Recently, a friend and founder of a social venture that increases access to basic services for underserved communities in the US, started gearing up for his Series A fundraising. As a mission-driven company, when he went out to raise capital, the advice he got about where to look was split down the middle. Due to his company’s social mission, some investors told him to focus exclusively on raising from impact investment funds.
On the other hand, other investors who’d spent time understanding his business model encouraged him to raise venture capital for the strategic advantages it would unlock, including industry expertise, connections, and commercial credibility.
If you are a founder building a company whose core mission is to solve a pressing social or environmental problem, you’ll likely find yourself in a similar position, asking yourself the same questions:
- should I raise funding from impact investors or venture capitalists?
- As we scale, to what extent will that external capital support or push back against our mission?
- How can I ensure that our investors and our company are fully aligned on impact for (inevitably) when the road gets rough?
These questions can all be boiled down to a single one:
Is venture capital right for social ventures?
There’s no black-and white answer to this question. However, under specific conditions, venture capital can be a good fit without putting your mission at risk. More importantly, over the long term social ventures may actually be a better investment, since they increasingly benefit from competitive advantages unique to social ventures.
The Sweet Spot: Intrinsic Alignment between the Business Model and Impact
If you run a social venture and are wondering whether venture capital is right for you, your starting point (for entrepreneurs and investors alike) should be to have a solid understanding of the level of impact risk that is embedded in your business model. Start by considering this question:
To what extent does your business model sit in lock step with your impact model as you scale?
All social business models lie along a spectrum here, ranging from impact can seamlessly be divorced from the business model to increasing margins has the inherent effect of increasing impact. The former introduces a high-risk variable as to whether external capital will be helpful or harmful to the mission, while the latter limits it.
For example, Stasis Labs is a cloud-connected vitals monitoring device aimed at decreasing mortality rates among the 11 million under-monitored patients around the world. Because impact is intrinsically linked to Stasis Labs’ core product and business model, and impact will scale in lock step with the business, they’ll sit farther to the right on the spectrum. In this case, limiting impact risk makes them an ideal fit for venture capital.
Toward the other side of the spectrum might sit many one-for-one models, in which a company typically donates one product for every one product sold. This business model is inherently risky for both investors and entrepreneurs alike, because impact can seamlessly be divorced from the business model.
For the investor in this scenario, increasing impact has the inherent effect of decreasing margins. For the entrepreneur, at the point at which they find themselves in a cash crunch down the road, they may have to scale back on impact — or eliminate it entirely — in order to optimize for survival.
Why Venture Capital is Starting to Invest in Impact
Historically, many VCs have been skeptical of social business models as good financial investments, which means that most social ventures will have an extra barrier to overcome when pitching VCs.
However, if you satisfy this key condition of intrinsic alignment, there are a handful of unique competitive advantages inherently tied to key drivers of success that you’ll be able to leverage. As you talk to VCs, you can point to these factors to walk your investors back from the ledge of viewing your mission as a risk, and rather as a competitive advantage:
The Market is on Your Side
Put simply, consumers want you to win, because you are solving a real pain of theirs and something that matters for the world. Additionally, 70 percent of consumers aged 18-34 say they are willing to pay more for a socially or environmentally responsible product (source).
Mission-driven companies have an easier time attracting top talent, from co-founders and team members, to mentors and advisors.
The Rise of Impact-focused Capital
From venture capital to hybrid impact investment firms to philanthropic foundations, capital is converging on impact: from 2015 – 2020, the impact investing market is predicted to grow from nearly $9B to $1T (source).
At their core, social ventures have a purpose that the public can get behind. In the short term, an impact story means you are much more likely to get positive press and PR.
Over the long term, this can return in spades to support the growth of your company through talent attraction and retention, strategic fundraising, increased opportunities for strategic partnerships, and more.
Stay tuned for application dates for the Techstars Impact Accelerator!