Since I’ve started angel investing, I’ve seen hundreds of social impact investment opportunities, but only a handful have actually been able to raise angel money. So what’s the secret to their success?
Unfortunately there is no perfect way to choose successful impact investments and therefore, no perfect formula for convincing investors to invest. Nevertheless, here are a few factors that will increase the odds:
- A serial entrepreneur: Running a start-up is certainly a learning curve. There is a much higher likelihood for success (especially quick success) when it’s an entrepreneur’s second, third or fourth time around.
- Post-prototype: Entrepreneurs almost always underestimate how much money and time it will take to repay their investors, and pre-prototype companies take even longer.
- Some revenue: There is no better proof of concept than money in the bank. Even if a company has $1000 in revenue, it can make a big difference.
- Clear path to exit: Selling a company is a HUGE process, so if the entrepreneur hasn’t identified an exit strategy with clear and tangible opportunities, they have a long way to go.
- A sizeable market: The best definition of a sizeable market I’ve seen, was on the Cleantech Angel Network site: “We invest in solutions that address major problems for significantly large target markets (i.e. a $100+ million addressable market). You must demonstrate a strategy to claim a significant share of this market (>20%). There are plenty of great business ideas – but not all businesses will generate returns that justify Angel investment. Providing a solution to a problem with a large potential market is essential.”
- A technical co-founder: This of course, only applies to tech companies, but I know from experience that building a technology business and outsourcing the technology is a huge hurdle. To be a successful tech start-up, you have to be nimble and quick and it’s really hard to do that with an outsourced tech staff or high paid non-founding employees.
As you may have noticed, these impact investing criteria aren’t much different than those for non-impact investing. While some may argue with me, I don’t think the criteria are all that different. There are a million opportunities to make an impact, but far fewer opportunities to make an impact AND produce a return. If a company meets these five criteria AND it is going to make a significant social or environmental impact, it is very investable (and we’d love to talk to them/you).
What do you think?