Entrepreneurs building a startup that can address social and environmental issues must start by navigating the common hurdles in impact investing. The private sector is increasingly defining the potent role it can play in bringing about positive changes.
Impact investing bridges the gap between financial gains and social impact as it is a market-driven approach. A broad range of investors are interested in funding impact startups but also focus on the potential risks and challenges.
Despite the hurdles, the worldwide impact investing market continues to grow quickly at a CAGR of 17.8%. If you look at historical trends, the market grew from $420.91B in 2022 to $495.82B in 2023. Experts estimate that by 2027, its valuation will be $955.95B.
These metrics indicate that getting funding for your venture is not impossible. But, to attract funds, you’ll explore the potential risks investors see beyond the buzzwords of positive environmental and social impact. Next, you’ll work out how to address them in the pitch deck you create.
Read ahead for more detailed information about the common hurdles in impact investing, also called sustainable investing. And how to navigate them.
The Ultimate Guide To Pitch Decks
Defining Impact Investment and Impact Startups
Impact investment is funding for companies and startups with the objective of generating positive outcomes within society and the environment. Think sectors like health, education, microfinance, energy, and agriculture. Eliminating poverty, inequality, and adverse effects of climate change are other spheres of interest.
Typically, these projects have a higher risk since they may not achieve their desired goals and intended outcomes. More importantly, these startups may not be able to earn adequate revenues and profits to provide viable returns to the investors.
Essentially, the impact investment sphere is as yet in the development stage without reliable metrics and benchmarks to guide investors. A bigger challenge is measuring the results in actual statistics, even if the numbers cannot be translated into actual profits.
As an entrepreneur looking for funding for your social impact startup, you’ll first try to understand the mindset of potential investors. Understand their concerns and work out how to provide data and information to answer their queries. That’s how you can hope to acquire funding.
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Common Hurdles in Impact Investing – Lack of Data and Standardization
The sustainable investment sphere is as yet evolving and in its infancy stage. And, the lack of data is the primary hurdle. The available data is inconsistent, without adequate statistics for making accurate interpretations and comparative analysis.
- It’s next to impossible to measure social and environmental impact in actual numbers and metrics. Results are, more often than not, intangible. For instance, how to measure improved quality of life.
- Stakeholders may have conflicting interests and objectives, and founders must create an optimum balance between financial and non-financial goals.
- Founders should be keenly aware of the fact that this business vertical runs a high risk of failure. Markets are dependent on external factors, like climate conditions and unexpected events. The global COVID pandemic is one great example.
- Strategies for measuring impact have come up short mainly because they are subjective and rely on individual perspectives. For instance, surveys can only target a limited number of families and draw conclusions on their experiences.
- The positive impact startups hope to achieve could be structured over an extended time. And not during the time interval when the surveys are conducted and data is gathered.
- Sourcing information from the relevant authorities about the taxes paid or data from social welfare groups may not serve the purpose of measuring impact.
- Providing products and services to a control group of consumers to measure their responses can lead to ethical issues. That’s because the criteria for selecting the control group can be biased and unfair. Not to mention that the selection and survey execution process itself is time-consuming and expensive–particularly for startups with limited resources.
Traditionally, investors rely on market analysis and historical data as criteria when shortlisting viable investment opportunities. That’s one of the most common hurdles in impact investing.
Faulty Business Plan
Lack of experience and knowledge is another critical challenge for impact startups. This factor could make it hard for founders to figure out the strategies that will work and have the desired results. They need training in how to design and execute an effective business plan.
The lack of data is again a deterrent because, without accurate market and competition analyses, identifying the core problem is tough. Developing a viable product or service to achieve the desired product-market fit also becomes a snag.
Or the scope of the problem in question could be too complex for a small business to handle. The founder may need large amounts of capital and/or aggressive marketing and mentoring for the project to materialize.
From the investors’ perspectives, they also lack the experience to screen viable projects and identify social entrepreneurs to back. Understanding their business plans and execution strategies may require additional expertise that is yet to be developed.
Since a robust business plan and structure can make or break a startup, not having one is one of the most common hurdles in impact investing.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Unexpected Changes in Political Conditions and Regulations
Sustainable startups are highly reliant on government policies and regulations. For example, any changes in environmental laws could make the company’s products and services redundant.
Changes in government policies could also affect the new company’s performance and demand. For instance, new taxes on its products or new compliance laws that make inventory more expensive. Factors like these could affect the venture’s bottom line and make it harder to remain sustainable.
