The paradox in impact investing is that a large percentage of impact investors are hurting the very companies that they want to help. Neophyte impact investors have not yet figured out the difference between philanthropy and Impact investing, resulting in a confusion that causes serious damage to the Impact business community.
There is a big difference between philanthropy and Impact investing. The organizations receiving funding are focused on doing good in the world and it doesn’t matter whether they are for-profit of not for them to do good. In fact, many for-profits outperform non-profits on execution and core metrics for outcomes. Impact investors should understand their motivations for investing and they should have clear financial and non-financial metrics that they use to create their investment thesis.
A non-profit, by definition, does not make a profit. It is also owned by no one and when it has come to its end or fulfilled its mission, all assets must be donated to another non-profit. Value creation is strictly focused on mission and core metrics include outputs as well as key ratios between operational costs vs. direct program delivery.
Social and Environmental Impact investing, on the other hand, creates value on three ways. The business generates a profit. It creates measurable positive social and/or environmental outcomes, plus it creates positive economic outcomes for investors and founders. The fact that the company creates these positive economic outputs doesn’t in any way diminish the company’s need for capital nor does it diminish the impact created by the company’s operations.
To help clarify how investors and CEOs should think about impact investing vs. philanthropy, I’ve put together a sampling of six common arguments that some, mostly new, impact investors put forward, and some responses to those arguments which I hope will clarify the power of impact investing and a more productive attitude towards profitability and liquidity events.
Six Common Arguments from New Impact Investors
Argument: “I don’t want to invest in a company that is just interested in selling out, so I advise companies I invest in to never have an exit strategy.”
Even non-impact investors are wary of investing in a CEO who appears to be in it just for the money, or is planning for the quick flip. These CEOs likely w
on’t have the grit it takes to overcome the many obstacles in their way and will quit half way through, losing everyone’s investment. There’s a fine line between the quick flip mentality and the strategic CEO who is looking for ways to maximize value and leverage that to increase outcomes for all.
CEOs who hear this argument sometimes change their strategy to exclude an exit strategy, which often means that the net impact the company will have is DIMINISHED because of the short sighted demands of the Impact investor who wants to feel good about themselves in the way that philanthropy makes people feel good. By focusing on data oriented approaches to strategy, investors can come to understand the exit as a way to expand outcomes, not diminish them.
Argument:” If the companies I invest in are acquired, the acquirer may have different values, thus hurting the beneficial impact that the company creates.”
This argument suffers from a lack of understanding how exit strategies and execution work. The exit strategy entails identifying the best acquirers for whom the company will provide the greatest value. This exercise naturally involves understanding the values of the potential acquirer and seeking to build relationships with acquirers who share the impact company’s values and will likely expand on them after acquisition.
So, a company that does not have an exit strategy is more likely to be acquired by a company who has misaligned values and may fail to carry on and expand the mission of the company. Rather than decreasing the risk of a values misalignment, the impact investor increases the chances of misalignment by refusing to support talk of an exit strategy.
Argument: “Impact companies should just focus on creating a positive impact and growing a significant company and not on an exit.”
This is one of the weakest arguments against an impact company’s focus on exit, and it is one that is commonly waged against tech startup CEOs, leading to confusion and underperformance in many cases.
Let’s start by remembering the Second Habit of the Seven Habits of Highly Successful People – “Begin with the end in mind.” This habit is just as important for impact companies as it is for people. Those who focus on the end and develop a clear path to get there are 65% more effective in achieving those goals than those that try to “just build a big company.”
Impact companies create value in three ways, and I don’t just mean the Triple Bottom Line. Impact companies create value through creating a valuable good or service which is able to compete in the market and create revenues and profits. Impact companies create value because their goods or services themselves create positive social or environmental outcomes. Finally, Impact companies with exit strategies understand how to create value for their acquirers, and those acquirers are often willing to pay a multiple of revenue to get it.
