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Although our perspective is biased, investing in small, great ideas is also good business and it turns out data says we might be onto something. A 2024 report on The State of Social Enterprise cited research showing there are roughly 10 million social enterprises globally. These purpose led businesses generate $2 trillion in annual revenues (more than mainstream industries such as telecom and apparel) and more than 200 million jobs.
Despite the positive impacts these companies are making, they only account for 3% of total businesses worldwide. And the need for funding is currently in the ballpark of $1.1 trillion.
As a venture studio, we dedicate our time and resources to building social impact startups. For more than a decade, our team has been part of the social impact startup and investor community where we prioritize profit-serves-purpose businesses.
To date, Small Great Ventures in partnership with Temerity Capital Partners has invested more than $1M in 12 social impact companies within the mental health, climate, and fintech industries. Along with our enthusiasm to see impact founders achieve their mission, we feel we have a responsibility to share our approach so that others can navigate social impact investments and join in on supporting ventures on a mission to change our future for the greater good.
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Investing comes with unpredictable risk and reward. There isn’t a sure-way of preventing risk, but it can be mitigated through intentional process and really great diligence.
First, every good investor needs an investment thesis. This can be as simple as an overview of the type of companies, founders or products you want to invest in. For small teams, like ours, we stick to core industries we can study and get to know really well. When we set the intention of investing in mental health startups, for example, we also needed to get well-versed on what good business in this sector looked like because it was a new field for us.
We avoid drastically different industries (finance vs. healthcare), different business models (B2C vs. B2B), and product type (software vs. manufacturing). One of our unfair advantages is that we have deep expertise in financial tech, and in turn, invest in fintech software solutions focused on financial inclusion that is B2B2C. It takes tremendous time, skill and effort to develop uniquely strong expertise in one domain, let alone multiple.
What would you consider your “unfair” advantage to be? Start there.
While there are probably dozens of effective ways to evaluate “impact” - we tackle it from three levels: individual, systemic, and scalability. We go into deep detail over here in this blog post, and here is a summary:
Some products or services may be amazing for society, but have no obvious individual impact. For example, voter turnout platform Motivote doesn’t necessarily impact life on a day-to-day basis - so we consider the individual impact of this platform low. If Motivote is adopted at scale and leads to a 10% increase in voter turnout across the country, it could have a huge impact on society, and the ripple impact could positively improve an individual’s life, too.
And, you may have to take some of the bad with the good. Are there negative externalities for each company you’re looking to invest in? Explore and identify what unexpected outcomes could result from the platform at scale. Would this idea produce good outcomes in some areas and cause more harm in others? If you’re looking at a low-income housing startup, would scaling their product generate significant carbon emissions due to environmentally unsustainable building methods?
Impact never happens in a vacuum; there are always tangled consequences you cannot foresee. As an impact investor, asking yourself these questions is key to conditioning yourself to look at the bigger picture.
Most early stage startups are a pipe dream. As the leader and often ideator of the business, it’s important to look at how much work the founder, or founding team, is doing to make it a concrete, viable business.
We typically won’t move past an introduction if most, if not all, of these steps have not been implemented.
Aside from foundational business assets, ensure the founder has a vested interest in the success of the business beyond financial gain. Understanding the “why” behind their motivation to start the business is important:
Void of deep experience (lived or professional), a founder may or may not stick with their concept when the going gets tough (which it inevitably will). Investors should put their money on someone who is truly dedicated to their project: mind, heart, and soul. It’s a long and challenging journey to success; when investing you want to ensure the founder is in it for the long haul.
Yes, enduring financial success and healthy returns on investment is every founder and investor's primary objective. Even in impact - a solution that leads to progress is only as good as its profit margins. Ensuring the founder is aware and planning around the risk for failure is paramount. Assess the founder’s ability to think critically, face reality, address challenges, and plan long-term. This reveals much about their resilience, courage, and aptitude. If they can’t list the top ways they might fail, challenges they anticipate, and risks they face in their industry - their idea is just simply that - an idea.
We don’t believe you can ever conduct “too much” due diligence - for the most part.
“I’ve never kicked myself for doing too much due diligence on a startup,” says Jake, our co-founder & managing director of Temerity Impact Fund. “However, I have been burned by either trusting the due diligence of bigger investors or not making time to do enough of my own research on the startup.”
Be reasonable and proportionate with the amount of due diligence as it relates to size of investment. Fifty (50) hours of due diligence for a $10K to $50K check is, well, actually too much. Adequate due diligence includes multiple founder interviews, deeply analyzing financial models, and writing a comprehensive deal memo breaking down each facet of the company. This process reveals any missing pieces, conflicts, or major concerns before making an investment.
Social impact alone is not a good enough business model to invest in. In order for social impact to work - it needs the fundamentals of good business, too. Investing in a social impact startup destined to fail before it begins doesn’t help anyone. Be rigorous. We believe companies can do good and be profitable while doing it.
Commitment to impact startups does not begin with a fund or a venture studio (although we have to say - we love our job!). There are many other ways you can invest in social impact.
Angel investing is a great way to invest in impact startups with smaller checks and without a venture fund. Typically, angel investors are the first ones to write a check when an idea is brand new or when a founder is just doing a “Friends and Family” round to test the waters with the concept.
Crowd-funding platforms like Wefunder allow you to search and find startups aligned with the industries you want to invest in with much less capital. Crowd-funding platforms are built for high volume, lower dollar investments suited for regular people or novice impact investors.
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Small Great Ventures manages the Temerity Impact Fund, which invests in pre-seed and seed impact startups. Through this fund, we share founder and investor connections to amplify both of our missions. We are always looking to add value-aligned investors to our network. Is that you? Send us a note.
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We give great advice on building things, partnerships, and creating impact.
When we get around to writing it down, we’ll (maybe) send it out in a dressed-up email.
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