Your Customers Aren’t Data Points: How Social Enterprises Can Avoid Three Impact Investor Red Flags
At Villgro, a social enterprise funder and incubator, and our sister fund, the Menterra Social Impact Fund, we meet hundreds of entrepreneurs each year. While there’s a lot of material on the internet on “how to pitch your enterprise,” either people aren’t reading it, or don’t seem to understand what’s being said, because I keep seeing the same set of mistakes being repeated. So here’s an investor’s perspective on how to avoid the common mistakes people make during fund-raising. One note of caution: we fund very early-stage entrepreneurs, so some of these observations may not apply to larger deals for later stage companies.
WOODS AND TREES: FAILING TO STRIKE A BALANCE
I’d like to see an entrepreneur who has a good sense of the size and magnitude of the problem they’re going after, but who then plunges into the detail of the specific pain they are trying to solve.
Too many entrepreneurs spend too much time telling me about the 300 million total addressable market (TAM) for their product and supporting those statistics with cross-referenced research. When you’re talking about a country like India, with 297 million people below the poverty line, any broadly defined problem has a huge addressable market. Beyond a certain point, it doesn’t really matter. A large addressable market does not a customer segment make; I’d like to see you segment that market insightfully, and tell me which little niche you will start with and why. When targeting that niche, I’d like to see insights that tell me that you’ve spent enough time with your customer, speaking their language, understanding their pain.
The particular problem with social enterprises is that the sort of people who become entrepreneurs are generally from the privileged, educated classes, who have rarely experienced poverty first hand. They’ve never gone to a government primary health center or government hospital for treatment, don’t even know where their local government school is, or ever farmed the land themselves.
To build a sound business that solves real problems meaningfully, you have to develop deep empathy for your customers’ problem and its context. If spending time with your customers is not something you really enjoy doing, if it’s not deeply embedded in your DNA, sooner or later you’re going to become a spreadsheet entrepreneur, which significantly diminishes your chances of achieving real success.
As investors in sectors like health, education and agriculture, we often know of the problem you’re trying to solve (and the challenges associated with solving it) – so we’d love to have an entrepreneur tell us something we don’t know. It will show us that they’ve really immersed themselves in the pain and developed compelling insights.
PROBLEMS ARE EASY; SOLUTIONS ARE HARD
We often meet entrepreneurs who have identified a problem but done little to develop a possible solution to it, or their solutions are simplistic and naive. We understand that at the early stages your solution may be nothing more than slideware, but have you given it sufficient thought? Have you analyzed important elements of it, and tested your assumptions with experts? Have you researched where similar approaches have been tried and whether they succeeded or failed? If they failed, what are you going to do differently to ensure your venture doesn’t meet the same fate? What skills will you need on your team to make this a success? Do you or someone on your team have those skills? If not, where will you find them?
None of these questions require money to answer, but they require a certain dedication to pursue answers. I’m also not looking for a perfect solution, where all the loose ends are tied up; in fact, I’d be very happy if an entrepreneur identified where he/she doesn’t have the answers but has a plan for how to get them.
At the early stages, this is going to be a journey of exploration, learning lessons and making changes quickly based on what we encounter. I’m therefore looking for a flexibility of mind, with a fixity of purpose. We’re cautious about an entrepreneur who is so in love with a solution or approach that he/she is unwilling to consider the possibility that it might fail and have to do something else. When you’re raising money from investors the conventional wisdom is that you have to convey supreme confidence because to reveal any doubt would be disastrous. I don’t agree. Abhishek Sen of Biosense gave up after the third question in our due diligence questionnaire and honestly admitted: “We don’t know, but we’ll find out together.” We backed him then, and several years later his products are impacting many millions of malnourished women. We call it “mentorability,” but it is more than just that. It is the self-awareness and maturity to recognize and admit that you don’t have all the answers and that you’ll be open to listening to the evidence and changing your tactics – all in the pursuit of the larger goal or shared mission.
FOCUS ON THE RELATIONSHIP; THE TRANSACTION WILL FOLLOW
Too many “savvy” entrepreneurs are very focused on the dynamics of a transaction, e.g. valuation, board seats, liquidation preference, affirmative rights, etc. At the early stages, I prefer to focus on building a relationship – can we build a company that has an effective solution to this problem, together? If you have that sorted, the dynamics of the transaction will automatically fall in place because you want to make this happen – you want to to be fair to each other, you understand each others’ concerns on a particularly sticky clause in the agreement, you don’t want something unimportant to wreck the relationship. If I see a set of slides in the initial pitch deck with transaction dynamics, justification of valuation, etc., it causes me concern. On the other hand, I’d like an entrepreneur to have thought about what he/she would like to see in an ideal investor. What role do you expect me to play? What help would you turn to me for? What are your major challenges and how can I help?
Raising money appears hard, but sometimes entrepreneurs make it harder than it should be. I hope by keeping these three points in mind, you make it easier for yourself. After all, raising money is not an end in itself, although it sometimes feels that way. It’s just the beginning of a beautiful journey to create lasting impact on some grateful person’s life.
PR Ganapathy is the president of Villgro, a well-known funder and incubator of social enterprises, and a co-founder of the Menterra Social Impact Fund.