Angel investors with a social conscience have many opportunities to put their money to good use, but they should go in realizing that impact investing isn't for the faint of heart.
That was one of the messages at a recent “funder boot camp” in Boulder, Colo., where a group of about 50 accredited angel investors, along with representatives from institutional investors and foundations, received training in how the direct investment process works. The boot camp was sponsored by the Boulder-based Unreasonable Institute, an incubator that serves for-profit social and environmental entrepreneurs trying to address some of the world’s greatest challenges.
It’s essential for direct investing newcomers to have a strategy, Wes Selke, investment manager for San Francisco-based impact venture capital fund Good Capital, told the audience.
“Some angel investors like to ‘spray and pray.’ They invest in a whole bunch of deals and take a passive approach. Others are hands-on. They roll up their sleeves and leverage their networks and expertise. They sit on boards and advisory boards. They become part of the stories of these companies,” said Selke, who is also the founder of San Francisco-based HUB Ventures, which he describes as “a startup accelerator for entrepreneurs building a better world.”
Like any angel investment, Selke said an impact angel investment requires consideration of a number of threshold issues: whether to be an active or passive investor; whether to be the lead investor or follow a more experienced investor; how many deals to invest in per year; how much to invest per deal; and whether to reserve capital for subsequent investment rounds in the same deal.
For new direct, impact investors, Selke said it makes sense to follow the lead of experienced investors who will structure the terms of the deal, recruit other investors and take charge of the due diligence process. For one thing, inexperienced investors probably can’t travel to remote areas of the globe to poke around before they write a big check, so it helps to collaborate with others who are familiar with the local business climate and the resident enterprises. Selke said his firm typically spends two to three months finding 200 companies from all over the world that are potential investment candidates. Out of those, 10 will typically get funded once the final vetting process is complete.
However, there can be issues with following lead investors, who typically put up the lion’s share of the capital and thus have the most control over deal terms. “You can ride shotgun with lead investors and save money on legal fees and due diligence costs. The downside is, you don’t really have a say at the negotiating table. But if you’re OK with the terms, you end up spending less,” Selke said.
As to the number of direct investments to make, many in the audience agreed that more than 10 would be difficult for most individual investors to manage. They also agreed that, when choosing impact investments, a focused approach generally works better than a scattershot strategy, because investors can pay closer attention to the individual companies and encourage accountability for social and environmental outcomes, as well as profitability.
To find appropriate deals, Selke recommended that new investors join impact investor networks such as Toniic, Investors’ Circle and Unreasonable Angels. They can also visit start-up funding platforms that include social enterprises, such as Gust and AngelList, to find deal flow. One of the best ways to get started is to attend a demo day at a start-up incubator.
After the funder boot camp, investors did precisely that as they joined the general public for the fourth annual Unreasonable Climax, which showcased 12 ventures from six countries. Principals from each enterprise gave brief, high-energy presentations before an enthusiastic audience of almost 1,000.