"Over the next three to six months, you'll find out pretty much everything you need to find out," he said. "Then if you have to write it off, it's no more expensive than the due diligence would have been."
Rather than poring over financials, Fenwick-Smith says he bases most of his investment decisions on whether he likes the entrepreneur's green technology, thinks the business model is sound and believes the company can become profitable in the long run.
Show Me The Money
But some audience members said they valued detailed financial statements as a way to gauge whether impact entrepreneurs were thinking realistically about the prospects for profitability. After all, the financial success of the enterprise influences whether the impact goals will be met.
One investor said she preferred to review current financials, rather than projections. Others agreed that pro forma financial statements were of little value because passionate impact entrepreneurs are prone to overestimate revenues and underestimate expenses. It's also hard, if not impossible, to assign a monetary value to devotion to a cherished social or environmental cause.
Audience member Kathleen Leonard, a vice president of investments at UBS Financial Services and head of the Boulder-based Leonard Social Investment Group, said she always looks at the financials because they reveal weaknesses in the businesses she's evaluating and "provide insight into where to probe further."?
Demonstrating that due diligence in the impact investing space is an ongoing process, panelist Hornsby said he holds weekly sessions with the companies his fund invests in. During those sessions he helps the entrepreneurs understand the basics of margins and ratios, become market-driven companies and ask the right questions of their customers. "These sessions become incredible experiences for mutual learning," he said.
When To Say No
One investor told the group that he avoids enterprises where he thinks the CEO is overpaid or isn't putting in sufficient effort. He said these can indicate a lack of willingness to make the business' core social or environmental cause a top priority.
The investors seemed to agree that good chemistry between impact investors and entrepreneurs is essential for a successful long-term relationship. Panelist Hornsby said he also looks for "emotional intelligence and passion" in entrepreneurs because it gives them the fortitude to weather the challenges of running a startup.
Moderator Deriso suggested that impact investors get to know their potential investment candidates well. Something as simple as taking entrepreneurs to lunch can be part of the due diligence process. "Let them order and observe how they treat the wait staff," he said.