30 Months of Impact Investing: Lessons and Reflections

We need to start to talk about money in ways that dethrone it and make it subject to human ethics and standards of love and decency’- Joel Solomon, The Clean Money Revolution

In Jul 2018, I had joined Acumen Fund, an early-stage impact fund in India, and wrote about my journey into Impact Investing and how I got here

Acumen Fund is an early-stage impact fund that invests in for-profit social enterprises at the seed, pre-A, A-stages with cheque sizes of $500K-$2M

Thirty months out as I move to a new role in the VC industry, I thought it might help to pause, reflect, and document my learnings from the impact investing space. I hope this is helpful to budding professionals keen to enter the rapidly developing sector, for-profit social enterprises, or folks in general who are curious about impact investing and its future.

Note: Recently Acumen India opened two positions and I have been chatting with a lot of folks interested in the space. Writing is more scalable than 1 on 1 chat and on that note let us begin!

Why did I join Impact Investing?

Wrote about it here

Great, so how was the experience?

Largely a good one. My desire to work in the buy-side was driven by the fact that it would offer a blend of financial analysis, industry deep-dives, and business model evaluation as well as strategy, business development, and stakeholder management through portfolio support.

I loved the fact that there was a lot of autonomy built into the role- be it in building investment thesis in various areas (consumer platforms, waste management, skill tech, last-mile distribution, ecotourism, Agri tech to name some), sourcing and speaking to various companies (best part of the job!), evaluating, and taking them to IC for investment decisions (more in the next section)

Add to it was the opportunity to closely work with the portfolio companies. As a board observer, I managed Acumen’s portfolio in education, financial inclusion, consumer, and energy sectors. Apart from the governance aspects (compliance, board meetings, etc.) I enjoyed working with the founders on various aspects- fundraising, hiring, business plan discussions, future strategy, network support ideation, etc.

Some examples include working with a premium honey company to do break-even analysis across regions and channels, preparing B plan projections and cash flow analysis for our education companies, offering feedback on a pitch deck and speaking to potential investors for a last-mile distribution company, executing an impact bond for our skilling portfolio among others

One area where I took time to adjust to at the start was the unstructured nature of a VC role. One works as an ‘intrapreneur’ as she/he is responsible for surfacing the best companies to the IC, maintaining networks within the industry to track leads, help in fundraising of port co, or discuss trends and spaces. Coming from GS and BCG which had a structured project-based role, this was a new way of working which I gradually became comfortable with

What all did you work on?

Used the below timeline snapshot to cover the key highlights of my work stint. I worked in the role from Jul 2018-Dec 2020

What were your top learnings/ reflections from it?

Industry Level

a. While it looks ‘Shark Tank’ style super glamorous from an outside-in perspective, venture capital is tough and exits are the hardest. Add in impact evaluation (first filter through which we evaluated deals) and social returns which makes impact investing tougher.

b. VC is a long-run game, and you need a high degree of self-motivation and patience. At the same time, you need to be a strong hustler and move with the speed of the market when you meet a great founder to invest in them.

c. One needs to be extremely efficient in ‘context switching’ as in one day you could be attending a board meeting, evaluating a potential pipeline, negotiating on a deal, and doing industry research on an attractive sector to build the firm view.

Pipeline and Investing

d. As an investor one really has the smallest of powers to influence how the society shapes up in the next decade. Which ideas you fund/ do not fund could affect society, entrepreneurs, and the economy in the long run. So be gentle and wise. FOMO and herd mentality to invest rarely helps.

e. At the early stage one is really betting on the team (their prior experience and execution potential) and a big rapidly growing market. While business model, early traction, PMF, defensible moats are all important the first two are the most crucial.

f. You need to have a high degree of propensity to say no’s daily (to startups). In a year one might speak to ~250–300 startups, evaluate 15–20% further and finally invest in 1% of them. One should also have a high degree of tolerance to hear ‘bad news’/ challenges as a regular part of the job. Else it will become highly stressful.

g. The need to understand the founders/ founding team and get to know them closely is super important before investing. Do ref checks if needed with their friends/ prior work colleagues to understand what drives them, working style, how do they tackle tough situations/ failures, etc. You will be working with them for a good 5–7 years and hence understanding all of this is critical.

