When gathering funds for your social venture–regardless if it’s from strangers on a crowdfunding platform or the likes of one of Silicon Valley’s venture capitalists–it’s a good idea to pass the mom test. “If my mother or father wouldn’t donate $5 to help with my campaign, why would a stranger,” reasons Breanna DiGiammarino, the senior director of Social Innovation at Indiegogo. “And this holds true every time.”
And those sentiments hold true when going for hundreds of thousands of seed and pre-seed venture capital dollars.
“At the pre-seed stage it’s about three indicators for us,” begins Wes Selke, managing director at Better VC, an Oakland, California-based venture capital firm focused on pre-seed and seed investments in socially cognizant tech companies. “It’s team, market and impact. And really, so much more on the team than anything else. Ideas are going to change and evolve and even pivot sometimes–so you don’t want to fall in love with an idea. We’d much rather invest in an A-grade team with a B-grade product than vice versa.”
‘THE PERSON IS EVERYTHING’
Selke and DiGiammarino joined Patrick Sagisi, an associate at DBL Investors and Jonny Price, a senior director at Kiva Zip for a panel discussion about social investing at the Tech4Good conference earlier this month. The panel was part of a weekend-long conference for social entrepreneurs hosted by the University of San Francisco School of Management.
While the four panelists come from organizations that focus on micro-donations and loans to multi-million dollar investments, the message remained clear and consistent: People matter.
“The person is everything,” DiGiammarino said, adding to the points made by Selke. “If I’m going to give my money to someone, I need to know they’re going to stick with it and see it out, rather than give up on it the first time something goes wrong. That person piece is so key.”
GRIT, SCRAPPINESS, PASSION ALL KEY TO VC SUPPORT
Indeed, convincing a funder to believe and invest in you and your social enterprise–whether they’re loaning $25 from Sweeden or looking to invest the first game-changing $1 million seed–begins with convincing them you and your team are worth it. “Obviously raw intelligence counts for a lot like where they went to school and what they have done in the past,” Selke said. “We’re also looking for grit or scrappiness–their street smarts and ability to get stuff done and not give up.”
Selke said a question Better VC always asks to get an indication on grit and scrappiness is what the founder would do if the idea didn’t work out. “If they have an idea or potential pivot right away, that’s a good indication they’re scrappy and thinking about things like that,” he said.
Additionally, Selke said, having an intense passion for solving the social problem at hand or a personal connection can often trump anyone trying to “make a bunch of money” or “disrupt” the space. “Focus on impact really enforces the financial returns,” Selke insisted. “That passion or personal connection is a potential source of competitive advantage.”
MICROLOANS BASED ON CHARACTER, NOT CREDIT SCORE
At Kiva Zip, Price says they focus on “loans based on character rather than credit score.”
“One of the ways we’re trying to reinsert relationships into our finance system is how we underwrite loans,” Price continued. “We try to get more of their character and standing in their community, rather than their just looking at their FICO score. And we’ve seen really compelling data that if you do that it can really improve the repayment rate.”
Citing the innovative microloan work of Muhammad Yunis and the Grameen Bank that garnered a Nobel Peace Prize, Price spoke of the power of the masses and Kiva’s charge to democratize small businesses and microloans. “There’s wisdom in the crowd,” Price said. “We’re empowering citizens to democratically vote and exert their own preferences in causes, which means we can dramatically expand access around which small business owners are deemed worthy of credit.”
THE POWER IN THE SOCIAL PROOF POINT
For Indiegogo, DiGiammarino says that vote of confidence and support can springboard a campaign. “We’ve found fundraising to start with your community is so important because it shows that social proof point that enables you to raise funds from broader networks,” DiGiammarino explained. The campaign owners, she continued need to raise about a third of their goal from their closest community–or the people that know and trust them. “It’s only at that point of raising about 30% of your goal that secondary networks come into play,” said DiGiammarino.
And once those external networks start to play, Indiegogo features trending businesses and entrepreneurs in their newsletters and social media. Eventually, DiGiammarino said, the campaign owners are able to gain media attention and even more legitimacy if they want to go the VC route.
Price agreed, culling the support of a sizable portion of the Kiva Zip can do wonders for a business owner. But it starts with the family members and close friends. “They have to go out and hustle and prove their entrepreneurship skill before we bring our community to get them the rest of the way there,” said Price.
NO CTO, NO MOOLA
Once a social entrepreneur does get in front of the likes of a pre-seed or seed investor like Selke and Better VC, which has funded companies such as Localwise, Givkwik and Sisu, among others, it’s important to come with intentionality–and a coder.
“We’re investing in technology businesses, so there has to be a very strong developer, coder or hacker-type that’s on the team,” Selke maintained. “We’ve seen deals in the past where it’s like two MBAs and they’ve got a software idea and we’re like, ‘OK, who’s coding?’ And they’re like, ‘Well, you know, I’ve got a cousin’ or ‘I’ve got this guy in the Ukraine’ and we’re like, ‘No, we’re not going to do that. Come back when you’ve got a CTO.'”
Selke also says they’re looking for evidence of a “product that will solve a problem that people want to use and hopefully want to pay for,” which of course can come from a successful crowdfunding campaign.
FUNDING ORGANIZATIONS TO CREATE ACCESS
Finally, the VCs, or course have to answer to their LPs. Which means, they look for companies that will just as much turn a profit and be a scaleable, successful organization as an agent for social improvement. “We are firm believers that you can do good in the world and can make money,” said Sagisi, whose firm, DBL Investors, has backed Off Grid Electric, Tesla, Pandora, Revolution Foods and others.
“Don’t get me wrong, we’re a venture capital firm,” Sagisi continued. “So our first priority is can this be a huge venture return. Because those are the businesses we believe are going to have the most impact in the world.”
Sagisi says the impact DBL focuses on is creating quality jobs in low- and moderate-income areas. An example he gave was investing in Pandora, which was founded in Oakland. According to Sagisi, DBL includes questions in its term sheets revolving around how many jobs are created in low income areas, what are the zip codes and salaries of the organization’s employees and what are the quality of jobs the organization provides.
“If you have access to a good job it means having access to health care, economic security and providing for your family,” Sagisi contended.
Access to opportunities for a better life is one of three broad metrics Selke says Better VC looks for in its portfolio companies. In addition to access, impact metrics on Better VC term sheets include job creation in health, clean energy and education as well as a reduction in CO2 emissions from the companies.
‘PEOPLE WANT TO BE PART OF SOMETHING BIGGER THAN THEMSELVES’
In the end, despite the differences in approach and helpfulness towards the social enterprise community, each organization represented on the panel share a common charge: To make the world a better place. Whether it’s investing millions in an app that will connect low income communities to better health care options or providing a low income entrepreneur a platform for a better chance at realizing a business dream, the social investors and crowdfunders stand for a more harmonious world with an equal playing field.
“In traditional finance, the higher risk of borrower, the higher interest they pay,” Price said towards the end of the discussion. “The people we try to reach–the ones normally no one else will lend to are having to go to payday lenders or other places and pay hundreds of percentage points of interest. So they borrow $3,000 and end up paying back $10,000–it’s insane. It’s a horrible example of how it’s really expensive to be poor. What we’re trying to do at Kiva Zip is totally disrupt that paradigm.”
No matter if it’s the LP, venture capitalist, crowdfunding director or passionate individual in an obscure location, the surge in seeking a better world stems from a more connected world.
“People want to be part of something bigger than themselves,” DiGiammarino concludes. Indeed.
