Impact Investing and Seed Stage

Impact Investing and Seed Stage: Odds are Never in your Favor...

In our first of the “venture workshops,” May Samali presented her master’s thesis on on the motivations of impact investors and the problems inherent to early stage financiers avoiding risk.  Her preliminary findings and perspective are in the Stanford Social Innovation Review, but her three main findings are:

1. Seed and angel stage financing often take 6-9 months longer for mission aligned companies versus a pure for-profit venture.
2. The pool of impact investors may be growing, but is far from mature
3. The odds are stacked against you while pitching a low-return (<5% IRR) / low-risk (<10% chance of losing principal) venture to an angel investor.

If there are 100+ venture-backed companies valued north of one billion dollars, do we see a similar number of venture backed social enterprises?  May and the Tumml team say no, no where close.  That’s a sad reality for an industry 30+ years old (Bill Drayton first coined the term “social entrepreneur” in the 1980’s).

While Cash on the House would likely not raise impact-investment money, I’ve seen 20+ social enterprises raise a combination of impact investment and traditional philanthropic money.  Some organizations like Refunite are operationally on-par with leading for-profit ventures in the same category and space.  These early-stage organizations are operating in tough environments, addressing tough issues, and dealing with longer sales cycles.  

But with that said, I’m not totally surprised by the dearth of impact investors at the angel level nor the unequal treatment in the impact versus for-profit space.  Angel investors are in the game because they have capital, want to change the world, or stay close to the innovation space.  All angel investments are a bet, that’s why most investors say they care about the team, not the idea.  Yes, it’s a disservice to entrepreneurs who want to change the world with an impact enterprise.  Yes, the financing cycle is far longer than for-profit ventures.  But valuations will be lower if the expected returns are lower.   

Out of all the high net-worth investors out there who turn to angel investing, we can only assume that a small portion will comprise of the Pierre Omidyar’s who want to spend their money seeding ideas that will likely earn a low return.  Thats natural, but luckily, social enterprises have options.  May talks about these options, including specific targeting to tech investors, raising a combination of philanthropy and impact money, and crowdfunding.   Every entrepreneur talks about the challenges with raising money, but I do hope the trends change in the impact investing world too!