7 reflections on the investment landscape for social tech
At Social Tech Trust, we’ve invested in over 300 early stage, purpose driven tech ventures. While some of the organisations we back go on to raise significant venture capital funding, our recent blog discusses how many struggle to access the capital they need to fuel their long-term growth and scale their impact.
To inform our response to this challenge, we held a series of online roundtables with early-stage social tech ventures to understand more about their experiences and views on what kind of alternative approaches they would like to see.
1. Challenging the dominant VC model
Almost all the founders that took part in the research expressed frustration in their attempts to access the capital they need to successfully scale their ventures and to fulfil their impact potential. They highlighted how the narrow focus of VC investors in terms of return expectations and business models, combined with the lack of alternatives, meant that numerous promising businesses were finding it hard to access suitable capital.
“If you look in the last 5 or 10 years at the number of UK companies that have IPO’d at £1bn; it’s tiny. Which means that most VC firms are never going to have that unicorn company. So what are they searching for? What are they expecting?”
2. Importance of value-aligned investors
Founders tended not to be averse to investors making high returns if they were prepared to take upfront risk and did not divert the venture’s mission. However, they voiced strong concerns about the underlying values and principles of the VCs they’d engaged, which they viewed as encouraging behaviours that were at odds with their growth plans and impact objectives.
“What’s off-putting about institutional VC is that it’s a total boom or bust. There’s no space to build a medium-sized (e.g. £20-£100m valuation) company. This leads to some value-destroying behaviours by founders in chasing top-level growth at all costs and having to ignore opportunities to have more positive societal impact on the way.”
3. Investor perceptions of social tech ventures
Although there has been a proliferation of new impact focused venture funds, the ventures were sceptical of how committed to impact these funds really are. They shared their experiences of investors closing down discussions over concerns that the social mission would limit the potential financial upside.
“The problem is the moment you mention you’re a social enterprise they believe you are not going to hit a multi billion pound valuation. So we sit in this grey area. In our articles 51% of profits must go back into the social mission. Which means that 49% could be paid as dividends. You find me a company that ever pays 49% of their profit out in dividends in any single year? It never happens. So why is that a barrier or a problem?”
4. Investor understanding of tech
Tech is increasingly being used as a tool to deliver social impact, yet finalising investments with social investors continues to prove challenging. The ventures pointed to some investors demonstrating a lack of technical knowledge and confidence in making investments into social tech ventures.
“We went for a big raise of £1.3 million pre-product and we got all the way to due diligence with a Trust and a well-known social impact foundation, but right at the end they decided that they couldn’t take a risk on technology because they weren’t tech savvy. That was a painful experience, but we thought if we can get that far maybe we can do something here.”
5. Alternatives to equity and debt
Most participants showed a preference for equity financing over repayable debt to provide risk capital for the business. Many also highlighted that these largely remain the only two options and as they look to the future, they would like to see more investors who were willing to explore different approaches, including revenue-based investment.
“The experience we had was that institutional funding seemed to be structured as either debt, that is predictable debt with a fixed interest rate, or equity for early stage. Whereas we wanted an equity-like debt instrument. Having explored that for about four months and having spoken to the obvious social investment institutions that we could, we went back to the drawing board and then went to raise equity instead.”
6. A desire for patient capital
Parallel to a desire for alternative forms of investment was the importance of recognising the value of patient capital. Pursuing transformative approaches may require new business models, creating new markets and engaging with complex procurement channels and it can take longer to make significant progress.
“With civic tech, or social tech, we are building systemic change. Systemic change does not happen in three months, or six months or a year.”
7. Increased optionality
Having optionality in funding was generally very attractive to social tech ventures. They were receptive to the idea of being able to either repay a loan or convert it to equity or also to have the option to pay down equity later. For founders, flexibility was key to providing them with the ability to adapt so that they could retain control over what was the right path for their company to achieve its goals.
“We’re already using 3-year debt to fund inventory, revenue-based financing to fund marketing and angel/equity to fund general burn rate all of which are great.”
With so many inspirational ventures presenting new approaches to addressing entrenched challenges, there is a genuine opportunity to build a fairer society as we emerge from the pandemic. This will require investment that meets the needs of the ventures as much as it does the investors. We thank those who took part and shared their experiences in our roundtables; insights from ventures such as these are crucial if we are to form a clearer picture of the need for alternative forms of investment and help more social tech ventures to thrive.