Early in my career, I was in a meeting with a potential investor for my start-up. I was seeking $50,000 from him, a sum I’d chosen because I thought it fit his capacity to invest. Toward the end of the meeting, he looked at me and said, “If I wrote out a check for a million dollars right now, what would you do with it?”
It was a question that I wasn’t expecting or prepared for. My lens had been focused on bootstrapping and cash flow. I hadn’t thought through a bigger strategy of being truly prepared for a large influx of capital. I knew how I was going to deploy the $50k I was seeking, and it was all focused on moving my organization forward a few yards. This investor wanted to know how I could score a touchdown. Instead, I got sacked for a 15-yard-loss. I would never make that mistake again.
Today, I often ask organizations I work with through Mission Edge’s Social Enterprise Accelerator and Impact Lab (SAIL) the same question: are you ready for a significant donation or investment and do you know how to effectively deploy the capital you raise? Most often I get a confusing response that inevitably ends up talking about “hiring more people.”
Hiring people is a result of growth, not a strategy to achieve it. That answer only tells me — or any investor — you aren’t really ready to take on additional capital.
Getting Ready for Investment
The social-impact funding arena is getting more complex and requires better preparation. A great example of this is the rise of social enterprises — for-profit or nonprofit businesses that earn revenue by selling products or services that reinforce their social mission. Social enterprises exist in a netherworld between nonprofits and for-profits: is it grant funding, philanthropy or investment capital they seek? Unlike the for-profit world where investment is straightforward and revolves around either debt or equity, social enterprises will often seek various kinds of capital that focus on wildly different types of return on investment (ROI). Foundations focus on program impact, equity investors focus on financial return, and “impact investors” focus on a bit of both. Given this disparity how do you prepare yourself to answer that million-dollar question?
The social capital conference SOCAP had a session several years ago that broke investment readiness down by stage of growth — from Blueprint to Validate to Prepare to Scale — signifying where you are on that continuum determines what you need to do (and show) to be “investible.” Very often this comes down to preparing properly for the operational requirements of growth, including having the right operational systems and people in place.
Many young organizations focus all their energy on their programs or product delivery and don’t think enough about the systems needed to ensure that capital can be managed, and results and expenditures can be reported on. Managing your financials and customers on spreadsheets doesn’t scale and is a guaranteed recipe for disaster. Fortunately, there are numerous affordable, cloud-based systems for accounting, CRM, project and team management, fundraising, and marketing available today.
While these systems can help manage your data, they don’t provide the reporting and analysis you need to ensure you are on track. Most investors will require a multi-year financial model that outlines expected revenue and expense and will be based on a set of assumptions the business makes about how quickly it will grow. This requires decisions about the growth of the organization on every level and shows that leadership understands the capital needs of the business moving forward. It is critically important that a financial model “game” out different scenarios, and that you develop contingency plans based on them. This will give investors confidence that you have a realistic set of expectations about what’s required to scale.
At the same time, investors in social enterprises increasingly demand outcomes data as well as financial results. Using a CRM system to gather data is helpful, but you still need to understand what to track and how to report on the results. Is your organization having a real impact in the areas you are focused on? Do you have more than anecdotal stories about your success? These are the questions you need to answer now for many investors.
Raising money often means rapid growth, and that in itself brings its own challenges. In my experience, when you are hiring quickly you are likely to make mistakes. When ordinarily a candidate might go through multiple rounds of interviews to ensure they fit, the process often gets truncated under pressure. Hiring requires both time and patience; resume vetting, phone screens, in-person interviews, and reference and background checks all take time. When you skip these steps you raise the chances of getting the hire wrong.
So how do you move quickly but also ensure success? Planning early should be an essential part of your business planning process, meaning a clear organizational plan that includes the roles you will hire for based on growth milestones, as well as job descriptions and compensation plans required to get and keep the best talent. Ideally, you would already have job positions posted and started interviewing, keeping a list of candidates in various stages of the process ready to go once funding is secured.
The most important benefit of starting this process early is ensuring you focus on the concept of “cultural add” with the hires you make. While many candidates may have the requisite skills you need, not everyone will align with your mission, vision, and values — not where your organization is today, but where it is going. I’ve seen many organizations destroy their momentum by hiring people, while technically qualified, that weren’t additive to the culture. By having a clear understanding of the values needed in the organization and a deliberate process for interviewing and vetting candidates, you can avoid the danger of hiring poorly under pressure.
Becoming investment-ready can mean many things depending on your stage of growth and the type of funding you seek. But some things remain constant: having good systems with data that can be effectively communicated and hiring people who fit the future of your organization.