Last month, I had the pleasure of attending SOCAP (Social Capital Markets), the world’s largest conference on social enterprise and impact investing, at the Fort Mason Center in San Francisco, California. As a veteran attendee (this is my sixth SOCAP conference), I am always energized to be around smart people who are passionate about the potential of the intersection of impact and markets. At the conference, I spoke on a panel called “The Rise of Impact Seed Funds” with Wes Selke from Better Ventures, Shauntel Poulson from Reach Capital, Brian Dixon from Kapor Capital and Julie Lein from the Urban Innovation Fund. We discussed the evolution of seed-stage funds and talked about specific investment strategies, and how our focus on impact boosts performance. Below, I’ve recapped some of the key takeaways from our panel discussion (feel free to check out a video recording here).

Defining and measuring impact as an impact fund

Social impact is a loaded word and means different things to different people. While each fund on the panel considers themselves an impact fund, we each define it very differently. Brian Dixon from Kapor Capital shared that, “when we’re making an investment we’re not only thinking about whether this investment will get us a 3x return of the fund, but also how does this actually make a difference.” At Reach Capital, “we invest in missionaries, not mercenaries” said Shauntel Poulson. When it comes to impact, they focus on three things: a user base that targets underserved and under-resourced populations, usage penetration in terms of depth of usage and user satisfaction, and long-term improvement in student outcomes and achievement. The Urban Innovation Fund, Julie Lein noted, is a market rate-driven fund with an investment thesis that is impact-driven, mission-driven and world positive. “More and more we’re moving towards a place where you don’t have to be concessionary when you’re achieving impact goals” said Lein. At Impact Engine, being impact-focused is part of our brand. We look for entrepreneurs that are impact-motivated. For each company we invest in, we work with the entrepreneur to create a logic model that links the product to the positive impact outcomes that product can create. It’s also important on the investor side as well. We bring in investors that are impact-motivated and provide opportunities to deepen their understanding and portfolio of impact investing.

What seed-stage impact funds are looking for

At the seed-stage, many entrepreneurs find themselves in a “chicken and egg” situation: they need the capital to build the product, but they need the product to raise the capital. Even at an early stage, there are many signs of success an entrepreneur can demonstrate, like initial traction and potential market penetration. Each fund shared insight about what they look for in a company that signals they are ready to invest. A strong, driven team that sees a larger vision and can execute is key, especially at the earliest stages. “We believe that the right team will figure out the right market, and if it’s not the right market, they’ll pivot to a better market” said Poulson. At Impact Engine, we believe that an “A team” with a “B product or market” is better than an “A product/market” with “B team.” We look for entrepreneurs who are targeting large markets and market adjacencies where there’s big opportunity. We also ask: are they a GSD (get shit done) entrepreneur? Have they hustled, gotten something built, tested it, and gotten in front of customers? As an entrepreneur, you always need more money to make your product more robust and scalable, but the more scrappy you can be, the more impressed I am! As Lein remarked, “show a willingness to get things done immediately. There is power in being passionate, scrappy and tenacious!”

The evolution of seed funds

Though accelerators and incubators first addressed the dearth of funding for mission-oriented companies, producing a cohort of early-stage startups searching for seed funding, many of these accelerators have transformed into seed funds as the field has matured. As Dixon says, “when it comes to accelerators and funds, there’s been a natural progression over time”. For example, as smaller seed-stage funds become successful, they raise larger subsequent funds with bigger check sizes and become better suited to invest in companies raising larger rounds. But recently, there’s been a rise in micro VCs, seed capital and pre-seed rounds, which is a great thing for entrepreneurs. As Poulson described, “today’s seed round is yesterday’s series A and today’s pre-seed round is yesterday’s seed round.” In today’s landscape, seed rounds can be upwards of $5M and companies can have multiple seed rounds.

The dos and don’ts of fundraising

The group shared lots of tips for entrepreneurs that are fundraising. The most important? Know how much you’re raising. When it comes to rounds, the landscape for seed stage companies has shifted towards SAFEs or convertible notes. While impact funds are certainly flexible and open-minded to both notes and priced rounds, entrepreneurs should understand the pros & cons of their funding choices. Notes can be less expensive and great if you want to be scrappy, but a priced model can be easier and clearer in terms of determining ownership percentage. It’s also important to know why you’re fundraising and why you want to work with a specific fund. Demonstrate a strong team, have a most viable product and customers to show, and have a clear vision of where you’re going. Be able to articulate your impact story.

Portfolio construction & follow-on investments

While each fund has a unique philosophy on portfolio construction, they all reflect the evolving landscape of seed funds. Some funds used to steer clear of follow-on investments, but now they are more open to reserve capital for companies in their portfolio if the company meets certain milestones. Poulson noted, “today, half of our capital is for follow-on investments and the other half is for new seed stage companies”. At Impact Engine, we have a similar strategy: we strive to invest our reserved capital in portfolio companies that are doing well, where we see potential for great returns and great impact.

The landscape for seed-stage funds continues to evolve, and each fund is always learning, growing, and evolving its strategy. It was a pleasure to share my experiences with Impact Engine at SOCAP. The conference is always an excellent reminder just how much this movement has grown over the years, and I look forward to attending the SOCAP conference for many years to come!

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