Conducting due diligence on early stage social enterprises can be a costly and time-consuming endeavor, requiring investors to evaluate companies against financial, industry, and impact measures. One way to lower transaction costs and spur greater early stage investment is to pair investors with deep industry experience with institutional investors, combining the business model expertise of the former with the financial acumen of the latter.
“Angels are concerned that early stage companies don’t have the same rigorous look at the business model and financials that traditional enterprises are subject to. They’re afraid to fall in love with an idea without the discipline.”
While many angel investors are interested in social impact, investing in a social enterprise can come with high transaction costs as investors seeks to understand the sector an entrepreneur works in and the potential viability of their business model. Regardless of how much an angel investor believes in the idea behind a social enterprise, without the assurance of due diligence, it is difficult to move ahead with an investment. This results in a smaller number of deals and fewer financing options for social entrepreneurs.
Rob Wilder leads Food Tech Angels, a network of accredited investors who share a desire to find early stage opportunities at the intersection of food and technology. While Rob and his partners understand the ins and outs of the food industry, their small network does not have the resources to conduct complete financial due diligence on each potential investment. To solve for this, Rob complements Food Tech Angel’s depth of industry expertise by co-investing with an institutional investor with the capabilities to perform rigorous financial due diligence. This pairing helps lower the otherwise high transaction costs of investing in early state enterprises by leveraging the core competencies of both investors. This kind of pairing could also be taken on by incubators and accelerators, enlisting financial professionals and mentors with industry knowledge to perform due diligence and add credibility to a social entrepreneur’s business model.
The alignment of industry-specific experience and rigorous due diligence led to Food Tech Angels’ investment in Local Roots, a social enterprise that deploys indoor farming solutions to promote healthier food. Food Tech Angels’ approach allowed Local Roots to obtain the “stamp of approval” needed to move forward with the syndicate’s investment. Local Roots is now one of Food Tech Angels’ most successful portfolio ventures.
How it applies to your city:
Enablers and funders can develop innovative solutions to reduce the transaction costs that can be a barrier to mobilizing capital for social enterprise. Supporters of social enterprise can think about creative pairings of industry and finance experts as well as “certifications” that might help investors to understand the potential value and risk profile of a deal. This will ultimately lead to more funding inflows and help create bridge capital (appropriate capital that matches risk levels) as a social enterprise matures.