Tips for Talking to Impact Investors

Impact Engine
Sep 28, 2018 · 11 min read

By Elizabeth Coston McCluskey and Tasha Seitz

We recently gathered our company founders and CEOs for our annual Portfolio Summit, and fundraising was a hot topic among the group. Since this issue is top of mind, we thought we’d reprise our article on the top tips for talking to impact investors and share some of the mistakes that we’ve seen companies make during the fundraising process.

When it comes to fundraising, finding the right investors to back your startup is key. This is true for nearly all early stage companies looking for capital, but when it comes to impact companies, finding the right financial partners is even more important. Not only do you want investors who see the financial opportunity of your impact company, you want investors who truly believe in your mission. And as we’ve highlighted in our “Spectrum of Impact Investing” post, investing philosophies vary greatly among impact investors. Despite this delicate dance, there are a few things every social entrepreneur can do to prepare for fundraising.

1. Be ready. The best time to raise money is when you have a strong case to make: have some traction and proof points around customer demand, willingness to pay, business model, etc. Bootstrap and conserve your cash until you have those proof points. Bring together a team that can execute, and get stuff done before you start talking to investors.

One of the things that we have observed is that startup companies tend to orient their fundraising cycles based primarily on when they expect to run out of cash. This can create real challenges, as investors are typically looking for traction and momentum. If a company can’t demonstrate those proof points, it makes it much more time consuming to raise money (both in elapsed time and the time you will have to spend speaking with investors and away from the business).

If investors aren’t ready to say yes, the tendency is to speak to more and more investors. The longer this process goes on, the greater the risk that investors will perceive the company as having tried to raise money for a long time without success, and therefore deem it an unattractive investment. You also won’t get the increase in valuation you want to see if you aren’t able to demonstrate that you’ve taken some risk off the table, whether it be product risk, product market fit, customer willingness to pay, or proving out sales/distribution models.

If you’re concerned about running out of cash before you’re ready to speak with investors, we strongly recommend that you become very tight on spending (i.e., conserve cash). In addition, you could ask for additional cash runway in the form of a convertible note from existing investors as well as investors that are interested in the company and willing to invest prior to a round in order to secure their spot in the deal. Companies that have customer contracts and revenues can tap into working capital lines of credit in order to extend their runway.

2. Be prepared. Be able to explain your market opportunity, how your business works, and your unique (preferably) value proposition. In addition, impact investors will want to know what the potential for social or environmental impact is and how you intend to measure it. Come to the conversation with a clear outline of what you’ve done so far to build the business and how much you need to raise to reach the next set of key milestones. Also, spend some time thinking about potential questions they may ask and be able to answer them in a credible way, which shows you’ve thought about the key risks and drivers of your business.

In addition to being ready to raise money, it’s also important to be prepared. When we’re excited about a potential investment, we want to see that the company can respond to our diligence requests quickly — it shows that the management team has anticipated our questions and requests and is on top of managing the process. Part of preparing for a round is having your existing investors or trusted advisors give you feedback on your fundraising materials.

Unfortunately, we’ve seen cases where a company will share fundraising materials that are confusing (e.g., a poorly constructed pitch deck), that have too little or too much information (e.g., annual financial projections only, or projections that are so complex that an investor can’t easily follow the assumptions), or that indicate the company’s internal processes aren’t what an investor expects them to be (e.g., a sales pipeline that doesn’t have expected contract sizes and timeframes for decision). Your existing investors are also likely to pick up on things that might be red flags to other investors so you can address them prior to making a bad impression.

There are two specific mistakes we’ve seen that we feel compelled to highlight:

(1) We’ve seen cases where a company will generate and share its own term sheet, including a valuation, with investors as part of a data room. This almost never works in the company’s favor. If investors think the valuation is low, then you’ve left money on the table. If investors think the valuation is too high, they could walk away without bothering to do the diligence work that might get them more excited about the company. If the investors think the valuation is way too high, they’ll attribute it to inflated expectations on behalf of management and may conclude the team isn’t savvy enough to run a company successfully and will never invest in the company. The best approach to negotiating valuation is to let the market set the terms — if you generate a lot of excitement from investors, then they’ll compete with each other and drive valuation higher. If you don’t have a lot of options, you might have to accept a lower valuation. Unfortunately you won’t get a sense of the dynamics of the fundraising market until you start to have conversations.

(2) It helps a tremendous amount if you have legal counsel that has experience working with venture-backed companies. They’ll understand the deal structures and terms that are typical, and in a negotiation they’ll know what issues are worth pushing on and which ones are not. In the end, that will save the company both time and money, even if the hourly rate is more expensive.

3. Be professional, thoughtful, and honest. Everything you do, and everything you say, will be noted by the investor. Investors — especially angel and early stage investors — are betting on the entrepreneur, and you need to convince them that you will use their investment dollars to create real value in the business. That means presenting yourself credibly, responding to questions thoughtfully, and being clear about what you know, what you don’t know, and what you’ll do to figure out the stuff that matters. Be clear about what you still have to prove. It’s okay to present yourself and your company in the best light, but be clear about what you have (and haven’t) done. Being unclear — or evasive — will always backfire in the long run.

Our cautionary note here is that presenting yourself and your company thoughtfully and honestly to investors requires that you are thoughtful and honest with yourself about what you have and haven’t proven with the business. We see this challenge quite often with companies that are experiencing growth and momentum in their sales pipeline that haven’t yet translated into actual customer contracts and revenues. As the CEO, you will need to be clear with investors that you recognize the company hasn’t yet demonstrated the growth through revenues, but present a compelling and credible case around sales pipeline metrics and growth. These types of situations make valuation discussions particularly tricky.

