What do Social Investors Want?

Funding is a lifeblood of any startup. It is a crucial element for the survival of any business.

For social entrepreneurs, it is important to take steps in the right direction if they wish to secure funds. This is the reason why they have to learn what social investors really want and what their expectations are. Having a thorough understanding of your businesses increases the likelihood of attracting the right investor. Therefore, the vision of your business must be clear and well-focused.

Below are four main guiding principles every social entrepreneur must bear in mind in order to secure reasonable funds to keep their businesses running.

Financial and Social Objectives Must Be Well-Integrated

Social entrepreneurs have to be convincing in order to succeed in winning the trust of an investor. They not only should have a persuasive social mission, but also present a strong business case. If both these elements are properly aligned, they create a strong case that can make an appealing financial outcome to widen your impact. A great example of that can be Taxi-Electric that runs the cars on electricity and charge a fair price for providing taxi services. In addition to that, they also provide job opportunities to people who experience long term unemployment or are students. Both of these core elements have enabled them to sell as many taxi rides as possible.

Another well-known example is Tony’s Chocolonely that produce and sell chocolates. Moreover, it opposes child labor and slavery at the same time by partnering up with trade firms in Ghana and Ivory Coast to purchase cocoa beans at a fair price directly from farmers. These organizations are making an effort to spread a positive message while growing their revenues and returns.

Investors usually look for such businesses that offer a combination of both. It is quite likely that angel investors would invest in visionary ideas and would try to improve the business side of these social startups, whereas, investment funds tend to focus on the business side in order to assist them in aligning their social goals. Investors normally expect social entrepreneurs to have a deep understanding of their financial as well as social goals along with having an integrated approach and clear vision. It is important to optimize your plan through discussion with your investor.

A Well-Balanced and Strong Management Team

It is important to have a well-balanced team of professionals.

Investors always stress the importance of having a solid team that has its goals aligned with the goals of a business. Having a group of professionals who are motivated to invest their time and expertise in a social enterprise is considered quite healthy for a business as it is an indicator of good future prospects. Financial institutions and venture capital firms specifically look for companies with strong teams while taking investment decisions. Therefore, it is recommended to add a diverse group of people in your team at an early stage, because having more than one person behind an idea shows its strength and persuasiveness.

Measure Your Impact

It is not easy for social firms to measure their impact or quantify its outcome and they blame the lack of resources for not being able to do so. Investors, however, consider the impact measurement a strong requirement before they invest in a business. Although, they understand that it is difficult to measure the social impact, yet, they emphasize that it can prove to be very helpful for social entrepreneurs to maintain focus on their operations and identify clearly what their goals are.

The question remains how to get it done. The key is to start small, for example, measure the number of people employed by a social enterprise and the positive feedback it receives. There is no doubt that every method comes with its limitations, but one cannot deny that you can, at least, measure your progress with it. Taking the question “why” is it you want to measure the impact can play a vital role in integrating your financial and social goals.

Avoid Deviation from Your Core Mission

It is very important to stick to your key mission. The deviation can cost a business a lot in terms of losing their financial wealth and losing their core values. It usually occurs after two to three years into the business, especially when new employees, leaders or investors start showing interest.

For venture capitalists, the shift from a mission is one of the major issues that arises in social enterprises. It happens when they start deviating from their balanced view of pursuing financial and social goals together, and instead, move toward financial returns at the cost of their social mission. If such deviation occurs, it detracts the social entrepreneurs from the original mission they discussed with investors.

It is to be noted that moving away from the original mission is not a bad thing as long as the expectations of the enterprise and investors are aligned. Keeping the investors on the same page, and having their agreement is crucial for the success of any social enterprise.

Crowdfunding and Venture Capital

If startups manage to get funding from a venture capital firm (VC) or angel investors, they mark it as a successful milestone.

However, in the past few years, another investment vehicle has been introduced in the financial market to fund innovative ideas called CrowdFunding (CF). It has been changing the game ever since its inception and it is a new form of raising money to finance ideas. Unlike other forms of investments, such as, seed funding, angel investing, VCs or bank loans, CrowdFunding actually enables startups and entrepreneurs to invest in their business with a large amount of capital supply. Before going into detail, let’s look at what crowdfunding actually is.