Any company needs to understand its core value proposition for its customer. What smart Impact CEOs and their investors will do is to ask what the value proposition is for its second customer too – the customer who buys the whole company. That value proposition is not always the same as the value proposition for the first customer and having a clear understanding of those differing value propositions can be the difference between success and the walking dead.
So, companies with an exit strategy are 1) more likely than others to be successful and 2) will create wealth for investors and founders which can 3) be reinvested into new Impact companies to create an evergreen cycle of positive social and environmental impact.
Argument: “You can’t control the exit, so it’s a mistake to try to pretend that you can.”
People who don’t believe they can control the exit, may also believe they can’t control the market or the customers for their products. They might just as well stay in bed – they can’t control anything and are fairly weak leaders of companies.
Great Impact leaders create their futures. They may not be able to control all aspects, but they can create an environment in which their thesis succeeds. Great leaders will drive towards scenarios that align with their values and
business goals. Just because you can’t control every externality does NOT mean that you must throw up your hands and refuse to plan for the future. It is exactly because of the uncertainty of the future, that exit planning is imperative.
Argument: “Social and Environmental Impact companies are not acquirable, so they should just focus on impact.”
Companies should BEGIN with the end in mind and create all three Impact value propositions (profit, impact, exit). Companies that create profit and
impact should be highly acquirable, and by thinking about it from the beginning, value of all three kinds can be baked into the core strategy.
When it comes time for exit, it’s not a cop-out or sell-out of values. I think of it more like a “commencement.” Just like when someone goes through Commencement at the end of high school, it doesn’t mean that they’ve ended their path towards education, but rather it means that they’re graduating to a higher level of execution by going on to university. Few would say that commencement in any way diminishes the quality of the person going through graduation.
So too with a company going through an exit. By being acquired the company can further its mission tenfold or more by leveraging the capital, sales channels, R&D, brand and other resources that the acquirer can bring to the Impact company. The net result is the opposite of a cop-out, but is rather a commencement of something even bigger and the Impact investor should be right next to the Impact CEO, helping them to achieve that end.
Investors who believe that making a profit is bad should stick to philanthropy. If they need to lose money to feel good about themselves, philanthropy is a quick path to 100% financial loss. Even a zero interest loan to a non-profit results in a profit of zero which is 100% more than a philanthropic gift. Investors who have a problem with Impact companies being profitable should stick to philanthropy rather than dragging down promising Impact startup CEOs and limiting the evergreen effect of reinvestment.
The more that Impact investors focus on achieving positive social and environmental outcomes along with value creation, the more capital will be available to support Impact startups and the more good will be done in the world.
Impact investing is at an inflection point and is growing at an astronomical rate. The global market for impact investments is expected to top $300 Billion by 2020. Capital is chasing Impact deals because of a new breed of Fund managers who apply the discipline and expectations of venture capital to Impact. The more we see of this kind of investing, the better the Impact Investing space will be for everyone.
We’ve known for years that Colorado has more startups per capital than anywhere else. Yes – per capita. It’s a great location to start up a company and maybe you’re wondering if there’s a Venture Capital infrastructure to support that? Well, now there’s incontrovertible evidence for Colorado’s leadership position in MicroVCs and it all comes down to … beer.
Just check out this CB Insights research relating MicroVC Tech Deals to Microbreweries. That’s right – the more microbreweries you have, the more MicroVC deals you get. And take a look at Colorado’s number 3 position in Microbreweries – what does that tell you?
Yes – a vibrant MicroVC community is brewing here in Colorado. We’re seeing a huge influx of MicroVC and NanoVC funds as the state begins to mobilize its local capital to support its burgeoning startup community.
Ok, maybe that’s just a facetious stretch of statistical comparisons – but there is definitely a rapidly moving trend in Micro Venture Capital and Colorado is feeling the benefits of new sources of capital coming on-line!
