What Impact Investors Look for in Entrepreneurs
Impact investing, an intentional investment made to create a measurable social or environmental impact in addition to a financial return is gaining significant momentum and the industry is experiencing rapid growth. New research shows the global impact investing market is continuing to mature despite the COVID-19 crisis and is now worth more than $1 trillion.
Pioneers like the Kleissners are offering an inspirational approach to putting today’s fortunes to good use and are on a mission to mainstream impact investing. And it makes sense – if you could make money and do good simultaneously, why wouldn’t you?! But before an impact investor decides to hand over their money to a social enterprise, here are five critical things they look for.
Purpose
Social enterprises with a well-defined purpose offer an attractive first impression for investors with similar philosophies and impact goals.
It is critical a social enterprise has a deep understanding of the social issue they are addressing, and be able to communicate this knowledge. Over time, new opportunities will arise, and social enterprises without a clearly defined purpose may stray from their initial cause, fail to plan for the future and waste energy on short-term firefighting.
“To me, the purpose of the organisation generally aligns with my personal goals or mission. I look for businesses which address issues that are close to my heart.” - Roslyn Baguley, Impact Investor
Management
Impact investors look for social enterprises with effective management teams.
Effective management includes leveraging the skills of individuals with industry and product knowledge; commercial and legal abilities; and leadership experience. An impact investor will look for operational expertise that can contribute financial sustainability and long-term impact, and ultimately help a social enterprise realise its purpose.
Social enterprises, like all businesses, often face barriers that need to be overcome and the external and internal landscape can change quickly, and outstanding management skills are often needed to effectively manage any roadblocks.
“It's one thing to have a dream, but then it's another thing to realise the vision. Good management involves effective planning, goal setting, and providing clear direction.” - Roslyn Baguley, Impact Investor
Social Impact
By harnessing both heart and brain Impact Investors can make a huge contribution to changing the way capitalism works - so that it takes into account not only financial returns but also impacts on the environment and society. Whilst commercial investors rely on financial metrics as a key component of business valuation, impact investors also emphasise social impact metrics alongside the business metrics. Ideally the impact is embedded in the business model.
Social impact metrics consist of criteria that a social enterprise is looking to achieve. An example includes the improvement of quality of life experienced by people with a disability.
To identify suitable metrics, it is important to identify the social enterprises’ beneficiaries and then develop an impact measurement framework. , This can then be followed by a standardised method for how to report achievements. Before committing to an investment, social impact metrics enable investors to easily assess potential social returns. Once the investment is ongoing, investors can then easily monitor the impact throughout the investment period and this can help inform their decision to participate in subsequent investment opportunities.
“Impact investors love businesses where the impact is intrinsic. So as the business scales, the impact also grows. The financial return and the impact return need to be inherently linked.” - Jessica Roth, Founder & Director at Social Impact Hub
Growth Potential
All investors are interested in the growth potential of their investment, although they might have different ideas of what growth means to them. For many impact investors, monetary growth is only one measure.
Growth of a social enterprise is measured on a spectrum, which looks at the impact on users or beneficiaries, in addition to profit. It is crucial for social entrepreneurs seeking investment to identify and be open about any perceived risk to both. These can include legal issues; the potential of product substitution; buying behaviour; policy shifts; and more.
Equally important is the ability to show macro drivers which can bring about new growth opportunities. This requires a social enterprise founder to have done their homework on market size, possible competitors, environmental changes, and any other situations that may present an opportunity for growth.
“We have supported businesses to secure impact investment at different stages of development, but regardless of stage, the investor needs to have a line of sight as to the growth prospects of the business, a possible exit strategy and therefore their financial return.” - Jessica Roth, Founder & Director at Social Impact Hub
Key Business Elements
Financial statements, if available, are also one of the key business elements that an impact investor will look at and assess. This information can include profit-and-loss figures, a cash flow report, and a balance sheet. Financial documents help impact investors make sure that the enterprise is properly tracking revenue and expenses.
Impact investors also consider the enterprise’s resources and capacity, such as the number of staff employed, office space or equipment, as well as forecasted needs. Finally, investors can sometimes consider the measurement tools a social enterprise uses, such as KPIs, Balanced Scorecard approaches and other tracking metrics.
If an impact investor provides the funding, are you capable of managing the growth that comes with it? Is your team strong? Is your capacity to deliver services or goods ready to handle the influx? These are important questions social entrepreneurs need to address, and answers that investors are looking for.
Final Thoughts
Ultimately, all investors, regardless of whether they are institutional or high-net-worth individuals, expect a business to have a well-defined mission, management personnel, market awareness, and well-documented growth potential. Where impact investment separates itself from traditional models is the evaluation of social and environmental goals and social impact metrics as key components of the assessment of whether or not to invest.
Getting funded by an impact investor is certainly about connections, but it requires an investible business model with inherent impact. Remember that impact investors are also people; they evaluate what they could bring to a social enterprise and may turn down a strong investment opportunity if they do not believe they can add significant value. But you shouldn’t be afraid to approach them. Just make sure, at the very least, you nail these critical things they will no doubt be looking for.
If you want a better understanding of how to ready your business for impact investment, we are facilitating a 2-hour online workshop where you'll leave with a clear understanding of the Australian impact investment landscape, the types of impact capital available, and how different investors view the maximisation of impact and financial return. You will also have the opportunity to use our Impact Investment Readiness Diagnostic Tool, which will assess your organisation’s impact investment readiness and identify what you need to work on to successfully secure investment. Register here.