Impact Investing: On Capital Gains through Social Good
While it seems to be gaining visibility as a new trend, impact investing has been a ‘thing’ for at least a decade. Fundamentally, it refers to the process by which an investor actively seeks to gain financial return and social benefit. Think global energy, environment, healthcare, solar power, technology, water; it’s everywhere. We see a lot of impact investing in the Bay area, especially in industries like cleantech and energy, where many of our clients are enjoying remarkable success.
It’s also (unironically) making a big splash in water. Here are important things to know about investing in social good – what to know, who’s investing, how you can get involved, and what’s in store for the future.
What to Know
As with all early stage companies, a great team is key. “A ‘B’ team can run an ‘A’ idea into the ground and break a business, but an ‘A’ team can take even a ‘B’ idea and make it work,” says Tom Ferguson, Vice President of Programming at Imagine H2O, a nonprofit helping solve global water challenges that has seen great results from engaging with impact investors. “If you look at virtually anything ‘unsexy’ and under-resourced, there is likely a good investment opportunity there,” Ferguson continues. When asked about investing in water, he replied, “It’s a challenging area, but it’s well worth getting smart on it now.” (ICYMI: the implications of climate change and global warming are most devastating on water resources.)
If you’re an entrepreneur looking for investment
- Impact investing, first and foremost, is mission-driven but not a replacement for financial returns.
- Focus and specialization are increasingly important. Stephen Terry, a trusted CFO partner here at Early Growth, puts it in plain terms:
“Be clear in your priorities and when considering investors. The ‘spray and pray’ method will not work with impact investing. Be conscious of the areas specific investors care about. If you’re working to cure a sleeping sickness in Africa, you don’t want to go to an investor focused on sustainable energy.”
- Tell your stories well – a common misconception is that impact investors operate like traditional nonprofit organizations. In truth, it takes expertise and a wholly different set of skills. With impact investing, the narrative element when approaching investors is equally if not more important on the impact side as demonstrating financial success. (For examples on what this looks like when it’s done well, see the Gates or Schmidt family foundations).
If you’re an investor
- An entrepreneur’s most scarce commodity is not money, it’s time. They don’t have any to waste. If you aren’t interested, let them know. Don’t drag out the process, get to ‘no’ fast, like ripping off a Band-Aid. (Check out Andy Lower and the “4-hour Due Diligence” model for ideas.)
- Focus on the metrics that matter. Some funders tend to place what Tom Ferguson of Imagine H2O called “onerous” reporting requirements on young companies. He offers the following advice to investors:
“The best thing you can do is let them do their thing. Don’t kill them with 45 monthly metrics to report. Start with one or two key impact-related data points to watch and build from there.”
When you look for partners for your idea or organization, venture funds and family offices are a great place to start. Here are some of the top impact investors on our radar and a snapshot of what they’re into:
- DBL Partners: Cleantech, IT, Healthcare, Sustainable Products and Services
- Kapor Capital: Education, Finance, Health, Social Justice
- Obvious Ventures: Sustainable Energy, Mobility, Education, Employment, Food, Healthcare
- Khosla Impact: Low-Income Laborers, Farmers, Families, Small Businesses in Emerging Markets
- Acumen Fund: Education, Electricity
- Omidyar Network: Digital Identity, Education, Emerging Tech, Financial Inclusion, Governance & Citizen Engagement, and Property Rights
- Better Ventures: Education Technology, Gender Equality, Future of Work, Healthcare (aging and senior care, preventative health), Sustainability (clean energy, water)
There are three times to get involved in impact investing, Ferguson shares:
- You can be late, when competition has driven down returns;
- You can be on time, which is practically impossible to do consistently as an investor; or
- You can be early, get in on early deals at reasonable prices, and learn key lessons ahead of others.
Which will you choose?
For more insights on impact investing and to learn how Early Growth Financial Services can support you along the way, contact us today.