What is CrowdFunding?

In simple words, CrowdFunding is a mean of raising money through a large amount of individuals, who are requested to fund an idea on a CrowdFunding website with a small amount of money. This phenomenon depicts the wisdom of the crowd, wherein, a business gets an opportunity to satisfy the market demand that was previously not exploited. Having this system in place results in creator getting funds to excel in his creativity and crowd getting a new product, which makes it a win-win situation.

CrowdFunding or Venture Capital – A Better Choice?

This can be a topic of solid debate if discussed in detail, because both sources have their upside and downside. In order to get a clear idea of which one of the two is a better choice, some of the key points have been discussed below.

Ease of Access

There is no doubt that it is easier to access funds via CrowdFunding than it is to raise capital via Venture Capital. You can meet your capital requirement with CF without having to build any connections, and instead, leave the decision to a large group of individuals. Sometimes, VC is hard to access. Despite having actual customers and real revenues, companies are considered small by the venture capitalists.

With CrowdFunding platform, it becomes easier to access a wide array of accredited individuals to fulfill initial capital requirements. On the other hand, regardless of how streamlined the venture capital processes are, there will always be more friction in terms of VC making inquiries and spending more time.

Stability

Stability is a key to a successful business, but it isn’t achieved easily. Most of the startups do not show an incredible growth curve in the beginning. It takes time to find the product/market fit and to find out a scalable way to sell a product. It means startups would need extra time for which, there will be extra financing requirements. In case of CrowdFunding, there is no apparent deal with responsibility and resources to fill this gap. This is where venture capital partners can assist a business to maintain their focus on execution by providing enough cash.

However, it should be done based on TRUST where both the founders of a startup and venture capitalists feel that the investment was done fairly.

Venture Capitalists working with CrowdFunding platforms

Ron Miller, a CEO of StartEngine (CrowdFunding platform), venture capitalists are compelled to use CF, because it asks founders for revealing the strength of their teams and values in the marketplace. He further said that it shows that strong teams and concepts are likely to get exposure in the market, which will draw attention of the VCs and other investors to further invest in their ideas.

For Example, Oculus Rift, a virtual reality system. They raise $2.4 million through CrowdFunding, which gave them the opportunity to rise another round led by Andreeseen Horowitz (VC firm) to raise $75 million.

Both sources of funds have their pros and cons. However, some VCs are now turning to crowdfunding websites to get access to new deals. Having strict timelines, they use CrowdFunding to identify if the idea is worth investing time in.

What do Angel Investors Look for in Startups?

Angel investors have to look for a business that worth investing, but it is not easy to differentiate between a startup that has a potential to grow and the one that is unlikely to succeed in the future. Angel investments are the most popular form of injecting funds into a business, especially a startup. According to a research, business owners are of the notion that it is a plan that attracts the investment, but investors seem to have other priorities.

Angels go for the “Ideas and Founders” and not the “Plan”

An online platform, known as Company Check that provides data on the companies in the UK, conducted a poll where 3000 business owners were asked about what they think an investor looks for while making an investment decision. It was revealed that around 38 percent of participants said it is a business plan, whereas, 27 percent of them voted for sales figures, followed by the founder, business idea, and economy. But the owner of Company Check, Alastair Campbell, was surprised with the results. He recently got an investment of $1 million for his startup called Carsnip. He said that at an early stage, it is an idea and a founder of a business that angel investors tend to go for, and then comes the sales figures and plan.

To further confirm the reasons, another poll was initiated where investors were asked the same question. Most of the investors shared the same notion as expressed by Campbell. Rory Curran, an angel investor of StatPro and Ecodesk, said that after his experience of investing in about 15 early stage startups and going through failures over time, he believes the ranking should be a founder, an idea, and then a business plan (especially the technology). And then comes the question of whether it is scalable, or if it will need significant reinvestment at a later stage. Similarly, former head of global markets at KPMG and an angel investor, Neil Austin said that he goes for the idea, then founder and then a business plan.

