We came together over a Skoll Foundation-funded project a few years ago to explore business models for social entrepreneurs. And the number one question that came up in our surveys and interviews with several hundred successful global social entrepreneurs was: Should I seek capital from an impact investor?
The answer is almost always “No”. Despite our belief in the power of impact investing and the need for capital to scale, most social entrepreneurs should not seek this type of capital unless four fundamental conditions are met:
1. Your business model is stable.
How well can you demonstrate your ability to generate sufficient financial returns for a potential investor? Cash flow needs to be stable and regular; you must have a track record of recurring or growing revenue that is documented for any impact investor to look seriously. Many angel investment groups will not even consider you if you are pre-revenue.
According to our research, social entrepreneurs seem to evolve their business models over five to 15 years, and income stability may take longer.
2. You have a convincing plan toward profitability.
Are you profitable? Is your potential market big enough? If not, can you make a case for future profitability based on similar business models used by others in different sectors or geographies?
Related article: Seven deadly mistakes to avoid as a social entrepreneur
3. You don’t need your cash more than an investor does.
Do you know how you will pay your investor back? Impact investors want a return and usually have a time horizon over which they need to get it. Will you have the free cash flow–cash over and above what is needed to keep your venture thriving–to provide this return? Debt will require interest and principal repayments. Equity investors may not need immediate cash, but they need a pay day.
In entrepreneurship circles, they often say “cash is king.” Understand the cash demands of an investment and make sure you can handle them. Don’t be lured by the idea that you can figure out how to repay the investment later.
4. You, your investor, and the terms of the deal are mission-aligned.
Impact investors are definitely not one-size-fits-all. Once you’ve found a potential match by stage, industry, impact area and geography, you also need to consider the implications of the investment on the mission and impact of your business, and be sure you and your investor are on the same path.
Social entrepreneurs need to remember that impact investors want to see stability and high potential and should not be depended on for the experimentation and risk-taking that gets you to that point.
Impact investing is not the panacea for everyone but is an incredible tool for the select group of businesses and organizations who are in the right place at the right time to start to return capital in the way that investors need it.
This is an excerpt from the full article, which can be found here.