Looking for Funds in All the Wrong Places: The Single Biggest Thing Social Entrepreneurs Misunderstand About Investors
Editor’s note: This post is part of the NextBillion series, “A Survival Guide for Raising Capital,” – one of several topics we’ll be covering through special series this year. Click here for more details on our 2018 series.
You start a business because there’s something you’re passionate about – something you feel compelled to do. And you know, if it’s successful, your business will have a major positive impact on the world AND make great money.
So you join the ranks of the countless passionate social entrepreneurs who launch their enterprises based on a desire to make a difference. But like them, you soon realize that your business needs more than passion to become sustainable: You need financing.
So you start thinking about talking to investors – and that’s when things get complicated.
You begin by researching how to find investors and what they are looking for. You read that most investors are looking for a 10X return within five to seven years. They expect you to work as hard as you possibly can during those years to become an “attractive acquisition target,” so that you can sell your company to a big corporation. You don’t know if you will ever be an attractive acquisition target and you’re not sure you would want to be. But you need money, so you start to think about how you can make your company fit into what investors are (supposedly) looking for.
You look at examples of pitch decks online and you create one that shows how your company could grow at an exponential rate. You create a hockey stick graph and talk about what percentage of the total addressable market you’ll be able to capture. You get advice that it’s best not to talk too much about your company’s mission, since investors don’t like to invest in companies that might put mission ahead of fast growth. Something doesn’t feel right, but you think you have to play this game if you’re going to get funding.
Investing Myth vs. Reality
In actuality, this approach is a huge mistake. It is based on myths about who investors are and what they’re looking for.
When you picture an investor, you probably imagine a middle-aged white man in a suit or the standard Silicon Valley uniform—khakis and a button-down shirt. The image of an investor that most entrepreneurs have in their minds is someone who spends a lot of his or her waking hours thinking about investing – what I call a professional investor. Professional investors include active angel investors (wealthy individuals who join angel groups and go to lots of pitch events, proactively seeking to invest in small businesses and startups), venture capitalists, people who manage various kinds of investment funds, and people who manage investing for wealthy families.
About how many professional investors are there in the United States? If we define professional investors as active angels and people who get paid to invest other people’s money (venture capitalists, fund managers, wealth managers and private equity investors), the total number of professional investors is in the neighborhood of 350,000. This includes approximately 300,000 active angels, 1,200 VC funds, 4,200 private equity firms and 6,000 family offices – and let’s say about 35,000 miscellaneous professional investors. So it’s a pretty select group. But though many of these investors do resemble the stereotype described above, with their focus on hockey stick growth and big exits, they’re actually not representative of the typical investor.
A Nation of Investors
In fact, a majority of Americans are investors. These are people who have investments in stocks, bonds, mutual funds and so on: 60 percent of households have retirement investments, 44 percent of households invest in mutual funds, and 52 percent of Americans invest in the stock market. And, of course, many more have funds invested in depository accounts at banks. If we were to estimate conservatively that half of the adult population has investments, that would mean that there are more than 120 million investors in the United States. So of all of the investors in the country, only about 0.3 percent are professional investors.
In other words, when most social entrepreneurs picture an investor, what they are picturing is a completely atypical investor! In reality, there is no such thing as a “typical investor” : Investors are so diverse that it is impossible to generalize about them. And this much broader group represents a huge pool of money that could be tapped by small businesses and startups.
Though most small business owners don’t look to them for funding, these non-professional investors have a lot of discretion over how they invest their money – even if it’s in a retirement account. And there are many legal ways entrepreneurs can access this money, including emerging practices like investment crowdfunding. When anyone can be an investor, and entrepreneurs can tap a larger number of smaller investors, it is much easier for a social business to find investors that embrace its mission.
What’s more, many of these everyday investors would like to find a way to diversify their investments and shift at least some portion out of Wall Street and into Main Street – in other words, into businesses that aren’t solely focused on profit. Numerous surveys have shown that most investors actually very much want to invest in mission-driven businesses that are values-aligned.
And it’s not about charity: More and more investors are coming to understand that, in the long run, mission-driven businesses are likely to be more profitable and successful. That’s why, when talking to potential investors, if you sense a lack of values alignment, it’s best to move on. Always seek out investors who are focused on your business’ long-term success, not on making a quick buck. If you stay true to what matters most, you can and will find investors who share your vision and want to support you on your terms.
IMPORTANT NOTE: Raising money from investors is a highly regulated activity. When you raise money from professional investors, they will often bring in lawyers to make sure everything is done correctly (and often to ensure that the investor gets the best possible deal from you). If you raise money from non-professional investors, be sure to consult with a lawyer who has extensive experience with securities and finance.
If you’d like to learn more about how to find the right investors for you and make sure you’re complying with regulations, come to Fund and Fuel Your Dreams on Oct. 18-20 in Baltimore, MD. If you can’t make it to the event, my book offers more information and resources to help you get started.
Image courtesy of qimono.