Last year, my business partner and I entered the world of impact investment with the goal of raising funds for a new energy access company we started in Indonesia. One of the biggest challenges we faced was lacking a clear understanding of the stages of raising funds. The aim of this article is to lay out a general framework of the stages of impact investing for an audience of engineers.
Proto-Planning Phase
Before attempting to raise any external funds, I would suggest developing your business idea with your own funds. This can be done by working outside of your day job or by working as an independent consultant so that you can devote part of your time to creating the initial business plan and financial model. As the saying goes, “Taking other people’s money is expensive.” This can even be true with grant funding, as discussed below.
Seed Grant Phase
Many organizations offer seed grants for early stage businesses that have positive social and environmental impact. However, in our experience, the prominence of the organization is inversely related to the ease of securing their funds. As it is with trying to land a job, a personal connection or introduction to the organization is significantly more likely to lead to funding rather than cold emails.
While grant funding can be a great way to help you develop your idea, keep in mind that there are typically strings attached.
While grant funding can be a great way to help you develop your idea and construct pilots, keep in mind that there are typically strings attached. Further, there can be high transactional costs to grant funding. These funds can be ann effective way to get to the next step but do not let the allure of “free funds” drag you into a never ending chase for grants. The goal of social businesses should be to leverage these grants in the early stage to prove the concept and make it attractive to the private sector at scale. But the business model should not require grant funding in the long-run. Otherwise this is essentially a non-profit NGO.
The Gap
Some call it the “Pioneer Gap;” there are several impact investors that try to transition a grant-funded pilot into a privately funded business. However, moving from grant funding to private funding is a huge hurdle which should be acknowledged by the founding team. Your approach to planning, strategy, and potential investors must shift to be prepared for the private sector.
Your approach to planning, strategy, and potential investors must shift to be prepared for the private sector.
While impact investors may have lower target returns, our experience found that their appetite for risk is not significantly lower than private sector investors. This means you need to be ready for the private sector to cross this gap. A couple of helpful books that address this are Venture Deals by Feld & Mendelson and The Startup Checklist by Rose.
Private Funds
After you have done your homework and are ready to start raising private funds, define the round you are raising for and set a realistic time frame for it. Once you begin to engage with interested investors, start working through their due diligence to get to a term sheet. It is possible the seed grant providers will want to participate in the round as well. It is also possible to create a round that combines grants with private funds but this requires a very clear story to investors and grant providers.
From an engineer’s perspective, one of the challenges in raising funds is that the process does not lend itself to strict planning.
These steps do not happen serially. It is helpful to meet private investors early on, even if you are targeting them for later funding rounds, so that they can learn about your business and start to get to know you. A great way to keep potential investors updated is by sending a short quarterly newsletter to a short list of key potential investors.
As an engineer, I like the idea of having clear tasks and schedules for tracking progression of a project. However, one of the big challenges of raising funds from an engineer’s perspective is that it does not lend itself to that type of strict planning. The hope is that this framework can help explain the stages of impact investment for engineers that are accustomed to working in straightforward step by step processes.
Resources
http://ssir.org/articles/entry/closing_the_pioneer_gap
https://gimletmedia.com/episode/1-how-not-to-pitch-a-billionaire/
Grant & Investments
http://www.globalinnovation.fund/
Programs
http://www.perc.org/programs/perc-enviropreneurs/enviropreneur-institute
Bryse Gaboury is a Contributing Editor for E4C and he has managed the implementation of infrastructure projects in Southeast Asia for over a decade. He is a Founder and Managing Director of a Southeast Asia-based engineering consulting firm for seven years. Awards and honors include PERC Enviropreneur of the Year 2015, Bozeman, MT; ASEAN-USA Business Summit Panelist, Siem Reap, Cambodia 2012; and The Outstanding Young Persons (TOYP) member 2011, Osaka, Japan.
