From joining an angel network that focuses on social change to asking wealth managers to find impact investments across a whole portfolio, impact investors (those who look for financial return alongside social and/or environmental impact) come in many different shapes.
Jean Case recently wrote an article for entrepreneurs on the six questions to ask before you start a social enterprise. It’s an ideal introduction for those innovators who want to tackle social change through business. But the people who are going to fund those enterprises need to make sure they’re asking the right questions, too.
If you’re thinking about joining this growing movement, here’s what you need to consider before you get started.
This one might seem obvious, but knowing exactly why you want to get involved will make sure you get the most out of it (the right returns, the right impact–or both). If you’re a philanthropist looking to “recycle” your capital rather than seeing the guaranteed 100% loss of grant-making, this might mean you’re more open to putting in first-loss capital that then catalyses later investment. If you’re interested because you’re a seasoned entrepreneur, maybe you know direct investing is right for you because you like to advise growing businesses as well as funding them. Maybe you’re using impact investing as a way to engage your children with your wealth in a way that teaches them about values as well as investing, which might mean you want to invest through pitch events that offer the chance for them to get involved too.
If you have a particular motivation for doing impact investing, articulating that to your advisors, your fellow investors, your spouse or your children–and even the entrepreneurs you meet–will make sure you’re finding the right opportunities to invest in the things you care about.
Knowing your impact criteria matters hugely in choosing where to invest. Some investors are agnostic: they want to create a better world through social and environmental change, and might want to meet entrepreneurs from education, housing, health, greentech and much more. Others might know exactly the change they are looking for and want to focus on that.
Even a single-minded commitment to one core social impact means making decisions about kinds of impact, however. For example, if you’re interested in positively impacting the lives of women and girls, an investment into a company like Aduna (which creates employment for women in rural Africa through its super-ethical supply chain) might seem obvious. Or it might mean backing an entrepreneur like Arunachalam Muruganantham, whose mini-machines for women’s hygiene products are revolutionizing women’s health and employment across India. Those are clearly women-supporting investments. But what about other businesses tackling challenges that may not have women at their core but certainly affect their lives? Extremis, for example, provides safe, secure, pop-up shelters in disaster zones and slums, allowing women to keep themselves and their families safe (and it is run by a female entrepreneur, another way of supporting women through impact investing). Does investing in a business that improves lives in general–including for thousands of women, though it is not specifically focused on them–meet that impact criteria?
Whatever the impact you’re after, it’s important to know before you start if you want to dive deep into one challenge and really try to solve it, or if you want breadth across a whole range. That said, being flexible doesn’t hurt; sometimes the most exciting businesses or the entrepreneurs you believe in the most will be surprising–and that’s okay too.
Investors who want to make their first impact investments often ask us what kinds of returns they can expect. Like any investments, it’s not so simple. Just as investors consider risk and return, they are now starting to consider impact. Sometimes that will mean a high-risk, high-impact investment with a strong return profile. Sometimes it might mean a lower risk, high-impact investment with middling returns.
There are different ways to invest that will bring different returns, but knowing what you are looking for from the outset will help. If you know you are only looking for market-rate or market-beating returns, looking at hundreds of debt investments into slow-growth grassroots organizations might not be the right path for you. You might want to narrow your criteria to established businesses with strong track records across a range of sectors to maintain diversity. Knowing the return profile you’re after before you meet potential investee companies is important–it means you don’t waste the time of entrepreneurs, and you don’t waste your own time either.
Of course, every investment is a risk. Investments go down as well as up, and all investments should be discussed carefully with your financial advisor.
Often, the reason entrepreneurs look for angel capital is because of the value-add that they bring. This is, if anything, more important for those considering themselves social entrepreneurs; they may be looking for impact expertise as well as business acumen in their investor.
If you have networks in a particular industry, you might choose to invest largely in companies where those networks are useful. If you can offer an investee your time as a board member, or make introductions to other like-minded investors, you will be much more valuable to the entrepreneur and much better placed to help them scale. Perhaps you have experience in measuring impact and you can help them think of more efficient and useful ways to measure and report on outcomes. Even if you do not have the time to sit on their board, you might be able to share your valuable experience of marketing, or business growth, or product innovation as a more informal advisor.
The most ambitious entrepreneurs should be able to choose which money they take. Coming in with more than capital makes it clear you can add value to the business. Sometimes you may choose not to invest, but if you really believe in a company’s social mission, you might want to help them anyway; knowing which skills and experience you can use to help these enterprises grow will make it a much more meaningful, enjoyable investing experience.
It is absolutely key to be clear on this before you make a commitment to invest. Entrepreneurs with a social mission are so diverse, and their understanding of–and willingness to report on–impact outcomes will be very different. If your reporting requirements are misaligned with the entrepreneur’s desire, capacity, or ability to measure and report, the investor-entrepreneur relationship will already be off to a rocky start.
If you are backing businesses like these from pure social impact motivation (and the financial return is a nice upside), you might be very clear that you want frequent, detailed outcome reports. This needs to form part of your initial discussion with the team. If you’re backing the business because you believe in the entrepreneur’s deep and personal commitment to impact, perhaps you’ll be more comfortable stepping back, and giving the entrepreneur control over how they report. Whether you want to see medical-style, randomized control trials, or whether a yearly impact report alongside a financial report to shareholders will do it for you, you need to be clear with the investee company from the beginning, so both sides can manage their expectations.
Before you take the plunge into making your first impact investment, you might want to consider who you need to bring with you. If you’ve been angel investing for years, you might be delighted to be a lead investor, at ease with due diligence and confident in negotiations. You may want to consider if you want to impact invest with your partner, or if you would rather do it alone.
If you’ve never angel invested before, you may need a bit of extra support. So ahead of finding businesses in which to invest, you will need to find the people who can help. That might mean your family office (especially if they manage both your investing and your philanthropy; they will understand your family’s values and your preferred risk/return profile) or your financial advisor.
Many people want to learn by doing, and joining an angel group will enable you to watch as fellow angels invest, learn from their experience, and co-invest alongside them. It might mean you can start with investments as low as $20,000 because you invest as a group. Investors’ Circle in the U.S. and Clearly Social Angels in the U.K. are two examples of angel groups focused on impact. Groups like these often offer training, introductory pitch sessions and supported due diligence processes.
Whether you’re ready to dive right in, or you have a bit of learning to do before you get there, there are thousands of individuals around the world already using their personal capital to invest directly in businesses creating social change–and these questions might just help you get started.