Another investor, Rajesh Sawhney, who has invested in about 50 startups, including Little Eye Labs (later acquired by Facebook), said that he seeks an exceptional founder with ingenious ideas and profound execution capabilities. He believes that angel investing is basically about recognizing and nurturing a unique talent.

“Experience” Matters

The chairman of Wyldecrest Parks and investor, Alfie Best, said that he considers cash flows to be a key factor, but when it comes to investing in startups, the experience of a founder along with the companies that are willing to purchase their products is what he evaluates.

Another angel investor from Silicon Valley, John Rampton, said that for a founder to make an impression, it is important to show that a team is backed by experience and credibility, because he believes it is a team that is going to make an impact and not merely the idea.

High-growth Business is a Potential Investment

Angel investors tend to go for startups with high growth prospects as compared to the ones that are likely to grow at a slow pace with modest profits. They hold their expectations high and seek a higher return than they can possibly get from a stock market. Allan Riding, an expert on angel investing and a professor at Carleton University, said, ““For every dollar that an angel puts into a company, he or she would like to take seven dollars out, after taxes, in seven years.”

An entity is likely to win an investment if it builds a business with sound future prospects. According to AngelBlog, angel investors are more likely to invest at pre-money valuations between $1 million and $3 million. By this point, it is probable that a startup has succeeded in establishing itself as something, having a real customer-base, fair valuation, and real revenues. Moreover, at the time of making an investment, they also look for an exit strategy to take a smooth exit.

Scalability

Another key factor that every investor looks for is the scalability of a business. They prefer to invest in startups that require a minimum viable product to get to the market and can scale quickly. For example, the largest taxi company in the world, Uber, does not own any motor vehicles. Similarly, a well-known retailer, Alibaba, holds no inventory. These companies scaled very quickly as soon as they entered the market.

It is important for entrepreneurs and startup owners to value the motivation and concerns of angel investors, because these investors take a significant risk when they invest in businesses.

How to Invest Smarter?

Angel investors and venture capitalists provide funds to early stage or emerging startups in exchange for equity and aiming to make huge profits. The trend of such investments has been increasing and there are a number of startups that became successful as a result of such investments, including WhatsApp, Uber, and Facebook.

It is very important to invest in a promising startup that has a potential to attain a unicorn status, yet, it is not easy to be an investor. Choosing the right start up is as important for an angel investor as it is for an entrepreneur, but does it determine an investor’s success? To understand how one can invest smarter, let’s look at a few tips by different investors.

Focus on Team and Market

The investor in Famo.us, TouchOfModern, and Airseed, Siqi Chen, said that when you make an investment in a startup, it is usually a very early product. Therefore, it is crucial for an investor to calculate and assess the opportunities accordingly and should keep the focus on the team and the overall market.

Ask Yourself – “Would I Join this Start-up?”

Another angel investor, Mike Greenfield, who invested in Hullabalu and Pocket shared some important insights on taking an investment decision. He said that in the beginning, he used to ask himself if the startup would yield a positive outcome on an investment, but it changed over time, and now he usually asks if he could see himself joining that company when he was 24? If the answer to the latter is affirmative, it shows that the founder of a particular start-up is working a problem that isn’t structurally flawed and has a good chance of winning big.

He further said that such companies have a potential to convince a geeky person like him as they work on something that is important and also ace the integrity test. He added that if a startup satisfies all those things, it makes him feel like he’s doing something right as an investor, regardless of whether he makes money out of it or not.

Read the Herd Correctly

There is this common phenomenon in a stock market, whereby, investors can make a lot of money simply by reading the herd correctly. The same was observed by Christopher Schroeder, investor in Vox Media and Skift, when he began angel investing a few years ago. He said that when he presented a deal to bright and successful friends, the first question they asked was “who is in?” even before the question about a team and its concept popped up. Therefore, one has to read his herd correctly before taking any decision.

Identify the Scale of Assistance Required by a Startup

Jeff Miller, another investor in the world of angel investing, said that when an angel provides a feedback on a product, founder usually appreciate it. But the clutch actions are quite rare than anticipated by him. Such actions can affect a company’s future. However, if you look at it from the perspective of successful companies, they look for a minimal assistance from their investors. So, it is important to identify the scale of assistance required by a startup for its future growth.

