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In a market dominated by uncertainty, many entrepreneurs are now asking themselves a simple question: Will I be able to raise follow-on capital? And if so, what’s the best way to do so? And according to Bloomberg, that path may not be easy, as investors are telling founders to expect down or flat rounds and a protracted fundraising process.
Sarah Cone, the founder and Managing Partner of Social Impact Capital, has a different perspective. Investing at the seed stage, Cone’s firm has completed investments in 19 businesses with portfolio companies including Milk Run, an on-demand marketplace for locally sourced produce, and Judy, a unique business that creates plug-and-play prepper kits. Every one of Social Impact Capital’s investments have raised follow-on capital or have exited.
I recently spoke with Cone for a bit more insight into her run of success.
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As any entrepreneur will tell you, one of their biggest challenges is raising late-stage capital. Describe your firm’s approach to coaching and helping your portfolio companies.
As a seed-stage firm, we have a front-row seat to this very exciting process. First and foremost, we focus on making introductions to late-stage firms and fellow affiliated investors, help with investor materials, presentation and process. Late-stage fundraising is quite different from early stage fundraising, so we like to roll up our sleeves and help.
Yet another element of this assistance goes all the way back to our investment at the seed stage and during our diligence process. We ask our founders a very important question: What metrics will they need to raise their Series A, and what are they going to do to achieve them? By having this in mind at the start, it helps lessen the burden during late stage fundraising.
Has the pandemic changed this strategy or impacted any of your portfolio companies’ ability to raise follow-on capital?
Our strategy hasn’t changed much at all. In fact, it’s just accelerated what we’re focused on: investing for a world that needs to be improved; a world with societal and environmental volatility. Our portfolio has had three follow-on financings since COVID-19 hit, and in general it seems like there is renewed interest in the serious types of businesses that we’ve always preferred. A handful of our businesses are thriving in COVID-19, most are unchanged, and because we invest in manufacturing, a few have been able to assist front line workers by producing and donating hand sanitizer and face shields.
The past few years have seen significant growth in so-called "mega-rounds" where venture capital is employed, at a deficit, to power supersized growth. What advice do you give entrepreneurs who are faced with a later-stage round like this?
For many entrepreneurs, we ask them to focus on one simple metric: healthy-unit economics. At any stage of the business and fundraising cycle, buying growth must be understood within the dynamics of healthy-unit economics. If the unit economics make sense, it may make more sense to step on the gas. If the unit economics don’t, it may make sense to be more careful.
We do understand the pressure and competitive dynamics though of a particular space or vertical. Say, If a startup’s competitor raises $100 million in a mega-round, they may be pressured into doing something similar to compete given the risk of being sidelined out of the market.
In today's world, consumers demand more from brands they trust. Explain Social Impact Capital's thesis towards investing in companies that fit this mold.
We don't believe that social impact is a compelling enough motivation on its own to make a decision, so we only invest in products that are also better on some other axis, typically lower cost. Sustainability is really just another way of saying reducing waste and improving efficiency, so sustainability often just creates more profitable supply chains.
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What advice would you give to entrepreneurs starting new businesses with an eye towards sustainability and social impact?
There’s never been a better time to start a business than right now. When you do, focus on two things: First, understand the efficiencies that are created by sustainability and your impact on creating a more profitable supply chain. Second, focus on unit economics as you grow. Your business is a business; first and foremost and you should be looking to achieve what you need in your next round of financing.
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A Leading Investor's Perspective on Raising Follow-On Funding and Making a Difference - Entrepreneur
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