#3 How we raised nearly $1M for our social enterprise in Colombia

The success of a startup is not directly proportional to the amount of investment raised during its lifetime. For all the billions of dollars invested in start-ups worldwide, only 1% of companies make it to a unicorn status. Nonetheless, many startups depend on external capital in order to grow or just continue running their business — just like Agruppa did — while being conscious of how limited a guarantee of business success an investment is. Looking for, raising, spending and then noticing how (in most cases) the capital was not enough is easily one of the biggest nightmares of those of us who have ventured into entrepreneurship, especially in the social sector. This post is for all those who want to remember the long road of raising an investment round, as well as those who are just about to start (good luck!).

I remember perfectly a day in August 2015, when Carolina (co-founder of Agruppa) and I decided to take a leap of faith and take ourselves seriously as entrepreneurs. We had spent almost a year trying to raise the funds we thought we needed in order to launch Agruppa and start selling. We had been knocking on every possible door, reaching out to all our networks and applying to every prize competition recommended to us, without major success (at least economically). At this point, we were tired and spent all our savings.

That day in August, we saw light at the end of the tunnel. We had won 20 million Colombian pesos (approx. $7,300 USD) competing with the idea of Agruppa for a prize by Colombia’s largest soft drink company (organised by Socialab who we cannot thank enough for supporting us at this early stage). The prize money gave us two options: (a) paying us a modest salary in order to continue fundraising for the amount we estimated we needed, or (b) going all in and starting operations with an amount of money in the bank account that knowingly would only last a couple of months.

We were facing a common challenge for entrepreneurs, a chicken-and-egg type of problem: what’s first, traction or capital? The answer from our experience is that raising capital, especially impact investment, is practically impossible without some traction. So then, the next question is: without capital, how do I generate that initial traction? The answer is rather long and windy: stretching your savings, applying for grant and prize money like crazy, involving friends and family and/or be very patient. The short answer is: just go for it with as much or little that you have.

As soon as we decided to start the engine of Agruppa, and launching with 7,300 dollars, everything started to flow. We secured a contract from the World Bank, won some other small prizes and ran a seven-months pilot, proving to the world — and ourselves, most importantly — that Agruppa was much more than just an idea. With this initial traction, we caught the attention of investors such as Wayra, Mercy Corps Social Venture Fund and Yunus Social Business, who financed Agruppa’s growth (more about the challenges of scaling in posts #1 and #2).

How did we end up raising almost one million dollars? Beyond a good idea, bespoke traction and a great team to back it up, these are the things that really helped us on the rocky road of fundraising:

1. Understanding the investment landscape: there are thousands of investors and funds out there, but only by understand the ecosystem can you actually leverage them. The key is understanding who the actors and what their key interests are. This process implies first of all creating some type of map or database of relevant actors. Those do not only include investment funds and angel investors, but also others who could be interested in supporting your venture for one reason or another (such as other entrepreneurs, leaders of corporates from the related sectors or industries, etc.). If you are still early stage, this probably also includes resourceful friends and family members. Once the actors have been identified, start classifying them based on their investment thesis: in what kind of enterprises do they invest, at what stage, what sums, which sectors or geographies, and what is the impact they are looking for. Having all of this mapped out makes it really clear where to focus your fundraising efforts.
2. Become a professional stalker: our motto while fundraising has always been: “if I don’t know this person, surely someone I know does”. That’s what really drove our fundraising journey. We participated in sector-relevant events in order to get the word out, collected contacts and business cards, and became professional stalkers in networks like LinkedIn (relevant for Colombia — based on your geography there may be others), researching not only who we would like to meet, but more importantly, who could facilitate this connection. Once you have identified your targets with the investor map (point #1 above), do everything within your reach to get a direct contact with the fund or investor — personal contacts really beats impersonal online forms (that many funds do have on their websites). We’re convinced our investment round would not have been nearly as successful if we had not invested into personal relationships. Many times would we get a “no” at our first intent, but staying in touch and cultivating relationships, as well as inviting potential investors to meet the team, see operations and just keeping them up to date on progress, is what can turn that no into a yes in the end.
3. Speaking the same language as the investors: the above mentioned investment thesis describes the investor’s why — the reason behind investing in the type of enterprises and the stage that they do (here an example of an investment thesis). The reason for dedicating some time to studying the investment thesis goes beyond just a simple match making; it should really inform your pitch. Understanding what investors care about allows you to present your work in a way that resonates with them (including language, logics, context). That’s why it is worth adapting your pitch materials (slide deck, one-pager, etc.) for each potential investor, instead of mass-mailing one generic story. In the case of Agruppa, our story could be told centering on the Mom-and-Pop shops in order to appeal to funds such as the World Bank who wants to support small businesses, or centering on the farmers in order to catch the attention of Yunus Social Business and the likes who care about agricultural development. We did not actually do this tailoring sufficiently, but additional to these two which we dominated, there could have easily been versions of Agruppa focusing on last mile distribution, on ITC for development, on mobile apps or data driven businesses. For social enterprises, it is consequently key to have a well defined theory of change (how will I generate the change I want to see in the world) which can in turn be tweaked to fit the investment thesis. A word of warning: do not tell entirely different stories to different investors (who most likely hang out with each other anyway as it goes in this space). This point is about presenting what you do in a context-specific way — while you keep doing what you do.
4. No one falls in love with an excel file: investors receive and review hundreds, sometimes thousands of opportunities per year. In Colombia, a venture capitalist will look at around 150 businesses per year, analyse around 50 and invest in three — that’s a 2% chance that your enterprise will receive investment (thanks to David Sanchez from Amplo for his perspective on this). For impact investment funds, chances are even slimmer. Taking into account other variables, such as the entrepreneur’s gender, the likelihood of success keeps shrinking. For example, male social entrepreneurs raise double the capital than their female peers in the US, and the gender funding gap is even bigger in the overall startup sector, as a recent study by BCG found. So what the heck can one do to stand out from the crowd of investment-seekers? Probably even the prettiest financial forecast will not do the job. Instead, have them get to know your business first hand, so they can see how it works, meet your team, and find their own reasons of why to invest in you instead of in any of the other hundreds of enterprises. This holds especially true for social enterprises, where the capital usually comes from people and funds who want to see with their own eyes what difference their money is going to make. In Agruppa, we even created an agenda for those investor visits and defined responsibilities within the team so that everything would flow smoothly that day, creating impressions that tell you so much more than an excel file.
5. Without return, there’s no impact: for social entrepreneurs, taking decisions that trade off business and impact is a daily challenge. And many times, we focus more on the social side of things (which after all is why we started all this in the first place). Today we understand the irony of pretending to have social impact without having a financially sustainable business. This really affected our fundraising, given that beyond grants and prizes, no one will invest in a business that is not viable financially, no matter how much they care about social impact. Impact investment funds may be more patient with their expected return and may be willing to cut some percentage points on that return. But in the end, they still need an interesting return for their investment, to the point that a study on social enterprises in the US states that “some social entrepreneurs found it easier to raise money from investors who are interested in the business case, alone. Impact investors were so risk averse that they didn’t invest at all”. From our experience, impact investors do invest, but without a doubt the vital factor is the existing or projected profitability of the enterprise. It’s almost like social impact is an add-on.

One of the few times that fun-draising was actually fun: winning 3rd place at the Global Social Venture Competition in Bangkok, Thailand.

Raising investment, especially for social enterprises and specifically in Colombia, is difficult. It’s not by chance that most of our funds came from abroad, seeing that the little impact capital available in the country is quite risk-averse. With Agruppa, we fell perfectly into the “missing middle” of enterprise financing. We had raised a first round and our capital need was outside of reach for angel investors, but the business was not yet profitable and did not have the capacity to absorb the bigger sums that many funds are looking to invest. Making it over that void is a challenge, and at Agruppa we did not make it in the end. We sincerely hope to see more investors who dare to finance this gap, and that amongst entrepreneurs we support each other in facing it.

(written with Agruppa Co-Founder Carolina Medina)

This is the third in a series of posts about the creation, growth and closure of our social enterprise in Colombia. In post #2 we share the basic and sometimes mistaken assumptions behind our business model. Check post #4 for how rigorously measuring social impact too early put the business at risk.