This trend mirrors a national trend in increasing Micro VC firms. Following the drastic drop in VC firms from over 1000 to just over 500 after the economic downturn in 2008, MicroVCs have flourished. There were fewer than fifty active MicroVCs in 2011 and today there are over 550 in the U.S. A tenfold increase in just a few short years and many of them are in Colorado.
MicroVC is changing the venture investing landscape and is responding to the needs of startups who need small amounts of capital to prove their product market fit and grow big. MicroVCs offer a scale that the big firms can’t efficiently provide and they get companies up and going quickly and efficiently.
MicroVCs aren’t just for small companies though. Check out these results from MicroVCs who are growing a new crop of Unicorns (private companies with valuations of $1B or greater) It’s not just the big funds that are hitting the grand slams – the Micro’s are slamming it home as well.
MicroVCs are creating a huge impact in the startup world and Colorado is the place to see this transformation taking place on a rapid pace.
You can learn more about MicroVC, NanoVC, and how accelerator VC funds are changing how startups get funded, and how angel investors can get involved in new ways previously unavailable to them. You’ve got just a few days to sign up for the Colorado Capital Conference coming up November 6-7, 2017 in Denver, CO.
Visit www. coloradocapitalconference.org for more
information and to register.
The conference is hosted by Rockies Venture Club, the longest running angel group in the U.S. Membership is NOT required to attend the conference, but if you’re an entrepreneur or angel investor, this would be a good time to look into the savings that RVC members enjoy on conferences, angel groups, workshops, masterminds and classes.
After the first angel or VC funding round closes and the checks are cashed, most startups go through a transformation, like from a caterpillar to a butterfly, that makes them fundamentally different than a pre-funding company. CEOs who fail to realize the changes that need to happen will end up facing challenges they did not expect.
Here are a few changes that need to take place after funding:
Create a budget.
No – not your proforma with all the optimistic sales projections – this should be a budget with numbers you can commit to. Many companies feel like having a million dollars in the bank is an unlimited blank check to buy fancy new furniture or hire a dozen new employees. But all those things drain cash faster than you think and having a written plan for minimizing your burn rate and maximizing the runway to your next raise (or hitting break-even) is going to be an important part of your success. Running out of cash before you hit the milestones needed for the next raise is a death sentence for your startup.
Update the Professionals that Serve Your Business.
If you’ve had your Aunt Bertha doing your books, it’s probably time to upgrade to a CPA who can provide you with the advice you need to keep from making mistakes. A CPA is going to be important once you need audits as well. Your legal team should now include several different legal specialties including securities, Patent and IP, and general business and contracts. You probably got your legal house cleaned up in order to get funding and now is the time to get the right people on board to keep it that way. Bankers, insurance, and other advisors are all going to be able to scale with you as you grow.
Communicate with Investors.
Investors notice when you stop calling them after the check has cleared. This is a bad thing for founders – especially those who are going to need to raise another round. Future investors will contact first round investors during diligence and a good relationship is important – even more so if you hope to have follow-on rounds from your first funders. Monthly reports including good and bad news, financials and metrics updates are a minimum. It’s better to stay on top of the investor relationship and by communicating frequently, investors are more on-board with what’s happening. Use a platform like Reportedly.co that allows you to see who has opened your messages and also allows investors to comment and offer help when needed.
Balance Growth and Resources.
You’ve been pitching your $100 million top line you expect in five years, but now it’s time to match your resources to your growth targets. Grow too slowly and you’ll never raise another round (so you’d better hit break-even) and grow too fast and you’ll run out of cash before you hit the benchmarks for Series A and then game-over. Perfect balance is what you need for venture success.
Update your Exit Strategy (Goals and Contacts)
During your pitch everyone wanted to acquire you, but now it’s time to start executing on your Exit Strategy. You should include the update in every board meeting and monthly update. Start making contacts with those companies for whom you create value early on. If they don’t know who you are, you’re not going to get the multiple offers you need for that 5X multiple you were lusting after.
