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Raising Money from Double Bottom Line Investors:

An Entrepreneur’s View

 

By Nick Gleason

CEO, Citysoft

 

It is with great passion and enthusiasm that I write what I hope will become the first of many articles for RISE.  In addition to being a social entrepreneur myself (I founded the socially responsible IT firm CitySoft in 1997), I am a cheerleader for this growing sector and for those brave enough to join this bandwagon.

 

My goal in this piece is to tell a bit of CitySoft's story as it relates to social investment and then identify some lessons learned and make a few observations about RISE and what it represents.  My hope is that our experiences will be helpful to others.

 

CitySoft's Story

CitySoft (http://www.citysoft.com/) is an activist Internet software company that offers a comprehensive web and IT systems platform called Community Enterprise™ to associations, non-profits, and related organizations.  CitySoft also has a long-term commitment to urban economic development.  Over the years we have pursued this commitment in a number of ways such as outreach to and recruiting from low-income urban areas and creating a non-profit - CitySkills (www.cityskills.org) - that is spreading these urban economic development practices to other employers.

 

Where Are The Investors?

When we started CitySoft in 1997, the sources of capital for activist start-up companies were rare and fragmented.  Capital networks for what is now called social entrepreneurship were largely informal, few, and far between.  When we started serious fundraising for CitySoft in 1998, it was slow going.  Because of our commitment to urban development, mainstream venture investors did not take us seriously.  Similarly, bank financing was difficult to secure because we were a small, young company.  We had to bootstrap.

 

Occasionally, we heard that there were socially-oriented investors "out there" but we didn’t know many people who knew how to locate them, how to approach them, get invited to their meetings, go to their parties, and so forth.

 

Friends and Family

Without connections to social investors, like many companies we began our fundraising closer to home with friends and family, or as one magazine article termed it, "parents and suckers."  We raised a small round of equity from these sources in 1999.  This is probably the most common way for companies to get initial financing and we were no exception. 

 

If you are seeking capital and have not raised a friends and family round, you should consider doing this before raising institutional capital.  It is good practice for the subsequent experience of raising money from more professional sources.  And, if you haven't done it before, it's important to experience taking investment money from people to whom you have a real obligation.  That experience was a turning point for me personally and caused us to mature as a business since we were suddenly responsible for other people's money.

 

Institutional Investors

By 2000 we realized that we would need more capital to grow and we renewed our efforts to connect with the social investment community.  Because there was no organized resource, the process of finding potential investors was essentially word of mouth.  This required lots of calling friends, friends of friends, and was very time consuming.  Little by little we found individuals like John May and Josh Mailman and funds like the Flatiron Future Fund and Calvert Funds.

 

It was a very inefficient process just to identify targets, let alone to figure out how to engage with those investors that we did find.  We talked to lots of potential investors and tried to figure out who would be a good match for us in terms of return profile, culture, connections, deal structure, and so forth.

 

Finally, in the fall of 2000 we met with the Sustainable Jobs Fund (SJF). By the end of the year, we had structured a deal with SJF and the Calvert Small Equities Fund.  Rather than close the deal at that point, we decided to try to convince other investors to join the deal since it was being "blessed" by credible investors.  By the spring of 2001, several other community development investors had joined the round such as the New York Community Investment Corporation and Coastal Enterprises of Maine.  In addition, we were fortunate to attract two technology leaders as individual investors – Esther Dyson (the founder of Release 1.0) and Mitch Kapor (the founder of Lotus).  When it was all done, we had raised about $1.7 million.

 

Lessons Learned

We learned a lot of lessons during this process, a few of which I'll mention here.

 

First, we learned that the cliché about finding the "right investors" is true.  Despite the long search, we eventually found investors who had a good understanding of what we were trying to do and bought into it.  That became important later because when the technology bubble collapsed, it was important to have investors who were engaged and cared about the ultimate success of the business.  They hung in with us when times were tough.

 

Second, we learned that it is important to find investors who really understand your business.  That is actually very difficult to do since investors often cover multiple industries and not all of them have operating backgrounds.  If you can find investors with operating expertise in your industry, this will often lead to many more contacts as well as faster decision-making.  If you can't find investors with operating experience in your area, then you should definitely recruit board members who have that kind of experience.

 

Third, we learned that one of the biggest challenges in getting deals done is lack of experience.  When we started, I personally lacked fundraising experience and that both slowed us down and made it difficult to get deals done.  If I were doing this again, I would make sure to get more advisors involved who had a detailed knowledge of how to do these negotiations.  In particular, getting an experienced lawyer involved can be helpful.  This can also shield you from some of the more confrontational aspects of a negotiation which may be important since you are going to have to work closely with your investors after a deal is done.  But, of course, relying on lawyers to guide a deal like this can get expensive.

 

Fourth, we learned that double bottom line investors have a wide range of needs and interpretations of their mission returns.  Some investors care a lot about the social aspects of the enterprise.  And, for some, it's a "nice to have" but not a "must have."  Also, the degree of interest in the social mission can change over time.  When the IT industry collapsed in 2000, some investors became more concerned with the financial return relative to the social return.  That should not be a surprise since a company has to perform well in order to be able to have a social impact.

 

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