Five steps to get impact investment ready

Jackson Rowland shares the steps every impact businesses needs to take to get ready to take on impact investment.

It’s no secret that New Zealand’s impact investing market is growing significantly, with the market size increasing 13 times from 2019 to 2020 to over $4bn. However, only around 10% of this capital is going to impact-driven kiwi businesses. This number is far too low which is something that Ākina is working hard to change.

We created the Ākina Impact Investment Readiness Programme, to provide funding to impact-driven businesses to access professional support services to help them get ready to receive impact investment. With a record number of applications received already for this year’s programme, the demand for investment from impact-driven businesses is stronger than ever.

Because of that, we thought it would be a good time to demystify the process of getting ready for impact investment. But, spoiler alert: it won’t give you all the answers. Getting a business ready for impact investment is a bespoke process that varies depending on the nature and stage of the business. However, there are some really important principles to bear in mind that will hopefully accelerate the journey!

1. Make sure you have an impact model

Make sure you’re clear on your impact model before seeking impact investment. The aim of impact investing is to enable social or environmental impact as well as a financial return, so it’s essential that you are clear on what impact your business is creating and how your business activities lead to this impact.

An impact model (also known as a theory of change) is a logic model that sets out the activities of the business, the short to long-term outcomes those activities create, and the ultimate impact, or change in the world, that the business helps create. The diagram below shows how these are often set out:

If you haven’t thought about your impact in this way, now is the time to do so! There are also some great examples of impact models that Ākina has helped create in the The Business of Impact report (see pages 23, 47 and 50). For more on how to create an impact model, The Impact Initiative toolkit has a handy guide and an impact model canvas tool.

2. Validate your business as much as you can

Investors will want to see that your business is appropriately validated for the stage that it’s at. Investors know that an early stage business won’t be as validated as a later stage business, but you should still aim to demonstrate as much validation as possible to convince investors that they’re likely to see a return on their investment.

When deciding what to validate, start with the most fundamental assumptions you’ve made for your business. These assumptions often relate to the business model: How do you know that the problem you’re trying to solve actually exists? How do you know the size of the market? How do you know which demographics will buy your product and, for what price? (Here’s a hint: don’t rely on someone telling you they’d happily buy your hypothetical product – rely on actual sales!)

These questions are crucial to the success of your business. You need to be able to answer them to understand if your business will succeed. Then, you need to use that validation to convince an investor of that success too. The more mature your business is, the more of these questions you should have answers to.

3. Figure out your Capital Staircase

Which of the following graphs do you think your business growth journey is most likely to look like?

For an overwhelming number of businesses, your journey will look like ‘C’, otherwise known as the ‘Capital Staircase’. While we like to think a business grows progressively over time, it more commonly happens in spurts. You might make a tech breakthrough, secure a significant contract or receive an investment, and the business will change almost overnight – that’s the vertical part of the step. Then you spend the next six months adjusting, bedding into new ways of operating – that’s the horizontal part of the step. But, brace yourself, there’s another step coming up! This is the typical growth journey for a business. Realising this, and planning for it, is really important.

A crucial part of that plan is trying to predict, and prepare for, the next step. When will you need external investment to level things up? How much investment that should be, and what milestones will that investment enable you to achieve in the following ‘horizontal’ phase? The clearer you can be on these steps, even the steps that are a few years away, and the clearer you can show this to investors, the clearer they’ll be able to see the future of your business, how their investment fits into that bigger puzzle, and how they’re likely to realise their investment.

4. Wrap an exceptional team around you

This one won’t be a surprise, but it’s important to emphasise. Firstly, your core management team should have some ‘x factor’. For an investor to genuinely believe your business will be able to repay any investment they make, they will need to be convinced that your team has, or will get, the breadth of skills required to achieve those goals – so much so that they get excited about the future of your business.

Now, not all early-stage businesses can afford a full team of employees, and that’s OK – the advisors that you wrap around you are just as important. What skills does your business need that your team is lacking? Who’s on your Board? If you don’t have a Board yet, who do you go to regularly for business advice? Do they have skills in the areas your business is lacking? Invite these people to be a part of your advisory team, and meet with them each month to shape your business strategy. If they can’t commit, ask them why. If it’s due to a concern about your business, prioritise fixing that concern. If you can’t find people who will give you their time, it’s going to be very hard to find people who will give you their money.

5. Ask investors what they need!

This is the Golden Rule, which supersedes all the others. Each investor will have different criteria around whether to lend someone money. Meet-up with the local investor groups and ask them what they need in order to be comfortable enough to give you their money. What types of businesses do they usually invest in? What made them comfortable investing in those businesses? What do they think of your business idea? What would be the key milestones they’d want to see before thinking about investing? Connecting with investors can shortcut all of steps 1-4 above, and get straight to the heart of what is investment readiness for that investor.

Then, once you’re ‘impact investment ready’, the next challenge is to think about how you protect your impact through the investment and beyond. But we’ll save that for another day. Goodluck!

Jackson Rowland is Director of Ākina Invest. The Impact Investment Readiness Programme offers funding to impact-driven businesses that need support to get ready for investment - with each successful applicant receiving up to $30,000. Find out more at akina.org.nz/apply