Ok, you think you’re growing too fast to waste time on shit like metrics. Fine – go ahead and be mediocre. The best companies are crystal clear on what success looks like, how to measure it and what their goals are. Without metrics, your team is mis-aligned, your investors are in the dark, and really – you haven’t got a clue about where you’re going. You don’t have time not to do this.
It’s not set in stone, but without a roadmap you’re bound to get nowhere fast. Companies without at least a lightweight two pager plan find themselves going through expensive pivots left and right to try to figure out what they could have done in the first place with a good planning process. BTW, statistics say that after three pivots you’re out.
Change from Tech Culture to Sales Culture.
So far, success has looked like getting your MVP launched. You are three founders and a dog coding away in a basement somewhere, but now you need to change gears and become a sales and marketing company with a tech foundation. Too many companies can’t get out of their tech roots and they keep on coding, but never figure out how to sell. Break out of your comfort zone and start selling.
You’re on the clock now and capital is the most powerful accelerator out there. You’ve got to code fast, sell fast, grow fast. Companies that think they can continue on their old pace don’t get venture capital. It’s a race against the clock with ROI multiples of 10X in five years, 25X in seven, there’s no time to waste and the slow starters won’t ever get to Series A.
Investors are your partners.
Now that the deal has closed, and all the negotiations are done, it’s time to tap into your investor base for help, connections and advice. Keep them in the loop and engage them – they’re worth a lot more than just capital.
Post funding transformation is hard and unnatural for most founders. Pay attention to your successful peers and remember that getting rounds of funding are not what this is all about – work towards creating a great, meaningful company with huge value for your exit partners!
Peter Adams is the Managing Director of the Rockies Venture Fund, Executive Director of Rockies Venture Club and Co-Author of Venture Capital for Dummies, John Wiley & Sons, August 2013. Available at Amazon.com, Barnes and Noble and your local bookstore.
Sexual harassment, gender based bias (both intentional and unintentional) have been a big part of Silicon Valley culture for years. Women have struggled as startup CEOs to get funded, or as investors, to get into the top venture capital firms. Those that did get in, often regretted it. Silicon Valley is a cesspool of misogyny and it’s got to stop.
Simply criticizing the situation is going to get us nowhere. While Silicon Valley is mired in inaction, the Colorado Startup Community is going strong in supporting women in venture capital and the revelation of Silicon Valley’s mis-steps, while distasteful, may finally lead to productive change.
There are four principles that Silicon Valley just doesn’t get, and Colorado venture community is going strong (but still with room for improvement).
While the recent stories of Silicon Valley misogyny are disturbing, it’s important that these stories are daylighted to expose inappropriate behaviors and to punish those organizations that condone or acquiesce to them. Colorado’s Foundry Group has published a Zero Tolerance Pledge on sexual harassment which represents a great commitment from a leading Venture Capital firm. Transparency is the first step to change, but much more than awareness is needed to effect change.
Massive cultural change supported by generations of beliefs, actions and misconceptions doesn’t happen all by itself. Communities need to be proactive in causing change. As an example, the Rockies Venture Club in Denver has consistently invested in about 50% women led companies, far more than the national average of just 13%. The organization recognized that while its investments were gender balanced, its investor community was not and that just 12% of its 200+ investors were women. Rockies Venture Club proactively founded the Women’s Investor Network, led by Barbara Bauer, in order to recruit, educate and engage women in angel investing. In just a few months more than a dozen women had made their first angel investment. RVC found that the way to make change happen was to be proactive and intentional in its actions, rather than just wishing for diversity.
