your pitch. I have done my best to capture as many specifics as possible.
To begin, a social entrepreneur should first identify what the institutional investor’s focus. Is it clean tech, life sciences, health? Advice from this point varies. A panelist suggested that social entrepreneurs should ensure that their ventures fit into the funder’s focal point. Another panelist said that institutional investors who had invested significant amounts of money in clean energy over the past two decades have seen very little capital come back on a consistent basis. These institutional investors are now guarded about investing in clean tech, one of their focus areas, but will invest in other areas outside of their program area.
Yet it is possible that this commentary is specific to clean tech investments. A panelist suggested that if a social entrepreneur is working in the clean or green tech space, that they should go to the world-wide market because of uncertainty with US policy around this issue. A social entrepreneur should try to predict the direction of public policy because if the government is promoting a certain policy, then investment dollars will follow that policy. However, a panelist said that it is risky to rely on public policy as a predictor, and used health care as an example. Institutional investors working in health care are preparing for 2013 – 2014, but one party in Congress is threatening to wipe out the health care law. The panelist advised trying to stay in fields that are not so subject to public policy whims.
Another consideration might be the date upon which the institutional investor will expect you to begin turning a profit. Make a guess at this date by looking at the round (A, B, mezzanine) that you are in, what stage, what sectors, what are the institutional investor’s mission and objectives, and what region of the world does the institutional investor work in. Look to see if you are one of their first or last and most recent investments. An institutional investor must plan for gains and losses. If they have twelve to fifteen ventures (“deals”) in their portfolio, they must assume that they will lose money on some, make money on some, and break even on others. Ask yourself where you would fit into this portfolio.
Before approaching an institutional investor a social entrepreneur should ensure that they have a clean balance sheet without any debt. Have a good bottoms up financial model, good data to support the proposal, and let the institutional investor that you know how you’re going to get where you’re going. Consider the time constraints on the manager that you are working with – how many potential deals do they likely have to perform due diligence on? Make your proposal pithy.
The conversation ended with these words of advice from one of the panelists. Social entrepreneurs have been following these rules, but he encouraged the social entrepreneurs in the room to break out of them. Institutional investors have rejected ventures that do not have a lot of risk involved. This is particularly true in the tech space. You must demonstrate that your venture is out of the box and risky, because this will prevent competitors from quickly coming in and outdoing you. The panelist said that if an investor is telling you “it’s too risky, it’s too risky” then he does not think that that’s a good investor. Avoid a board that has very different objectives from you.
It was a very interesting conversation in which realities were stated and encouraging words were spoken. There are plenty of incubators out there for aspiring social entrepreneurs if you are looking for additional resources. I have been learning a lot about the Unreasonable Institute, a mentor-driven accelerator program that has many members in attendance at SOCAP11, and if you are in the Bay Area there is also always HubSoMa. There are other hubs all over the world.
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