Choose a Company with a Good Working Product

It is of vital importance to invest in a company that has a good working product. Having a good team of individuals in any startup is not enough if they don’t have a product that solves a problem. A product has to show a “product-market fit.”

Double Down the Investment Once a Potential Unicorn is Spotted

Once you identify a potential winner, you should “double down”, as it represents almost 20 percent of the initial pool of investment.

However, patience is the key, and individuals in early stage startups usually have to wait for 3 to 10 years before they start earning profits from their investment.

Although, there is a lot of risks involved in investing in a new startup, yet the trend for angel investing is rapidly increasing. In order to invest smarter, an investor has to always welcome different ideas, because great ideas are born every day.

But only a few of them, with the right investor (and investment) turns out to be a complete success.

Women & Angel Investing

Angel investing is a known term in the world of investments. Startups and early stage companies in need of funds usually try to approach these angels who make investments in exchange for stocks of the company. A number of popular names, such as WhatsApp, Uber, and Facebook have encouraged the angel investors to come forward and invest in startups with an aim of making huge returns.

The Shift in Focus Toward Female Entrepreneurs?

So, what do angel investors really look for? It is mostly the commitment, quality, integrity, and passion of the brains behind those startups that these investors care about. Last year, an angel investor and CEO of photo editing software PicMonkey, Jonathan Sposato, made an announcement that he’ll only invest in startups that have one or more female founders in it. He said that female entrepreneurs face a tough time getting traction, whether it’s about raising money, sharing their ideas, or even recruiting. He further said that you cannot just ignore these issues; you have to act as a catalyst if you are passionate about it. Sposato was of the opinion that this problem arises, because investors tend to back those startups that are similar to other successful firms they funded before, and most of those companies are led by men.

Male Entrepreneurs Securing More Investments

According to a recent research by the Women’s Business Council and Deloitte, it was identified that the proportion of women entrepreneur fell in 2014 despite a large number of registrations by new companies. Lack of female angel investors is also a contributing factor as most of the angel investments are still controlled by men. In a study of 220 UK startups by Startup DNA, it was revealed that male founders are 59 percent more likely to secure investments than females.

Angel Investing – Tides are Changing

However, the tides are changing. In a report issued by the UK Business Angels Association and the Center for Entrepreneurs, women now represent one in seven angel investors in the UK, which is twice as much as it was observed in 2008. Similarly, in the U.S., the number of female investors has increased from 20,000 in 2005 to around 60,000 in 2014.

More opportunities are being created for women and its source is the ever growing awareness among angel investors about the fact that startups with female founders are good investments. Moreover, women are also becoming aware of their potential to be a successful entrepreneur, whereby, they no more have to clean other people’s mess and can instead focus on materializing their own goals. Jeffery E. Sohl, director of the Center for Venture Research, said that while a percentage is still low, a large number of women-led organizations are getting angel funds. He is hopeful that this trend will continue to grow, as more women are getting degrees in engineering, technology, and science.

A senior fellow at the Kauffman Foundation and Founder of Next Wave Ventures, Alicia Robb, gave credit to the women entrepreneur role models who are paving a way for other women and showing how they overcame the obstacles despite the challenges. In 2015, 29 percent of the entrepreneurs, who sought funding, were women and 24 percent of the angel backed companies had female founders. According to a report by the BMO Wealth Institute, 51 percent of the personal wealth, U$S 14 trillion, in the United States are currently controlled by women and the amount is expected to rise up to $22 trillion by 2020.

Although, angel investing has always been dominated by male investors, the media has begun to play its part. For example, TV shows, such as Shark Tank, are familiarizing women with angel investing. Robb also said that angel groups have put in a lot of effort to reach and engage women. One example is Astia and Golden Seeds. They are focused on connecting investors to invest in startups with female founders. During the last five years, different organizations, including Pipeline Angels, 37 Angels and Female Funders have also joined them, and it has expanded from 21 cities in 2015 to 33 cities in 2016.