Portfolio Management

g. Investing (often the most celebrated aspects in media) is just one part of VC’s job. The real grind starts post investing when you closely work with the company for years to help them find a PMF, attract the next set of customers/ employees/ investors, offer your/ fund’s network to support all while navigating multiple challenges/ near deaths on a continuous basis. A learning for me has been that Portfolio management is being deeply involved and not just a check in the box.

h. Fundraising and hiring the right talent will be the biggest challenges for companies exemplified more so for social enterprises. What helped me during hiring for portfolio companies was looking for hires who were intrinsically motivated by the mission/ purpose of the company and the excitement to build something meaningful with lasting impact

i. One needs to be ready to support/ be a listening ear to the founders. Beneath all the glamor, being a founder is an extremely stressful and at times lonely job. One needs to be excited and continue to think on how to always add value to founders (expert advisory board, set up structure and processes) at an early stage of the journey.

j. Your portfolio companies might run out of cash, find it tough to scale, or be wiped out by a well-funded competitor. At those times you might need to take a tough decision on asking the entrepreneur to wind down, do a hard pivot, or fire employees to reduce cash burn all of which will be gut-wrenching. Empathy during those conversations while valuing the blood and sweat of the founding team which has gone into building the venture is crucial to remember.

Exits

k. You need to start planning an exit from your portfolio companies and have honest conversations with the founders on exits at least 18–24 months before your target date. Have multiple contingency plans in place for any adverse events and don’t celebrate till the money has hit your fund’s bank!

l. Some of your star companies that have attracted big rounds might not give you the target IRR (which could be frustrating) because the time period got stretched.

Any tips for people keen on impact investing?

Is Impact Investing the right path for me?

First, try to understand what motivates and pushes you to explore this space. Is it the intrinsic drive to be able to invest with purpose/ add value to the society or is impact investing just a fancy ‘buzzword’ you are attracted with?

List down your career goals and create a 7–10-year plan. Speak with folks already working in this space and hear their experience. Map your career expectations against this and try to visualize if you will want to work in the industry post such discussions.

I want to make a career in impact investing.

- Understand that it will be a long-drawn-out route. Getting into this space is tougher than getting into Harvard/ Stanford (no kidding!). Set a timeline for when you would like to actively apply for roles, actively network (more in next point), and then take a call to work in allied sectors- impact consulting, I-Banking, operational role at a social enterprise, etc. till a good role comes up.

- Try to be value additive to VCs when you reach out. A cold email asking for a job vs. an email which intelligently talks about 1–2 of their portfolio companies and/ or mentions the help you can offer to them or in the firm’s investment focus areas- Which candidate will you pick to speak further?

- Understand 2–3 sectors in detail and create an investment thesis on them. Use it to understand the fundamentals of business, market sizing, unit economics, etc. Form a view and speak to industry experts/ VC’s in your network to discuss and brainstorm while refining the thesis.

- Follow the top funds and the leaders in this space. Try to access their writings, attend events where they are speakers, listen to their podcasts. This will really help you understand them/ firm culture in some sense even if you do not have direct access to speak with them. In an era where knowledge is getting democratized, not knowing enough about the fund/ sectors where they operate cannot be an excuse.

- Learning agility and curiosity should be super high. With tons of content these days, focus on quality. Having an entrepreneurial bent of mind is also crucial because you will become an ‘intrapreneur’ taking crucial decisions once you join a fund.

- Create your own personal brand in the broader ecosystem — either through analyzing companies writing on emerging trends, sharing investment thesis, or video interviews/ podcasts. Don’t worry that you are adding ‘noise’ to the ecosystem. If you are producing great thoughtful content that helps, people will notice and appreciate the effort you are putting in. Not to mention the brownie points you can earn when you do bag an interview slot.

To sum up

Overall impact investing remains a rapidly growing space. Several trends point to a much stronger ecosystem being shaped in the space. Many impact funds have or are in the process to raise bigger funds (Lightstone Aspada, Ankur Capital, Aavishkaar, etc.), DFI’s such as CDC and IFC are doubling down on India and emerging markets, traditional PE/VC’s have/ are setting up dedicated impact funds (TPG, Bain Capital, KKR, etc.).

Investible sectors in impact have expanded from microfinance and energy in the last decade to education, agriculture, healthcare, among others. Finally, there is increased participation of commercial funds (in later stages or as co-investors) with impact funds to fuel companies that dispels the common myth that you can’t make returns in impact investing

Overall, the space between commercial and impact investing is blurring which depicts the potential and promise. All this bodes extremely well for the impact investing industry and ecosystem and it remains among one of the most exciting (and super relevant) industries to work in!

That’s all folks and I hope this is useful to people keen on impact investing!

If you will like to dive further, here is a good piece on why not to work in venture capital or a recent report from Omidyar Network which elaborates on their thesis in Innovating for the Next Half Billion

Bonus content with tons of useful resources, tips, and openings in VC job on John Gannon’s blog

Image credits: Net Impact

The views and opinions expressed in this article are those of the author and do not necessarily reflect those of any institute or organization he is or was previously associated with.

Venture Capital, Blogger, Travel Enthusiast, Ex- Goldman Sachs