Impact Investors Are Looking for These Five Things in Your Startup

“Give me five!” by Martin Fisch (Source: Flickr)

Investors pursue impact investing for various reasons. Wealthy individuals and foundations usually want to make important social change in a more sophisticated, sustainable, and substantial way than traditional philanthropy. Large investment institutions and financial advisers need to meet client demand for more nuanced financial products. Governments want to motivate commerce and stimulate growth in underprivileged areas and populations.

When deciding on which businesses to fund, they often look for five key characteristics:

1. A strong business model that will lead to a strong financial return on investment (ROI), whether the ROI be market value or not, reports the Stanford Social Innovation Review.
2. Clear social impact objectives that align with the investor’s portfolio, goals and overall mission.
3. Well-defined impact metrics, and a well-thought-out strategy to achieve those metrics. A note on metrics: some investors believe “intention matters up front, and compliance matters more later”. However, documentation of your startup’s commitment — through something like a World Positive Term Sheet — remains an important statement of intentions to investors.
4. A business savvy, mission-driven founder with a deep understanding of their product or service.
5. A smart team that’s financially literate and has discernable experience in the field.

Additionally, we’ve identified several traits that startups that have received impact investment share:

• Location — The GIIN’s 2017 Impact Investor Survey found that roughly half of investor’s assets went to developed markets and half was invested in emerging markets. These results echo findings from the 2015 and 2016 surveys, but represent a downward trend from 2014, when investors favored emerging markets.
• Industry — The same 2017 GIIN survey also ranked impact investing industries by total assets under management (AUM): housing was first, followed by energy, micro-finance and other financial services. The survey notes that “although food and agriculture and healthcare are relatively small in terms of their proportion of AUM-weighted allocations, the largest number of investors have allocated at least some capital to these two sectors.”
• Accelerators Matter — With investors expecting an ROI, accelerators have filled the gap to provide early-stage startups a chance to refine and maximize business and social impact. The Aspen Network of Development Entrepreneurs (ANDE) and Village Capital examined the important role of accelerators in bridging the “pioneer gap” in this 2013 report. Recently, established tech accelerators, such as Techstars, have launched impact-focused versions of their traditional programs to back “for-profit, mission-driven founders building tech to solve social and environmental problems.” Stanford’s Social Entrepreneurship Hub offers this useful guide for startups looking into accelerators and incubators.
• Corporate Appeal — Large corporations, feeling pressure from shareholders to improve their Environmental, Social and Governance (ESG) ratings (see our BlackRock coverage for more) seek innovative social impact startups for their supply chains and corporate venture funds. Big names like Salesforce, Comcast and Twilio are backing startups explicitly because of their social impact potential.