4. Target the right investors. When you’re building a company, you should be looking for investors that can add value beyond the dollars they invest. So pay attention to investors who have built a company before, have sector experience, can make introductions to potential customers or partners, or help you raise more money in the long-term. The savviest angel investors want to provide value to the entrepreneurs they invest in. These are the investors you want in your company and on your side. As an impact company, you should also be looking for investors whose values align with yours, which will serve you down the line when tough decisions have to be made.

We strongly recommend making a short list of your most highly desired investors prior to launching your fundraising process — these are typically investors that know your industry well, have a good reputation, and will add value to the company through their experience and connections. If you can get an investor that fits this profile to commit to your round early, it makes the remaining fundraising process much easier, as it signals that a well-respected investor who knows your space is willing to bet on you. Having your existing investors and advisors make introductions for you and offer to share their perspective will make it more likely you’ll get the attention of these investors.

Note, however, that these kinds of value added investors are unlikely to be the “highest bidder” in terms of valuation. One of the fundraising mistakes that we see entrepreneurs make in the early stages is to optimize for the short term rather than the long term. The goal is to grow a large and valuable company. If you can attract strong and valuable investors at the early stage, even if they aren’t willing to pay the highest valuation for the company, you’re better positioned to grow and scale successfully. Ultimately, even if you own less of the company as a percentage of equity, the most important driver of value is how much the entire company is worth. As Chuck Templeton, our venture partner, would say, “it’s better to have a slice of watermelon than a whole grape.”

One last cautionary note is to be aware of the differences between the types of investors you are speaking with and understand how their decision-making might affect the rest of your financing process. Most of our portfolio companies are talking to venture firms, family offices and strategic investors. Venture firms typically have the most experience working with young companies and have clear processes for getting to an investment decision. They will also be very familiar with investment structures and terms and have a strong viewpoint regarding valuations based on what they are seeing in the market. Some family offices have a lot of experience with early stage investing and some have very little. We’ve seen a wide range of experience and sophistication, and family offices can be tremendously valuable to the companies they invest in based on their own business experience and network. On the other hand, it can be tricky to have a family office as a lead investor, especially if they aren’t as experienced and don’t have a good sense of market terms and valuations. If the company agrees to funky terms or high valuations, it can discourage participation from other more experienced investors. The last category of potential investors are the strategics. Like family offices, strategic investors can be tremendously helpful to companies, but can also be tricky to deal with. Their decision timelines can be unpredictable, and we’ve seen situations where strategics that don’t have an established venture arm with experience venture-stage investors will pull out of deals unexpectedly and leave companies in the lurch. They also often include terms that gives them special rights when it comes to acquiring the company, so you’ll need to be careful to negotiate terms that won’t put the company at a disadvantage in the future.

5. Don’t just talk, listen. Get to know the investors and what they care about. Pay attention to the questions they ask. Figure out what motivates them and how they like to work with entrepreneurs. Read between the lines of the conversation. This will help you target the right investors (see №4). Accepting an investment from someone else is an awesome responsibility. You will be living with these investors for years to come, most likely, through good times and bad. Make sure they are the people you want on your boat. Make sure that they understand the risks of the business, when to hold your hand, and when to hold you accountable.

Listening to investors gives you valuable feedback, as does observing where there concerns are and understanding how they perceive the opportunities and risks of your business. Even if an investor decides not to invest in your current round, they can be a valuable connection in the future. Your company may be a good fit with their investment strategy, but still needs to prove a few things before they are ready to invest. Understanding the investor’s concerns and objections is valuable even if they decide to pass on investing, as they give you information that will help you improve your communication and preparedness for conversations with other investors.

6. Manage the overall investment process. It’s up to you to create momentum towards a close. If you can get credible investors to commit early — people who understand your sector and can add value to the business — it will signal to others that your company is a good investment. Even better, have good news to report about progress business has made as you move towards closing your round. Investors will move quickly if they see momentum and think they might miss out on a good opportunity. Your job is to pace all of your various conversations with investors towards a close. This can be really hard because fundraising can take a lot of time and energy. But if you lose momentum in the process, it’ll take a lot more time and energy to get the fuel you need for your business. Make sure you have enough conversations going at one time and make sure they all move along. Always ask what the next step is and don’t let the conversations go cold; they may never warm up again.

We’ve already talked about being ready and being prepared for the fundraising process, and targeting the right investors, all of which help with creating momentum towards a close. It is also important to read investors’ signals correctly and understand where they are in their decision-making process. Are they scheduling follow up meetings? Do they continue to ask for due diligence materials/conversations from week to week, or do they seemed to be stalled? How many people have you met with at the firm? Are those people decision-makers? Is presenting to their team or partnership a requirement, and have you made it through that step? Have you discussed terms verbally? Do you have a term sheet in hand? All of these are signals that give you a sense for whether the investor is driving the process forward internally or prioritizing other potential investments. Your existing investors can help you decipher where you are in the process and help suggest how to get/keep things moving.

7. Don’t let the “no’s” get you down. Investors say “no” to companies 99 percent of the time, for a lot of different reasons. Every investor has a story (sometimes many!) of the company they passed on that became a huge financial success. Just because an investor turns you down, it doesn’t mean you’re never to going raise money, or that you’re not going to build a successful company. It may be a function of fit, or timing, or a bad experience an investor had in the past. If you’re not hearing a lot of “no’s”, you’re probably not having enough conversations!

Targeting the right investors and focusing on driving momentum can help increase your likelihood of getting to yes, but invariably you will still hear a lot of “no’s” from investors. Listening and learning from the conversations that don’t yield an investment can still give you valuable feedback to help you improve your investor targeting, messaging, and materials. If you’re hearing a lot of “no’s”, hang in there and lean on your existing investors for advice and support!

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Impact Engine

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We are a venture capital and private equity investment firm focused on growing companies that generate positive social and environmental outcomes.