Why aren’t female-founded businesses getting more VC money? For Julie Wainwright, founder and CEO of consignment website The RealReal, it comes down to the lack of female VCs. “When you have different businesses that aren’t proven that may appeal more to a female [customer], a female investor is going to be able to evaluate that” better than a male investor could, she says. “I think in general, most VCs are trying to do their jobs, but there are a lot of unconscious biases.” (Fortune Most Powerful Women, 2017)
Start at the Foundation
Cultural change happens much more slowly than any of us would like. Organizations like NCWIT have done an excellent job of showing how unconscious biases that are based on years of social conditioning can impact our decisions without our even knowing about them. One way to combat those biases is to start at the foundation and create education programs for young entrepreneurs that create new ways of thinking about gender and leadership. The BizGirls program is a CEO Accelerator for high school age girls that is designed to create empowerment and confidence in girls by providing them with leadership and entrepreneurship experiences that help to remove unconscious biases and empower girls to take on whatever challenges that their passions may lead them to.
Work on the Top – Board Representation
Corporate boards are slow to change and according to a Credit Suisse Report only 14.7% of corporate board seats are held by women. This is a fairly astounding figure since it is well known that corporate boards with gender diversity outperform those populated by white males. Colorado has begun an intentional process to increase the number of women on corporate boards led by the Women’s Chamber of Commerce and it’s Women’s Leadership Foundation’s Board Bound program. The Women’s Investor Network in Colorado has also begun to create an on-line resource to connect women with opportunities to serve on angel and venture backed company boards, thus providing them with a stepping stone to public board service.
Colorado’s collaborative and inclusive community leads to the kind of discussion and active participation that leads to continuous improvement. Here in Colorado we hope that Silicon Valley can learn from us and begin to create a positive environment of inclusion and gender balance that will help lead companies and communities to success.
Women make up the fastest growing community of angel investors and it’s changing the face of Angel Capital for the better.
Angel groups like Rockies Venture Club have been beating national averages for investing in women and minority led companies with 54% of our portfolio consisting of women and minority led companies vs a national average of just 14%. But in order to balance the ecosystem it’s important not just to invest in women led companies, but to engage women angels who can help mentor startups and who can gain experience serving on the board of directors of some of the startups they invest in, thus paving the way for increasing the number of women on corporate boards at all levels.
Research shows that companies with women on boards out perform those with no or few women. Companies wit
h the highest percentages of women on their boards outperform their less diverse peers by 66%. We have certainly seen these trends in our portfolio companies and are committed to developing further diversity in our community.
We have launched the RVC Women’s Investors Network (WIN), led by Barbara Bauer. The network has had several well-attended events that focus on angel education and making connections. The group is based on four principles that play on women’s strengths:
Engagement: Programs that allow people to work together and share wisdom of crowds to make good decisions and great investments.
Give Back: WIN members have years of business experience and they want to be more than just a check – they like to mentor and coach up and coming companies.
Act From Knowledge: Women like to understand the landscape before they jump in and invest. No more “fake it until you make it” – that can cost thousands for new angel investors!
Education: Classes, workshops and “get to know an angel” events provide deep venture capital knowledge to get WIN members up and going quickly and confidently.
If you’re interested in engaging with the group, volunteering, or just learning more, consider attending the WIN Luncheon at the Angel Capital Summit, Tuesday March 21 on the DU Campus.
Click HERE to register
If you’re interested in learning more about Angel Investing and Venture Capital, you should definitely attend the full Angel Capital Summit. Tuesday-Wednesday March 21-22 in Denver.
Click HERE for more information and to sign up.
Want to learn more about Rockies Venture Club? Check us out at www.rockiesventureclub.org
Getting angels to invest in a project can be difficult. They’re risk adverse, conscious of market trends and often work in groups. Yet, these are some of the things that make angel investors so valuable. Typically an angel investment is $25,000 to $100,000 a company, though this can go higher. Read more
Syndication has numerous benefits. It stimulates angel investment and empowers angel investors to build and maintain a portfolio of investments. It also benefits startups, as it streamlines the funding process for the entrepreneur. The collective group of investors have a higher net worth and a larger network than angels working on their own. They are able to finance startups at earlier stages than most VCs. Syndicates also have a more diversified portfolio and a greater ability to pool resources. These resources include skills, contacts and experts. Due to the nature of syndicate groups, investors can often develop more due diligence. Read more
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