Step 5: Managing for Mutual Success
Once you have made the investment, you enter the management phase, in which you figure out the best ways to interact with your investee to help maximize mutual benefit. As Charly Kleissner of the KL Felicitas Foundation says, “It’s not just about throwing out money and waiting for the 1 in 20 to be a huge financial hit. This would be as dangerous in the impact investing space as it is in the venture capital space. There is a dire need for direction and mentoring in the early stages.” This process is highly diverse and depends on the needs of the venture, and the experience and availability of the investor. Below are some thoughts and guidelines from Toniic members about what they have learned.
1. Establishing a regular financial and impact reporting process.
a. Balance needs vs. time. You want to develop an accurate sense of what is going on with the enterprise, but that needs to be balanced with what is reasonable to expect from a busy entrepreneur. No matter what level of engagement you undertake with your investee, you’ll want to ask the entrepreneur for some regular progress reports in writing. Most experienced investors are sensitive to rightsizing metrics and reporting and thus ask the entrepreneur for copies of the periodic reports they are preparing, regardless of whether they are for other external stakeholders or for internal use.
Two Approaches to Metrics. Ian Meyer of the T. and J. Meyer Family Foundation asks entrepreneurs to tell him what they are already measuring and why. This helps manage expectations and tries to meet them where they are.” He also mentioned that having the conversation around reporting early is critical to maintaining a good relationship longterm. The Eleos Foundation, takes a beneficiary-focused view of measurement. To measure impact they ask “what more can the investor do to empower the entrepreneur and empower the community they are working with?” They believe that maintaining focus on the benefits to the “end user” or the community in which the entrepreneur operates is paramount to measuring a successful investment. The foundation tries to make sure indicators are not just set by the investor, but are also coming from the impacted communities themselves.
b. Shortcuts, benchmarking and portfolio-wide reporting. Some members use common reporting tools, like GIIRS or IRIS indicators. For a closer look at how a Toniic member developed their strategy for measuring impact across their investment portfolio check out this case study. Toniic published a set of core IRIS indicators that members have recommended investors start with to track outputs; more detail on this in Step 6: Assessing and Achieving Performance. There is also the question of how best to roll up metrics across an early-stage portfolio in order to understand your investments from a portfolio point of view. Very few members reported having enough consistency in both financial and social indicators across their portfolio to do this in an automatic way, though we have seen later stage fund managers who use IRIS to collect data, enter it into the SalesForce-based PULSE platform and then pull reports from SalesForce for internal use with their own investors or stakeholders. B Analytics, a project of B Lab, features GIIRS ratings and also offers investors a platform in which to benchmark investee portfolio performance against similar groups, by industry, stage, and geography. For most early-stage investors, however, rolling up a few key metrics may suffice.
Signal other investors. Toniic member Miguel Granier of Invested Development (ID) says when his fund makes a commitment, this signals other investors that ID is willing to take the risk in this enterprise and interested investors need to act. In the case of their investment in Simpa Networks, they timed this well, as a previous funder had come in with a $40K convertible grant and ID engaged with Simpa in June of 2010. By early September, ID had agreed to a $350K equity investment pending a minimum $500K raise. As part of the agreement, Miguel’s team mapped out a series of operational and financial milestones for the company, and actively shared the map with other investors at conferences including the September 2010 SOCAP event. According to Mike MacHarg, co-founder of Simpa Networks, “Miguel was a tremendous supporter and definitely expedited the round with these tactics. Having the ability to argue that an additional $150K would activate the first $350K got strong attention— and those conversations turned into larger commitments (the Hilti Foundation came into the round with an initial discussion of $250K to activate the ID investment, then decided to increase to $750K once they saw the plan).” By December 2010, Simpa Networks had raised the remaining capital it needed to complete a $1.3 million Series A round.
2. Working directly with the enterprise
a. Provide direct ongoing support. Depending on what governance provisions were outlined in the deal structure, you may be asked to provide ongoing support – however formal or informal – to the entrepreneur. Particularly in the early days, your feedback, advice, and network can be extremely beneficial – as long as it is welcomed from the team. An example of this kind of direct support is seen in the case of Healthpoint Services. Toniic member Charly Kleissner helped founder Al Hammond negotiate potential involvement with pharmaceutical companies who were interested in investing early on.
b. Remember entrepreneurs want partners, not just oversight. Ask your entrepreneurs what they need regularly and think about how to help give them access to networks, resources, etc. Talk with them about the frequency of check-ins that will make sense for them, recognizing that earlier-stage businesses might benefit from higher frequency. Think about the best way to engage by phone and what natural points in their business cycle emerge for live field visits. What are the most critical issues in your opinion and what are theirs? For which issues or problems might you have the most help to offer? Remember every time you interact with the entrepreneur, you are taking their time and energy away from running their business; be disciplined and add value.
Beware of mission misalignments. Cathy Clark of Duke University spoke to social entrepreneurs who have assembled a pool of investors with diverse goals and then tried to use the impact-focused investor as an anchor for their mission intentions. “I wrote a case study a few years ago on a health venture that had big mainstream VCs as its primary investors interested in selling its product in developed markets, though the CEO’s passion was base-ofthe-pyramid markets. She felt this was the only way to get the money required for clinical trials. She then did two things to support her mission: she cultivated and won a PRI from a major foundation interested in BOP markets and then contracted with the Gates Foundation and the World Health Organization to distribute the product at cost in those markets, convincing her investors that this was a net financial benefit to the company (a low-cost loan funding no-cost distribution and reach).” Clark warns, “In my experience, this strategy only works as long as the company is thriving. As soon as money gets tight, the board in this situation will insist the social objectives be subsumed. And who would blame them, as they were not given the opportunity to buy in to the investment’s mission-related objectives at the time of their investment, and there was no one representing this interest on the board, which should have triggered a re-evaluation of objectives at the time of the PRI. Unless the mission is locked in legally or by a third party impact certification, the alignment of mission and financial goals is tested every time the company raises new money and creates new relationships and has got to be carefully articulated throughout the lifespan of the impact-focused enterprise, especially at exit.”
c. Consider governance roles and needs. The degree of involvement and partnership will also depend on the governance structure of the venture and your level of involvement in it; equity investments, for example, may come with board seats, which require more engagement. Note that if the entrepreneur is inexperienced, he or she may need some coaching about how to best build out a board and then engage it, and on how to prepare information to help the board to give good advice and make smart decisions.
d. Share success and help with follow-on funding. At some point, your investee venture may either become profitable on its own, learn that it cannot survive, or go back to the market for more capital.
If your venture is doing well, you should be a champion for your investee. Share their success and lessons with other investors, other entrepreneurs, at conferences, etc. Since the capital market ecosystem is young, success can hinge on the level of engagement of investor and resources he brings to the table in these conversations. Active investors need to also work on the follow-on capital opportunities with their networks.