The Next Step in Your Impact Angel Investment: Screening Potential Companies

October 01, 2014

Connect Member

Angel Investor, Strategist, Catalyst at Large

catalystatlarge.com

Now that you’ve decided you want to make an angel investment with positive social or environmental impacts and you’ve found some candidates for the investment, you need to screen them and select the right company for you. It might sound simple — just find a startup that’s doing some good, do some basic research into their company, and write a check — but in order to get what you want out of this investment, there’s more to consider.

Here are four things to think about when screening and selecting the best company for your impact angel investment:

The Story and the Substance

Find entrepreneurs and companies that are passionate and innovative about an issue you care about, but don’t get carried away with their story. Of course, it’s important to believe they are dedicated to the issue at hand and will be relentless in working to tackle that challenge, but you also have to consider the business side of this venture. You want to invest in an entrepreneur who is going to build a successful business. She has to be passionate about both the story and the company’s substance because at the end of the day, no one gets to make their impact if the business isn’t solid. At the same time, make sure the mission and social impact element is so core to the company that as the company succeeds and grows, the social impact grows with it. Otherwise, once they are making money they may just drop the high impact focus altogether.

The Risk, Returns and Liquidity

What are you hoping to get out of this investment?

As with any investment, you need to know your tolerances, needs and goals. However, because there is more at risk with an angel investment, this is much more important. Angel investments are high-risk, volatile and not very liquid. What is fascinating about impact angel investing is that new deal structures, like alternative term sheets and approaches to investment, are emerging. Many traditional angel investments start with convertible debt or equity, but in recent years, the social impact community has introduced new approaches to flexible debt, royalty or revenue participation in addition to traditional equity.

If your goal is to maximize social return over financial return, you might consider opting for a company that prioritizes its impact higher than your earnings. These companies may also carry less risk, but we are still talking about angel investing — all of which is high-risk. Don’t get me wrong, there is profit to be made in purpose-driven business. Investors benefit from taking the risk and investing in an entrepreneur; just be reasonable in your expectations. Try to make sure you choose to invest in a company that has the same goals as you.

The Logistics

We always ask questions before investing in a company, but there’s more at stake with an angel investment. If you don’t ask the right questions, you could end up investing in a company that has a very low chance at becoming financially sustainable, or that does well financially but doesn’t make the social impact. In any angel investment, you should ask these questions:

  • Who is the entrepreneur?
  • Who is the team?
  • Who is the target customer?
  • How are they handling design and production?
  • What is their plan for customer service?
  • How are they approaching governance? The management, their board, their stakeholders, the staff, etc.
  • What are the goals and how are they going to measure success?

But since this is also an impact investment, you should also be asking about the company’s social aspect:

  • What social or environmental problem are they solving?
  • Who are the people working for the company?
  • What are the employment practices like?
  • How are they making the products?
  • Is there something about their materials or their supply chain that has a direct positive social impact?

Paying attention to these things will not only help you assess their ability and desire to do good, but knowing this information will also help you lower your risk. Who wants to invest in a company with lower productivity, potential for lawsuits and absenteeism because of bad practices? Or a company that has bad press and loss of customers because of poorly made decisions? Asking these questions will help you find a company with less liability and bad press, good practices and governance, and a real commitment to positive impact.

The Approach

Now that you know what’s ahead, are you ready, willing and able to do all of this work yourself? If not, you can ask for help. One option is to join a social impact angel network to consult and collaborate with others. Another option is to have an impact investment advisor do the work for you.

However you choose to go about your impact angel investments, you must have a portfolio approach. You have to diversify in order to increase your chances of success. There are more and more investment-ready, social impact-focused businesses out there, and by investing in more than one, you are thinning out the potential risk while helping create more businesses like them and helping them make their impact.

Suzanne Biegel is a member of the DailyWorth Connect program. Read more about the program here.

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