Impact investors are the class of people who invest/fund ideas which are capable of generating sustainable social impact apart from financial returns. We, at Impactpreneurs, list a few important points that investors look for in a social enterprise before investing in it.
In the case of startups wghere there is a little track record of the company in terms of revenues or growth, founder’s background is probably the most important information that the investors have with them to evaluate the company. The educational pedigree of founders and their past projects can help send positive signals to the investors. Sam Altman of YCombinator emphasises that it also helps if the founders have worked together on projects before starting the company and have ideally known each other for years. Another quality that investors look for in founders is how resourceful they are. This makes sense because startups in early stages are always looking for more resources – highly motivated employees, connections, money and having “relentlessly resourceful” founders help.
2.) Key Problem
Before investing in any idea, investors try to understand the problem that the company is attempting to solve. They want to understand the scale of the problem and in the case of impact investments, they also want to understand the societal benefits of solving that problem.
Startups need to find a product/market fit in order to attract customers. Paul Graham puts it better than anyone else – make things people want. It is better to start with building a Minimum Viable Product (MVP) than a fully featured product with all the bells and whistles. A minimum viable product is the one with the smallest set of features that solve the problem you are trying to solve. This helps put the product as fast as possible in-front of users and collect feedback. Happy users of your product are the strongest signal you can send out to investors and investors are also more likely to be interested when they can see the product in action rather than just an idea on paper.
4.) Business Model
Besides a great product, a startup should have a clear business model which defines who are the potential customers, how the company plans to make money and what are the resources it would need during its operations. Even though a business model often evolves over time as startups understand their market better and receive feedback from their users, it is no reason to not have a business model, to begin with. Like everything else, it should be refined and improved upon iteratively.
5.) Return on Investment in terms of social impact
The return on which impact investors focus is the amount of social impact their investment in a social enterprise will create. It is often difficult to quantify social impact and the specific metric usually depends on the sector in which the social enterprise is operating. For instance, a clean energy company distributing solar lamps might measure its social impact in terms of the number of households that received the lamp and the extra hours that students were able to study during the evenings. Hence, it is very important for founders to think deeply about what best quantifies their impact and convey it clearly to investors and stakeholders.
With inputs from Shubham Bansal
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