Venture Capital with a Twist: How to Pitch an Impact Investor
As a venture capital firm, Omidyar Network has evaluated thousands of deals, and invested over $260 million dollars in for-profit companies. In many ways, our office environment resembles that of our Silicon Valley peers. Our conference rooms are full of start-up teams pitching us on the next world-changing product or service; our hallway conversations are about the latest developments in tech. But you don't need to look hard to notice our social mission. Our walls and desks are decorated with photos of those serving disadvantaged communities. The quote on the wall across from our main elevator reads: "Every individual has the power to make a difference."
We're often asked: how different is it to pitch to an impact investor than to a traditional venture capital firm? In fact, it's not that dissimilar. Most of our criteria are the same as that of our Silicon Valley colleagues. The main distinction is that impact investors prioritize social results and often are willing to take more risk and invest in non-traditional sectors in service of this goal. But don't assume this means we are willing to reduce our analytic rigor. Impact investors look for compelling pitches that convince us not only that an entrepreneur can create a thriving business but also that he or she can transform million of lives. Here's what many of us look for and how it can inform your next pitch.
All venture capitalists look for a few important qualities in the start-ups we fund to help us determine their likelihood of success. Here are the criteria we use, in a condensed version, which are also common to the VC industry:
(1) Potential for massive scale
We look for ideas with potential for massive scale. This means we only invest in businesses with very large potential addressable markets–-and usually pass on deals where entrepreneurs are interested in serving a singular modest-sized geography or a small market segment.
(2) Strength of team
People are key. We need to believe in not only the demonstrated track record of the team, but their dedication, resilience, and willingness to stick with the vision through any necessary pivots. No matter how compelling the initial idea, if we don't see these qualities in the entrepreneur and her founding team, we will not invest.
(3) Clear customer value proposition
We look for entrepreneurs who are solving real problems. Like all VCs, we invest in those who deeply understand their target market and design with customer needs in mind. This may sound obvious, but in fact it's quite easy to forget the customer in one's passion for developing the latest gadget or feature.
Of course, as impact investors, we are also willing to back opportunities that traditional VCs would not. Here are a few ways in which we evaluate a pitch differently:
1. Clear, positive social impact
Even if a company appears attractive from a pure financial perspective, we will not invest if it doesn't have the potential to positively benefit millions of lives. We often see business models that we think may be highly profitable, but lack a strong impact component. In these cases, we pass on the deal and refer the entrepreneur to other VC colleagues. While impact investors have different approaches for measuring impact -- number of lives touched, jobs created, metric tons of carbon emission saved -- all impact investors want to see evidence of clear, positive social impact.
2. Sector focus
Omidyar Network is a strategy-driven impact investor. We focus on a few key sectors where we think we can have outsized impact. In our case, this includes mobile payments in the developing world, education for the poor, and financial inclusion for the billions of people without access to formal financial services. Given our knowledge and networks in each of these areas, we are often willing to take on significantly more risk than a traditional VC.
For example, Bridge International Academies delivers high quality, affordable private education to children living in slums in Kenya. When we considered investing in Bridge we knew there were multiple risks: political instability, significant market risk, and an untested business model, to name a few. But our knowledge about the market made us confident that the organization could handle these risks and we believed the model could spark a new sector of schools that could transform the lives of millions of poor children. Bridge is now the largest private school chain in Africa.
Because of our commitment to developing non-traditional sectors, we not only invest in the entrepreneurs; we also work to make their operating environment less difficult. In this vein, Omidyar Network often works with industry groups and policy makers to improve the policy environment and infrastructure for specific sectors in which we invest.
Because of their fund structure, most VCs expect to exit an investment within 7-8 years. By contrast, Omidyar Network operates as an evergreen fund, which allows us to focus on building a business for the long-term. This is important because many of our investments are in less mature markets where business models need more time to develop. While we still expect to hear compelling exit strategies during pitches, we are more likely to be open to creative thinking, especially in situations where our investment can help generate a new industry sector with strong profitability and massive impact.
The Bottom Line
Venture investors like to say that they are looking to invest in amazing entrepreneurs whose companies can change the world. For us this is not a figure of speech.
Impact investors want to know everything that traditional venture capitalists want to know when evaluating an investment opportunity. They want to be convinced that you are building a strong, profitable and highly competitive business. But they also want to know how your venture will have a direct, positive social impact that will reach millions of lives as your business grows. If you are able to make a credible case for both, you have the makings of a strong pitch.
This article originally appeared as part of Harvard Business Review's online series, Scaling Social Impact. With sponsorship from Omidyar Network and in partnership with The Bridgespan Group, the series explores how entrepreneurs and more-established organizations are using market forces to create social good.