Best Practices for Landing Impact Investment
Wednesday, July 7, 2010; 12:00 AM
Stephanie Bernstein calls herself an accidental entrepreneur. Even with years of experience working in sales and education in the natural products market, the founder ofTo-Go Wareconfesses she struggled with one of the most basic and necessary pieces of the startup equation: the search for funding.
Though To-Go Ware was launched as a one-woman/triple-bottom-line enterprise in 2004, Bernstein soon found that building a sustainable business by developing and selling eco-friendly reusable utensils and food storage containers was more than she could handle alone. Eventually, she hit the point that so many business owners face--get a loan and grow or get out. So she went to the bank and walked out empty-handed.
It's no surprise. As the country inches toward economic recovery, even the savviest entrepreneurs focused on people, planet and profits are hard-pressed to find funding. The primary source of capital for small businesses--commercial and bank loans backed by the U.S. Small Business Administration's 7(a) loan program--made 36 percent fewer loans last year, backing only 44,221 loans from banks for starting, purchasing or expanding a small business.
Bernstein soon found that raising capital privately was even more challenging. Just when she thought she'd have to cut her losses, Bernstein heard about a nonprofit in San Francisco looking to fund businesses that were "unbankable." The To-Go Ware story resonated with the organization, and Bernstein landed $25,000, as well as the ability to tap their resources and expertise to seek further investment. She also learned an invaluable lesson: "Find investors who are into what you do."
These funders--loosely grouped under the moniker "impact investors"--aim to solve social or environmental challenges while generating financial profit.
Casey Verbeck is one such investor. Verbeck spent the last 15 years founding, running and advising new business ventures and is now the CEO of Touchpoint Trust Group, which is focused on building a responsible economy. However, Verbeck is quick to point out that it takes more than "a warm and fuzzy" story to capture the imagination (and the dollars) of an impact investor.
"An investor wants to be able to understand the mission of the company and its impact. Can the owner scale that model? And are they cash-flow-positive?" If the answers to these hard questions add up, Verbeck says he's found a winner.
Recently, Verbeck partnered with Sarah McLachlan and the Lilith Fair to launch the i4c campaign, which offered funding to businesses that met a series of rigorous criteria. Bernstein's To-Go Ware was one. Alter Eco USA and Better World Books were the others. Here are three best practices to help your triple-bottom-line business snag impact investment.
Tell a Compelling StoryBetter World Booksstarted when three friends from the University of Notre Dame began selling textbooks online. It quickly turned into a pioneering social enterprise, a business with a mission to promote literacy. Still, co-founder Xavier Helgesen says, it was important for Better World Books to combine the fact that the company planned to collect and sell books online to fund global literacy initiatives with a realistic plan to get there.Verbeck says it's critical to keep this kind of information straightforward during an initial meeting with a potential investor; think in terms of eight to 10 slides on a visual presentation. "Say it concisely and move on to show there is real investment potential," he says, noting that the founders energy, passion and conviction is just as important as the mission. "At the end of the day, an investor is funding the leader(s)."Helgesen agrees. "We had to convince our investors that we had a credible management team, since it was the first startup for the majority of our team." But one thing that weighed in Better World Books favor was that the team had bootstrapped the company for its first five years. "We had grown to $20 million in revenue without external funding, which showed that we were able to do a lot with a little."Put Your Best Financial Foot ForwardVerbeck says investors don't expect the numbers to be 100 percent accurate. "You want them to be as true as possible and [describe] how you are going to execute an action plan," he explains. "Impact investors often have 'patience capital,'" he adds. In other words, they can wait a little longer for a startup to be profitable.Mathieu Senard, co-founder and CEO ofAlter Eco, discovered the investors they pitched were in this camp. "Our strategy was to provide a business plan with healthy returns over a 5- to 7-year timeframe, without promising the moon and performances that we wouldn't be able to achieve," says Senard.Though Alter Eco distributes coffees, chocolates and whole grains to major retailers, it operates on a fair trade model; therefore, according to Senard, this type of performance is simply not attainable. "A healthy return on investment over a realistic period of time is what convinced our triple-bottom-line investors."But keep it simple. Says Helgesen, "I see a lot of young entrepreneurs detailing everything down to the coffeemaker and duct tape purchases." He recommends even high-level financial statements be edited to between 20 and 30 lines.Lay Out a Reasonable Plan for Future Growth"Investors know financial projections from startups are 90 percent BS," Helgesen says. But they should detail how the business will become profitable when the numbers get bigger. "They are a window into how the entrepreneur thinks about the business," Helgesen notes, but he cautions not to underestimate how large overhead will grow when the company scales.Senard admits that making projections for Alter Eco is just now becoming easier as the business moves into its sixth year because of the multiple moving parts of building a food brand in mass retail. He advises entrepreneurs to make their best estimate and divide that number by two. Helgesen concurs. "Under-promise and over-perform. It makes board meetings a lot more fun."Finally, Bernstein recommends recruiting great advisors to help not only secure but also manage investment capital. Helgesen points out, "An experienced CFO can give investors a great deal of confidence and can make sure that funds raised are smartly allocated."