Higher Financial Risk
Attractive profits and returns are always the objectives that investors work toward. However, not only is the impact business landscape highly volatile and risky. But there is a high probability of the startup going under.
Typically, the success rate of startups is just 10%, which means that 90% of new ventures will fold eventually. Impact companies have a higher risk because they are serving a new and unexplored market. They could be unable to develop a robust product or service that consumers want.
Poor design, ineffective marketing, and improper delivery execution are other factors that could also lead to the company failing.
Undesirable Publicity for Investors
Impact or conventional, investors pride themselves in supporting startups they have vetted through with due diligence. They compile a portfolio of viable projects that they list on their website pages.
From the startup’s perspective, getting funding validates their business idea and generates interest and attention. Securing future funding rounds becomes much more streamlined.
On the flip side, the company could be unable to achieve its targets and goals or have a negative impact. If that happens, the investment could reflect badly on the investors. The undesirable publicity could not only result in a damaged reputation, but also financial losses.
When it comes to sustainable investing, coming under public scrutiny for the wrong reasons is never a good thing.
Redirection in the Startup’s Objectives
Startups undergoing a pivot from their core mission is a real possibility. The products or services they develop may not be viable, or consumer needs can change. If that happens, the startup may choose to diversify its offerings just to stay in business. Or, to maximize profits.
The pivot may not align with the initial business goals the company started off with. Or, it may have a change in management or the restructuring of its team. An acquisition or merger can lead to reversing the positive impact the investment had.
Greenwashing is one of the most common hurdles in impact investing. Investors are wary of backing projects that provide misleading information about the products they develop. The advertising and marketing strategies they adopt convey the false impression that their products are eco-friendly.
Several energy giants responsible for carbon emissions project their activities and products as beneficial to the environment and community. Using the greenwashing technique, they may capitalize on consumer awareness and preference for greener products.
Startups not only employ greenwashing to promote their products and boost sales but may also attempt to secure higher funding. Pitching ESG and social responsibility could be a strategy for low-interest rates or cheaper funding.
Securing funding is just one of the snags you might face when setting up a new company. Ready to know more about the startup hurdles every entrepreneur needs to overcome? Check out this video.
Overcoming the Challenges in Sustainable Investing
Although sustainable investing has several challenges, startups and investors are working out new strategies to navigate the hurdles. Here’s what you can do:
Resolving Inadequate Data Issues
- You’ll resolve issues like the lack of data by integrating complete transparency when it comes to designing pitch decks and providing investor updates.
- You’ll build investor confidence by being accountable for the funding you receive.
- Use strategies like the Theory of Change to outline the impact you intend to achieve with the business model. This approach will also mark the approaches you’ll use to achieve the desired objectives with robust models to measure goals. And deliver verifiable metrics.
- Use standards like Global Impact Investing Network (GIIN)’s Impact Reporting and Investment Standards (IRIS+) and the Social Return on Investment (SROI) methodology to calculate metrics.
Resolving Faulty Business Plan Issues
- Structure your business model to align with Sustainable Development Goals (SDGs). Investors will recognize and contribute to targets that have global affirmation. As a result, you’ll present standardized reporting and benchmarking to maintain investor interest.
- Adopt tools like the Logical Framework (Logframe) to help you structure business objectives and quantifiable results. You’ll also track production and operations and measure them against the indicators to evaluate the startup’s progress.
Resolving Potential Legal and Compliance Risks
- Work with your legal team for information about the right legal business structures for impact startups. Check for the category where your business falls, like a limited partnership, limited liability company, or benefit corporation. The type of investment you pitch for, and the investors’ objectives will depend on the business structure.
- Securing sustainable investment may have different tax implications depending on the location where you’re incorporated. The taxation structure and incentives you qualify for may also depend on the business plan. Research all the relevant information before you proceed.
- Research the compliance regulations and reporting obligations impact startups must follow. Whatever pivots the company makes must account for new developments in the regulatory ecosystem.
To Sum Up!
Awareness about global challenges with respect to the environment and community is quickly grabbing interest. In the coming years, impact startups and sustainable investing are projected to play a vital role in addressing critical issues.
The focus is now on responsible development to achieve social and environmental change but not at the cost of financial returns. Investors and founders now commit to thoroughly understanding the key concepts and principles that drive sustainable investing.
The sustainable business ecosystem is open to understanding the risks and accounting for legal and regulatory compliances when ideating concepts. That’s how they’re able to make informed decisions and work toward building a fair and eco-friendly world.
Understand the common hurdles in impact investing. Work out how to navigate them before you set out to build a new venture.
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