Why Early Stage Investing?
Early- and seed-stage ventures are commonly either pre-revenue or just earning revenue. These ventures typically face critical choices about the intersection between their impact and business models over the first 1-3 years; therefore, they often need more than just capital. Early-stage enterprises are an important investment focus for impact investors because the groundwork is laid during this phase for the company’s customers, revenue model, impact thesis (its theory of change about how it will create social value), and overall sustainability. Early-stage investment opportunities, though they can be more complicated, are also particularly attractive because entrepreneurs and investors tend to hold very similar values: they are both seeking innovation and disruption for the greater good. Early-stage enterprises often contain, out of necessity, novel innovations that introduce substantial positive benefit to target populuations, thus offering a chance for significant impact.
Why great early-stage investment opportunities feel rare: the gap is not just about capital. One challenge of early-stage investing is that many investors currently perceive a shortage of high-quality, investment-ready early-stage deals around the globe. This is despite the enormous groundswell of interest in for-profit social enterprise as a tool for development and social impact, the explosion of interest by funds, governments and investors in impact investing generally, and an expanding terrain of incubators and accelerators focusing on social enterprises. The reality is that many early-stage ventures need help finding business models that work, customers willing to pay, suppliers and partners who can scale at the pace of their vision, and talent that can take them through the next few years and beyond.
Unique pathways require unique combinations of capital and support. Early-stage ventures have different paths to establishing a business model and plan that is truly investable, and these can vary widely. As a result, when impact entrepreneurs are in an early-stage of development, they typically need a combination of four types of external support: grants, investments (in the form of debt or equity), mentoring and coaching. It is rare, however, to find two entrepreneurs who need the same mix. Some may have an all-star management team who simply need a cocktail of investment capital. Others may have received grant dollars from a business plan competition, but lack the network and expertise to implement effectively. What Toniic members and their impact partners have been able to provide is diversity of capital and support with the flexibility to adapt to the needs of the entrepreneur in this critical early stage.
Putting deals on a path to access capital for scaling. When done well, this kind of flexible assistance can help actually change the risk and reward ratio that often seems to paralyze later-stage impact investors. Some deals that start out looking as though they are never going to provide a competitive return (often called “impact-first” after the Monitor Institute’s 2009 report defining the term) can evolve over time into enterprises achieving a market rate of return. Pre-revenue early-stage ventures that try to blend impact with financial solvency and return need more than capital and a straight equity investment, otherwise they will often fail. This need drives one of Toniic’s core theories of change: seed-stage enterprises can succeed thanks to introductions, business development, capacity support, and policy expertise. If early-stage capital is done in the right way and in the right pattern over time, some ventures can attract capital seeking a market-rate return for their ultimate scaling and growth. This pattern of need was documented eloquently by Monitor in their report, From Blueprint to Scale. Toniic’s members have had some early success as well as challenges in meeting this set of needs, which is documented in the Case Studies.