How can you translate your vision into an investable proposition?
How do you go about exciting social investors with your investment idea? Having clear aims and a social impact are a must, as is a strong financial case, explains investment manager at Numbers for Good Sarah Chu.
Start by writing down exactly what your social enterprise wants to achieve. Think it’s crystal clear? Try and explain it to someone who has no idea about what you do. If they seem more confused than enthused, you probably have more work to do. Don’t get bogged down by technical terms, buzzwords or trendy frameworks: social investors are normal folk, they’ll want to quickly understand what you do, how you differ from others, and what success looks like for your organisation. It is surprising how many organisations think that they have this nailed and yet struggle to explain it to outsiders. Keep it simple; compelling doesn’t mean complex.
Many social investors look at social impact as the first hurdle to understand if they want to invest. This ‘hurdle’ is not about your organisation using a specific form of impact measurement, but about demonstrating the strength of your social impact. Start with the basics: define how you help people, the targets you want to achieve and the tools that you’ll use to know whether or not you have hit these targets. Take a look at social investor websites; check if they invest in your sector and how they measure their impact. How do your own measurements compare?
Keep it simple; compelling doesn’t mean complex.
Whilst many social investors are flexible about the areas of impact they invest in, others are more interested in specific areas of social impact. If your organisation doesn’t fit into one of these areas of impact, don’t try to shoehorn it in. Investors will see through this. Post-investment, your investor may ask you to report your impact in a certain way or suggest additional measures of your impact; they may also support you to do so.
Having set out what you want to achieve and how strong your social impact is, attention must then turn to your organisation's financial proposition. Expect investors to look at your historic financials as well as forecasts for profit and loss, cashflow and balance sheet. Here are a few things to think about when building your financial model:
1. Are your projections realistic? Strong income forecasts, for example, are based on a solid track record of historical performance and committed contracts for the future. Don’t have these? Look for alternative indicators of revenue such as expressions of interest from potential customers and comprehensive market research. If you are building cost forecasts, get into the nitty-gritty of your current cost base. Differentiate between variable costs versus fixed costs and think about how you can cover fixed costs even if you don’t hit your growth targets. Be sure to include any new costs (or cost savings) associated with growth. Investment itself may bring new costs; debt, of course comes with interest repayments but other types of investment may add costs – for example reporting requirements, such as audited accounts.
2. Have you stress-tested your financials? No organisation is sheltered from risk; adopt an open and proactive approach to identifying potential risks, highlighting the likelihood of occurrence, the expected effect, and how you will mitigate them. Run different forecasting scenarios, pushing costs up or income down. This will help you, and investors, get comfortable with the potential risks in your organisation and operating environment. Holger Westphelly, a senior investment manager at social investor CAF Venturesome, explains why this is critical: "As lenders, we recognise that there is uncertainty in any business plan, and want to know just how big the risk is. We ask our loan applicants to think about how they will repay debt if their Plan A doesn’t work out and we wouldn’t fund an organisation without a strong Plan B."
3. Can you afford the investment? Include the cost of the investment in your forecasts; making sure you can afford all your interest and principal payments. If you are raising debt which doesn’t have a fixed interest rate, play with the interest rate. Can you still afford the debt if interest rates are 1% higher? How about 3% higher?
Ambition? Check. Impact? Check. Solid financials? Check. It may sound great on paper but the only way to truly test it is by getting out and about social investors and advisors. You may feel prepared, but you should also be prepared to refine.
Photo credit: Adrian Scottow