Recent crises have further revealed the need for a long-term vision of systemic change—one that will require action from the investment community and business directors to be realized. As Ford Foundation President Darren Walker outlined in his book, From Generosity to Justice, “It has become increasingly clear to me that solving today’s challenges requires unprecedented collaboration between business and philanthropy, private and public sectors,” Walker says. “The idea is to address directly more of the root causes of injustice, rather than just addressing the symptoms of those problems with charity.” In times of economic uncertainty, entrepreneurs with a social mission can demonstrate that purpose is a long-term competitive advantage when they’re fundraising.
Entrepreneurs should do more to highlight their environmental, social, and governance (ESG) impacts. While capital may be harder to come by immediately during uncertainty, investors who are moving forward will increasingly look to partner with entrepreneurs focused on opportunities addressing the effects of COVID-19, social justice, and climate change. That makes it even more essential to highlight your company’s impact goals and envisioned long-term path forward in a new, inclusive, and regenerative economy.
From my experience investing in and working with impact businesses as managing partner of The Builders Fund, there are several steps an entrepreneur should take to find the right investors —and specific additional strategies to build your vision despite the current national unrest and market volatility.
The Building Blocks
From our perspective, relationships and trust are primary drivers in any investment decision. Building trust requires transparency and awareness of a business’s strengths and weaknesses. Instead of inflated financial projections, bring realistic growth models and your passion to the table. No matter what’s going on in the world at large, for social entrepreneurs seeking dollars from impact investors, here are four basic building blocks the will increase your chances of fundraising success:
Be clear about the “why” behind this investment: What market exists for your product, and how does your business specifically address environmental or social problems? Share your vision for how your impact will grow over time. Impact investors are looking to make a difference through purpose and meaning—while also making a strong financial return—like you are with your business.
Hone your focus on investors who are looking to put their funds behind the social-purpose solutions that your business provides: Do the early legwork on potential investors—areas of interest, investment size, authentic commitment—to avoid wasting their time and yours. The investor universe is large, even in impact investing. For example, Builders typically makes structured equity investments in high-growth, established businesses, so an entrepreneur who hasn’t opened a business yet wouldn’t be a fit for our firm (even if what you’re doing is within our areas of interest and impact themes). You will be more successful in fundraising by focusing your efforts on sources of capital that are aligned with your business stage and market focus.
Build this relationship on trust from the start: Be realistic about your company’s idea and outlook, as well as how you stack up against competitors in your space. After you have investors’ attention, they will do their due diligence so any exaggeration in your plan will eventually be questioned. Trust is essential to progress, making it important to keep growth plans grounded in reality.
Create a strong team with relevant experience to the market you are pursuing: We invest in teams first and market opportunities second, with the knowledge that a great team will find their way to the right opportunities. Continue to evaluate your team over time as the company’s needs will change and the business grows.
“An impact business must manage its bottom line like every other firm, and you can only achieve your mission if the business is sustainable.”
When Uncertainty and Crises Arise
Every business is bound to face difficulties—including the challenges social entrepreneurs face this year with COVID-19. In addition to the basics outlined above, some additional steps should be taken to continue to fundraise and reach your goals despite uncertainty. Led by Faculty Director Cathy Clark, The Center for the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business has produced an online guide of resources for impact entrepreneurs looking to raise capital. Their recommendations, in addition to our own, include taking the following steps.
Understand your cash: Focus on staying afloat—live to fight another day. Understand your options for reducing operating expenses, including staffing adjustments and talking with stakeholders about their own plans and strategies. An impact business must manage its bottom line like every other firm, and you can only achieve your mission if the business is sustainable.
Get a cushion: Consider ways to improve cash flow, such as better payment terms from suppliers, and emergency sources of cash, which can include new sources of revenue, alternate lines of credit, or government relief loans such as the Paycheck Protection Program.
Build for growth: Revise your strategy and projections, adjusting for the new economic realities, and being realistic about how that affects growth projections. Decide which impact capital vehicle is best for your business and which types of investors you should pursue, then cultivate relationships with them. Finally, negotiate the terms that matter most to maintain the mission and ensure the long-term future of your business.
Demonstrate an understanding of how the pandemic is changing your market: How will it affect your business under a range of scenarios? How have you adjusted your strategy since COVID-19 emerged and how do you plan to continue those shifts?
Adjust your strategy to include the next likely phases of the pandemic: As more businesses gradually reopen and a vaccine moves from development to deployment, what will change for your business?
Ensure your house is in order by gathering the right documents: Business plans, accounting audits, financial reports, and other documents must be ready for when investors ask for them. For social mission entrepreneurs, this also includes information to back your stakeholder values and ESG impact.
The truth is, uncertainty and the resulting market fluctuations and investor’s risk capacities are always in flux. The pandemic presents a unique set of circumstances, but arguably, the need to invest in well-run businesses with a mission that is beyond profits sets social entrepreneurs up to be more resilient, more able to demonstrate success, and as a risk-reducing addition to an investor’s portfolio.