Finding the right impact investor for your social enterprise
Investors spend a long time choosing where to put their money. But do entrepreneurs put enough effort into vetting potential funders – the people and organisations who may play a major role in the shape and direction of the company? Rupert Scofield, president and CEO of FINCA International, shares three tips for investment-ready entrepreneurs
If you’re a social entrepreneur, you’re likely familiar with the challenge of finding investors who truly share your commitment to driving change. Even impact investors with the best intentions are often plagued by competing priorities—namely, profit and impact. While the premise of ‘doing well by doing good’ has inspired many investors to consider impact, others have rightly come to challenge the idea that social and environmental change is inherently compatible with market-rate returns. John Elkington, the man responsible for coining the “Triple Bottom Line” approach, has notably “recalled” the management concept aimed at placing economic, social, and environmental priorities on equal footing.
“Fundamentally,” Elkington recently wrote, “we have a hard wired cultural problem… Whereas CEOs, CFOs, and other corporate leaders move heaven and earth to ensure that they hit their profit targets, the same is very rarely true of their people and planet targets.”
Unfortunately, the effect of this profit-driven culture on impact investors is particularly acute. While the idea of making an impact is always appealing, many investors are wary of making the bold commitments necessary to advance transformative change. And others, simply drawn to the latest trend, may capitalise on claiming the ‘impact investor’ title without following through. So, how can you find investors who truly share your priorities?
Evaluate their track record.
When pursuing a potential investor, take a thorough look at their investment profile and history. Have they invested in social enterprises in the past? Does their investment approach reflect an interest in social responsibility?
An even greater indicator of a strong partner lies in whether they employ a patient approach. Social enterprises take time to build and scale. Investors who understand this, and who have a reputation for building strong relationships through enduring post-investment support, are likely to treat your enterprise with the same consideration. Explore whether potential investors are familiar with your sector and regions of operation. Investors who already understand, or demonstrate an inclination to learn about, the unique challenges you face will be best suited to support your social enterprise in the long term. Whether those be the complexities of working with vulnerable populations, or the barriers to scaling in emerging markets, long-term investors begin their partnerships with reasonable expectations.
Long-term investors begin their partnerships with reasonable expectations
Examine their investment philosophy.
While many investors are increasingly interested in responsible investment, few are accustomed to the difference in approach it requires.
Be sure to evaluate their ethos in pursuing investments in social enterprise. Does their strategy include specific mission clauses or definitions of impact? Look for investors who share your understanding of what impact means and have made internal and external commitments to pursuing this goal.
Even more important, make sure these commitments are backed by substance, whether evidenced by the proportion of their funds in impact investing, the career trajectories of your contacts, or the timeline they have followed with investments in the past. If they haven’t made an institutional commitment to this work, they may just be following the latest investment trend.
Ask the right questions — and pay attention to theirs.
Don’t shy away from asking targeted questions — about funding sources, timelines, expected returns and typical exit strategy. Their answers will give you valuable information, as will the questions they pose in return. If their questions seem hyper-focused on returns, you’ll be able to tell where their priorities lie. While any investor is inherently interested in the returns on their investment, those who are too insistent on market or above-market rates may be entering into your partnership with the wrong expectations. If they are truly curious about the efficacy of your approach, they are more likely to stick with you through difficulty.
And truly savvy, impact-oriented investors will be interested in your strategies for handling failure. Actively engaging with the possibility for failure, and demonstrating a genuine interest in your approach to tackle such challenges, means they see the value in sticking with impact-focused investments. Investors who embrace this approach are also most likely to provide useful guidance when the going gets tough, especially if they’ve dealt with challenges in the past.
Truly savvy, impact-oriented investors will be interested in your strategies for handling failure
Vetting investors is always a challenge. While the prospect of any investment capital can be tempting, it is important to be certain that potential investors share your priorities. Not only will their funding sow the seeds for your future success, investors will play a major role in the shape and direction of your company. If your values are aligned, investors may serve as a sounding board for ideas, a mentor in times of trouble, and a facilitator to other investor or business relationships to build your company. Keeping these approaches in mind can help to shield your social enterprise from those looking to make quick profit, while keeping the wellbeing of our planet and the people on it at the heart of your process.
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