Robin Zhang is an investor in social enterprises – businesses that aim to have a positive social or environmental impact. He shares some expert advice for social start-ups looking for investment.
In China, the number of social enterprises has increased into the thousands in recent years. Yet only a handful of these social entrepreneurs successfully won investment from impact investors (including me). There may be various explanations for this, but for me, the reasons are simple: the entrepreneurs either didn't get my immediate interest, or they failed to convince me they are capable of using my money.
Selling your idea in an emerging economy – the example of China
Bear in mind, China is the world's second largest economy and an emerging market. Business people in such a fast-changing environment are usually impatient. Even the managers of 'patient capital', who are willing to forgo an immediate return with the expectation of more substantial returns later on, are in a hurry to get things moving.
People in China are used to seeing development within a year, perhaps even months. So you can understand why social investors seek entrepreneurs who can both illustrate a clear social mission, and demonstrate the necessary ambition and business skills. These are the essential qualities for growing their social enterprise from a baby to a giant in a relatively short time.
As such, my suggestion for social entrepreneurs, whether in an emerging – or already developed – economy is always to assume that potential investors are impatient, and to catch their interest in just two minutes.
Don't misunderstand me – the goal is not to get the promise of investment in just two minutes (forget the miracle stories from Silicon Valley), but rather to generate enough curiosity from your investors that they tell you: 'My time is rather tight today, but I do hope to get another 60 minutes to understand you and your enterprise tomorrow'. That is a sign of your first success and the most crucial first step on the way to success.
Getting social investors' attention
Here are my tips for reaching this first goal in two minutes:
1. Start with the cause
Unlike business investors, social investors are keen to hear who you are and what motivated you to start your mission-driven business. Whether it's a 'big issue', such as the social inclusion of migrant workers from rural areas into cities, or a 'smaller issue', such as visual impairment, you need to articulate your motivation and give your investor a sense of how motivated and resilient you are, even in the hardest times.
2. Paint a three-year picture
For an investor, a one-year picture is too short while a five-year picture is too vague (remember my point about investors being impatient). A three-year picture provides a longer, but still realistic, forecast for your social enterprise. Also, use two dimensions to illustrate your social enterprise: social and business.
3. Use the right numbers
Investors (not surprisingly) are interested in the numbers, so you need a solid command of your finances if your idea is to go anywhere. It's important to show an understanding of the 'bottom of the pyramid' (BoP) – the largest, but poorest socio-economic group – as well as financial scale, and profit. This understanding will add greatly to your credibility, help the investor understand how your business operates, and what progress it will make tomorrow.
4. Practise your storytelling
People love stories, especially social investors, as they need to tell your stories to their limited partners and board too. Remember, when you are telling a story, investors are also imagining what they are going to say to their donors or board. So tell your audience how you got started, how you progressed through obstacles, and what impact you have made (again, using stories and numbers). Avoid big and vague examples. Instead, make your story specific. Avoid long sentences. Get straight to the point. Be firm.
Selling your social enterprise idea
Congratulations, you've got the investors' interest and an invitation to meet again – you have successfully made your first step to receiving investment. Now it's time to plan the next step: selling your social enterprise idea.
This could be the more challenging step as you need to be equipped with the right knowledge and have good time-management; (even a two-hour meeting can go really fast).
Here's what you need to do:
1. Show that you understand your customers' needs
Almost all investors have one big question in their minds: do you really understand what your customers need? Therefore, define the specific group of people you are trying to serve, and the group who generate your income. Tell your investors what surveys and focus groups you have done in relation to the beneficiaries and customers, and explain why your product or service is well-tailored to their needs.
2. Remember the essential stats
While you only need the 'big' numbers for your initial two minute-pitch, in stage two you need to present the finer points relating to your enterprise's operations and market. These should include the most important financials of the last three years (if your enterprise is old enough), market shares by your competition, and size of target customer base. These numbers show your investor how familiar you are with your market, and how well you understand the 'health' of your own enterprise.
3. Explain how you defend your market and grab shares from the competition
New ideas don't remain new for long. You have to assume your idea – assuming it's a good one – will soon be mimicked, so you need to tell your investors how you can survive and thrive in a highly competitive market. You must tend to some critical issues: what are the entry barriers for existing; who are the (bigger) competitors (even if they haven't stepped in yet); what is the most valuable asset in your business and how you can keep it; how can you take a share of the established market?
4. Protect your investors' shares
As most social enterprises are at the start-up stage – at least in China – social investors are mostly 'angel investors', affluent individuals who invest in start-ups. They are keen to protect their own share as new capital might come in soon. If you really like your angel investors, and want to grow with them along the way, then protect their share from being diluted – you should each be in the same boat.
Social impact investors provide more than just seed money, (already a high-risk investment); they also help shape strategies and even introduce customers or partners when needed.
Robin Zhang is the founder of Venture Avenue and Yu Venture Philanthropy, which offers – together with the British Council – training, mentoring and funding opportunities for social enterprises in China.
Find out how the British Council is helping social entrepreneurs in East Asia, using the Twitter hashtag #SocialBizAsia.