Raising Money from Double Bottom Line Investors:
An Entrepreneur’s View
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 (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
Where Are The
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
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
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.
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
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.
a lot of lessons during this process, a few of which I'll mention here.
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
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.
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.
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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