Video Transcript
Finding Aligned Capital
I bet your next question is, “Is there impact capital out there for ME?”
Well, it depends. Because impact
capital is not generic. Let’s go back to
the impact capital sources on the
supply side of the butterfly.
When a fund, foundation, or
government organization is looking for
enterprises to invest in, its impact
capital has specific constraints
attached it.
These constraints can include:
 The asset class and vehicle of the investment it is able to give, such as debt,
equity, or real estate, and whether it invests directly in companies or through
funds
 The industry it is willing to invest in, such as health, energy, or finance,
 The geographic area it is willing to invest in,
 The stage of the investee company
it will invest in – such as early stage
or growth stage,
 The expected level and timing of
financial return on its investment,
 And the impact goal that is tied to
the capital, which could be creating
jobs, improving labor conditions in
supply chains, supporting women,
forming new marketplaces, or any
number of others.
The different combinations of each of these constraints means there are lots of
different and very specific “flavors” of impact capital. Investment managers think
strategically about the flavors of capital they issue in order to diversify their portfolios
and meet the needs of their clients.
The bottom line for you as an impact
entrepreneur is this: once you go from billions
of dollars of impact capital to identifying the
specific flavor of capital that fits YOUR
enterprise, you might be talking about only a
handful of investors. And it’s uneven. For
example, for companies creating mobile
money apps to reach the traditionally
unbankable in Kenya, there might be dozens of investors. For another intersection of
geography, industry, company stage, and impact goal, there might be only 1 or 2.
Here’s Eric Savage, an impact investment banker and co-founder of Unitus Capital in
Bangalore, India, on his view of this:
“I really wish there was an oversupply of capital to the
impact sectors. But sadly, the reality is very clear from
my viewpoint that there's not nearly enough investors
who are really investing in most of the impact sectors
out there.”
Eric uses the example of raising several rounds of capital for a company called Forus
Health. Forus focuses on radically affordable health care technology and their first
product was an eye screening device to diagnose major causes of blindness for base
of the pyramid clients.
“But when we went out to investors, we were raising $5 million. And so whatever
amount of money you raise, you immediately eliminate most the investors. Because
every investor has their sweet spot of how much they invest. So we know literally,
pretty well, hundreds of investors. And so when you go to $5 million, you eliminate
most investors, because they want to invest more than that. And then you eliminate
some of the investors because they want to invest less than that. And then so for
those remaining investors where $5 million is the sweet spot, most of them won't
invest in health care or any other sector, because they all have sector focuses. And
even those who do do health care probably won't do health care technology. And then
if they do health care technology, they may not do optometry. And all the sudden, the
funnel gets extremely narrow. And if they do like that specific sector, it's very possible
they already have a competing investment in that sector.
So when we were raising money for Forus, frankly we got down to the end, and there
only two investors who were truly interested. Fortunately, they did invest. Every capital
raise we do is really difficult. And while there's lots of investors out there looking for
investments, when you get to one specific company, there's a lot of very logical
reasons why the vast majority of them say no.”
So this is why you need to be smart: the supply of the specific flavor of capital aligned
with YOUR venture may be scarce, and the demand, from ventures like yours, is large.
If there is only a narrow set of investors whose flavor of capital matches your venture’s
characteristics, you need to be as prepared as possible before you talk to them. By
being prepared, you earn the chance to get to the next step, which is finding out what
the investor may offer, in cash, knowledge, relationships, and cachet.
At this point, many entrepreneurs ask, why go to impact capital sources at all, rather
than traditional capital sources? The answer comes back to your need for alignment
with your investors on two main factors: first, the pace of your expected growth and
returns, and second, the aspects of mission and impact you want to protect.
Here is an impact investor, Maya Chorengel of Elevar Equity, on the importance of
alignment on your pace of growth and profitability:
“If you can't generate the kind of margin that would
generate a financial return of x, you shouldn't be trying
to attract commercial capital that expects a return of x.
You should be trying to look for a different capital
provider to get you to that point. So I think it's really
about what are the right sources of capital for the
different kinds of initiatives, depending on what their impact outcome and their
financial outcome might be.”
As Maya says, it’s about finding a good match. Your investors should be
aligned with you on goals for financial return AND impact, and ideally they
should be able to provide strategic support as you work towards those
goals.
So how do you find your way in a growing impact capital market that may actually be
somewhat undersupplied for YOUR specific flavor of capital?
What you don’t want to do is talk to hundreds
of investor leads and try to keep them all
interested, answering all of their questions
along the way, only to find out months down
the line that they never invest in your particular
geography, or your particular impact area, or
your particular industry. That’s a waste of time
and energy, and fundraising is already hard
enough.
Instead, you need smart shortcuts. You need to develop a
strong, clear investment proposition that you can
communicate easily. You need to narrow your investor
targets down to those offering the specific flavor of capital
that matches your venture, so you don’t waste time on the
ones who will never be able to invest in you. And then you
need to find ways to develop a long-term relationship of
trust with the most aligned investors. Mastering these
steps is the focus of the rest of our modules.