The needle in the haystack: what impact investors look for
Raising early stage investment is difficult. Let’s not pretend otherwise. Since we launched Nesta Impact Investments over a year ago, we have seen close to 500 applications for investment, but only about 10% of these have resulted in a meeting and only 1% ended up receiving an investment from us. To some these percentages may seem low, but they are broadly representative of the sector. So what do investors look for that is missing in 99% of opportunities? Or, to put it another way, how do businesses make it into that 1%?
Each investor will have their own criteria and sweet spots in terms of interest and may look at; stage of development, funding requirements, exit horizons and types of funding available.
So what will spark our interest?
- Understand the investors you are approaching and do your research. For example, at Nesta we are specifically looking for investment opportunities that will have an impact in one of three areas: ageing, the education and well-being of children and communities
- Be readily scalable (as well as accessible and affordable) to as many of the potential beneficiaries as possible
- Be financially self-sufficient within a reasonable period
- Show a strong alignment between commercial objectives and social outcomes
To be honest, any entrepreneur worth their salt should be able to show all these things so what are the added extras that will get you that all important deal?
Determination is a vital ingredient for start-up entrepreneurs and teams, as there will typically be many obstacles in the path of turning a concept into a fully-fledged product or service. Managing and overcoming these setbacks is a critical success factor, as rarely is the road to success lined with green lights. Understanding how the teams we sit in front of have coped with the setbacks to-date and how good they are at anticipating potential problems is key.
Preparedness is important because while it’s easy to make sweeping and oversimplifying statements you need to be able to back them up with well researched facts. Researching, understanding and preparing for interactions with key customers, users, suppliers or even investors is an important discipline for any management team, whether they are a listed company or a 2 month old start-up. We look for teams that can demonstrate why they have taken a particular approach to a specific situation. For example, have they researched why one potential customer is more appropriate than another within a given market opportunity? Now, we recognise that this is no guarantee of success, but it definitely increases chances of a positive reception to the pitch or business proposal.
Communication is another factor. It may seem obvious but a good entrepreneur or team needs to be able to communicate effectively to the various audiences/stakeholders that are important to the business. It’s amazing how many we’ve seen that fall at this hurdle.
Finally, entrepreneurs should be encouraged by the recent moves that make raising early stage funding, a bit easier. From the tax breaks for private (angel) investors announced in the recent budget, to the host of ‘business accelerator’ programmes established over the last 12-18 months, to the changing regulations around crowdfunding and the growth of impact investment funds. There is more support out there for start-ups and if you do have a great business or idea then make sure that when you do go for investment it’s with a partner that works for you and will add value.