While the long term effects on startups from the COVID-19 pandemic is still to be seen, recent reports predict companies seeking seed-stage funding are likely to be hit hardest. Q1 2020 saw the lowest amount invested in seed-stage rounds for the past two years, with the largest drop at 27 percent in dollars invested quarter over quarter. As highlighted in a recent Financial Times article, even startups creating vaccines for COVID-19 are struggling to raise the financial support needed to survive the 18+ months needed to progress from trial to production.
Investors want to know that your company has a path to profitability, has growth potential, and has a strong team to execute. Striking the balance between pragmatism and purpose is a delicate process, but is necessary to bring investors on board with your mission and back it for the long-term.
And while key tech organizations like Sequoia Capital and Founder Institute are calling on the tech community to come together in support of startups on the frontline of the global health crisis, early-stage founders will likely face challenges raising capital for their projects, however worthwhile their missions and purposes may be to society as a whole.
For a long time, investors had steered clear of what was often referred to as “patient capital” due to its tendency for slow and comparatively low returns. And despite a spike in impact investing trends in recent years, my experience running an impact startup and engaging with impact venture organizations across the country has taught me that many startups which could make a positive impact are still missing out on investment opportunities, largely due to the way they present their companies.
Failing to create a business model, struggling with the right pitch and inadequately proving the sustainability of their businesses, are the main reasons impact businesses are falling short in securing their piece of the funding pie.
To maximize their chances of success, and ultimately the survival of their impact projects, here are three simple but powerful tips to overcome the purpose/profit divide and get investors on board for projects that can really drive positive change in today’s difficult times:
Show that impact is part of your company’s DNA
Hiring can be a challenge for most early-stage businesses with limited resources. However, in my experience, founders who are able to convince others to follow their dreams for a better world have an inherent advantage when it comes to building a team.
Millennials (the largest percentage of the modern workforce) are much more eager to work for purpose-driven businesses than the generations before. A 2018 Workplace Culture report highlighted that millennials are even willing to accept a reduced salary in order to facilitate real change.
Your pitch is a representation of your company, so it needs to include information about the team, including employees, mentors, advisers, existing partners and customers. Investors are often just as interested in the jockey as the horse.
A passionate team will keep morale high, bring energy into boardrooms and exude confidence to investors that the company’s long-term vision is within reach. The right team is ultimately what is going to drive the business forward. Investors know that a great idea without a talented team is dead on arrival.
But your ability to attract and retain the right talent is just one factor; purpose should be woven into your business culture. That means aligning yourself with causes or purposes you have an authentic connection with, and selecting suppliers, vendors and stakeholders that are in line with your core values.
Present your long-term plan for profitability
When portraying your business, you don’t need to decide between being an impact business or being a scalable business. Be both–an impact business designed for scalability.
While investors might be warming to impact investing, they are still unlikely to back any project with no clear roadmap to offering a return on investment at some point. As such, founders will have to design and demonstrate a model that can ultimately deliver some profit as a sustainable business that can stand the test of time. It’s not just about the investors: If you want your impact to grow in scale, the company itself has to grow, too.
Your pitch to investors should include a description of your cost and revenue structure, and the way you would use the investor’s money to build your business. Include clear information about your plans to scale after an injection of capital and projections for revenue growth over time.
Demonstrate your ability to bring others on board with your mission
As you move along your entrepreneurial journey, you will find that a relatable purpose will help attract the attention of early adopters.
Studies show that modern consumers are drawn to ethical products from ethical brands. Companies that position themselves as being purpose-driven therefore have a great chance of bringing on loyal early adopters.
Most consumer products companies spend 20 to 30 percent of their revenue on marketing. I’m convinced, however, that if you align purpose correctly, you’ll be able to spend less on marketing without sacrificing customers.
A great example is Bombas, the company that donates an item of clothing–a pair of socks–to someone in need for every pair of socks it sells. As of today, Bombas has donated more than 30 million clothing items after partnering with more than 3,000 Giving Partners across the U.S.
Companies with a true purpose have a way of attracting support. Bombas’ valuable mission has made consumers far more eager to buy its socks, thus exponentially expanding the number of people that the project can help over time.
Investors are on the lookout for companies with that special ability to attract consumers on a large scale, because it means they have the potential to grow fast. The first step in scaling is highlighting a large target customer niche, and then demonstrating traction within this niche.
I would recommend doing market research to gather information about the size of your target niches. The survey questions should have a strong focus on the impact element of your business and gather information about: customers who have a problem your brand can solve and who would be willing to pay for it; and people who feel your brand purpose resonates with them.
Showing investors you are strong on these two factors will demonstrate your great potential for scalability.
In summary…
While impact investing is certainly gaining momentum, pitching a business with a purpose still requires skill. The reality is, concentrating on only the purpose section of your company will not be sufficient to secure the right funding.
During the current economic downturn, investors will be looking for companies that have a path to profitability, have growth potential and have a strong team to execute. Striking the balance between pragmatism and purpose is a delicate process, but is necessary to bring investors on board with your mission who will back it for the long term.
Bryan Janeczko is a serial entrepreneur and founder of Grō Academy, which offers free on-demand tools to teach you how to start a business.
