Tomorrow is my birthday, and my friends recommended a birthday newsletter edition. In the spirit of birthdays and gift-giving, I am bringing forward these conversations that should have come much later in the content sequence. I believe the answers of these professionals will demonstrate why you need to reorganize your work to make your organization investible. Look out for the highlighted resource. Enjoy!
Our amazing guests are Professor Scott Taitel, Amanda Tanui, Pedro Brito de Sá, Lee-Anne Andanje, and Devashish Taknet. Professor Scott Taitel is the curator of the Social Impact, Innovation and Investment specialization at New York University. His wealth of knowledge and broad experience in developing countries in Latin America, Asia, and Europe has shaped the trajectory of several organizations. On the other hand, our other guests are my colleagues from when we worked on the NYU Impact Investment Fund (NIIF). We had to source companies working along the impact areas of education, financial inclusion, food systems, environment, and health. After sourcing these companies, we had to conduct due diligence to ascertain fit in order to pitch to the investment committee that the organization was great for impact investment. As we conducted due diligence, it was easier to move some companies forward than others. I asked them some questions. It’s my hope that as you read their responses, you will get a sense of what you are doing right or wrong and plan to make adjustments. Let’s run through their responses.
When conducting due diligence on companies, what were some of the most common mistakes or shortcomings you saw that disqualified the organization from moving to the next stage?
Amanda Tanui: The operations or theory of change in their dealings was not telling a strong enough impact story (especially considering additionality and competitors). Also, not showing strong proof of viability, e.g., with previous sales, quality contracts with partners, or previous funding.
Pedro Brito de Sá: As we were looking into seed-stage companies, we disqualified those that did not have a clear impact-first business model, that lacked definition in their growth plans or target markets, or that NIIF itself was not equipped to provide any meaningful support outside of the cash infusion. On a different note, it is also common for founders to deprioritize building a website with good descriptive content, but discoverability is key at this stage. Investors will not invest in you if they can’t find you, or if your materials make you look like an amateur school project.
Lee-Anne Andanje: There are three major shortcomings I observed: a lack of clear impact metrics and tracking, insufficient market research and understanding of the competitive landscape, and limited scalability and potential for returns.
Devashish Taknet: In my opinion, when a founder or founding team approaches an investor, they should be clear, consistent, and confident about their financial statements. At the end of the day, investors want to see not only (future) profitability but also a deep understanding of the business model’s revenue streams, cost structures, and financial projections. So working with your accountant or CFO to craft a compelling financial narrative is imperative. Additionally, overly optimistic or unrealistic growth projections can be a red flag. Investors are looking for achievable and well-justified forecasts that align with the company’s current capabilities and market conditions. Your narrative should seamlessly integrate financials, growth projections, and market conditions, with each element reinforcing the others.
Scott Taitel: Often, impact-oriented organizations develop expertise solely around driving the mission without adding team members who can bring skills and experience to achieve financial sustainability.
What would you wish that more founders did in their organizations to become a better fit for impact investment?
Amanda Tanui: They should have a very convincing theory of change for their impact story. That is, including a story of additional value over and above the expected future trends, compared with competitors, and how each stage of their operations acts in alignment with that theory of change. Also, founders should be more personable and easy to work with, inviting partners to work together to solve their challenges in an honest way. Because investors also want a great rapport and mutual trust and want to know how exactly to help them fulfill their great vision.
Pedro Brito de Sá: The number one tenet to building an impact-first company is to define a business model where your revenue grows in lockstep with the impact. Without that, you can be operating in an underserved area or for underserved demographics, but your growth incentives (and those of your other investors) will likely not directly translate into impact, as revenue is most often prioritized. This is typically a direct exclusion criterion for impact investors.
Another important aspect is the transparency of communication. If your company had a slow start, a major business model pivot, or a major change in leadership, do not skirt over it. Companies, especially impact-oriented companies, are complex endeavors that depend on so much more than the talent and work of their teams. Embrace that experience, share what you learned, why it happened, and how you will ensure past mistakes will not be repeated. This helps create a connection with your investors that showcases your business maturity and builds trust.
Professionally designed decks and a website. Cannot stress this enough. If you do not know a professional designer, do not have your cousin put something together in Canva (nothing against Canva, great tool!). Fiverr is a great resource for finding freelancers in general and for designers specifically. Make sure you have at least a one-page website with a brief description of your company and the founding team, as well as direct links to LinkedIn/ websites and contacts. Create one short deck with a quick summary of your company and goals, but also a long one fully laying out your plans. Professional image matters, and the less friction you offer to investors fully understanding your potential, the better. This is valid for all companies, but resource-constrained impact-oriented companies tend to neglect this more, and it works against them.
Lee- Anne Andanje: To become a better fit for impact investment, I wish more founders would develop a deep understanding of their target market and customer needs. They also need to establish robust impact measurement and reporting systems. It is important to demonstrate a clear path to scalability and financial sustainability. Finally, they should showcase a compelling narrative highlighting their impact and potential for returns.
Devashish Taknet: For any founder or founding team, establishing a solid financial foundation and a robust impact measurement framework should be prerequisites before approaching an impact investor. Once you’re in the room, I recommend harnessing the power of storytelling to articulate your vision, strategy, and the impact you aim to achieve, all while being transparent about the challenges ahead. Use real-life experiences and anecdotes to highlight the urgency of the problem, sparking an emotional connection with your audience. Impact investors assess not only the viability of the business but also the passion and commitment of the team to deliver results.
Scott Taitel: Solicit investors whose investment strategy is aligned with your business strategy. An organization that needs patient capital expects lower than risk-adjusted market returns and places impact over profit needs investors who can accept these variables. Such organizations can often waste time pitching to investors or funds that, despite their impact, focus have requirements for a market return over a short-term horizon. The top three things I consider when choosing an organization that will receive investment are the character and experience of the management team, realistic financial projections, and impact that is in lockstep with financial growth.
ImpactVantage Hot Seat Takeaways
In subsequent newsletters, you will learn how to address some of the issues raised by our guests. But for today, here is a quick recap of key points:
A solid theory of change that demonstrates an impact-first business model is important.
Demonstrate realistic financial viability and scalability. Understand your market and competitive landscape. Non-existent, insufficient, or overly inflated financial data is a red flag.
Perception is key. Compelling and transparent storytelling of progress and challenges backed up by properly branded digital assets is important.
Define a clear impact measurement and reporting system for your organization. This will help you gauge if impact is in lockstep with financial growth.
Not all investors are for you. Seek for alignment to avoid wasting limited resources.
Worth Reading
Worth Listening to
Why Donors Need Social Impact Data to Make the Best Donation Decisions - Social Impact Show
Combining Personal and Business Purpose with Hamzah Sarwar - Social Impact Pioneers
Highlighted Resource
The highlighted resource for this edition is Standup AI by Jerry Castanos. This tool provides a report on the existing federal grants available to execute projects in the issue area you work on. Leveraging AI, the tool provides some analysis to help you make “an educated business decision.”
End Notes
If you have a product or resource that can be helpful to an impact-oriented organization on its way to becoming investible, fill out this Google form. Who knows, you might be featured in the highlighted resource section.
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PS: Are there topics you would like to see covered? Share them, and I will see how to add them to the existing content schedule.
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