Integrated Investing
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Market Attractiveness : The market is the group of people who are, or will be, buying the product or service delivered by the venture. The market attractiveness domain reminds you to evaluate the size of the market the venture is trying to reach, the total number of potential customers, the value of the sales the venture could generate, and how many products or what volume of services the venture can potentially sell. It’s important to evaluate the trends in a given market to determine whether it has grown in recent years, and whether there is a likelihood that it will continue to grow. A more promising investment opportunity is one in which the venture is targeting a growing market rather than a declining one.
Sector Market Benefits and Attractiveness : Whereas the market attractiveness domain evaluates the market opportunity from a macro perspective, sector market benefits and attractiveness reminds you to evaluate the market opportunity on a micro level. Take a look at the specific (niche) market segment being targeted, and consider how the venture or product differentiates itself from others in the same niche. Consider the other market segments the venture could access. Ask the venture’s management team if you can talk to some of their customers as part of your due diligence to gather feedback on their needs and how the venture is meeting them. To gain more insight, consider talking to other customers in the market segment who may be buying from a competitor.
Industry Attractiveness : This domain evaluates the industry on a macro level, considering the barriers to entry the venture is operating within. What is the competitive nature of other participants in the industry? Are competitors numerous and fierce? Are ideas easily stolen? Are there one or a few significant, large competitors who will make it difficult to operate in this industry?
Sustainable Advantage : On a micro level, does the venture have a sustainable advantage that sets it apart? For example, does it have intellectual property that can be or is protected through patents? What are other factors that will make it difficult for others to copy or replicate the venture’s products or services?
Mission, Aspirations, and Propensity for Risk : What are the founding team or entrepreneur’s mission and aspirations? The strength, audacity, and integrity of an entrepreneur’s mission, vision, or goals can be an indicator of the attractiveness of the opportunity. Starting and building a new venture is rife with uncertainty. Therefore, the founding team or entrepreneur must have the appetite and propensity for risk and the desire to navigate risk strategically and intelligently.
Ability to Execute on Critical Success Factors : A key question here is whether the founding team or entrepreneur does what they say they are going to do. Ideas are a dime a dozen, but execution and the ability to actually realize ideas, seize opportunities, and say no to things that do not help the venture succeed is critical.
Connectedness Up, Down, and Across the Value Chain : Does the founding team or entrepreneur have sufficiently strong connections with their customers, suppliers, potential partners, and distribution channels to deliver their value proposition? Connectedness up, down, and across the value chain is a good indicator of the founding team’s depth and breadth of experience and network in their chosen field. Are they trusted in the field they are in, or are they fish out of water?
Impact Identification and Evaluation Tools
The final part of the integrated investing toolkit is comprised of tools for identifying and evaluating impact.
ACCESS TO ESSENTIAL RESOURCES MATRIX
In Chapter 1, I introduced the impact concept of access to essential resources. As you start to look at specific companies and ventures and consider whether to invest in them or not, think about all the types of essential resources being provided by the venture. Begin by making a list of them.
Essential Resource Type of Essential Resource Who is the Essential Resource for? Type of Access to the Essential Resource
Let’s use the example of myBestHelper, a startup that provides a convenient, technology-enabled service for families to find great caregivers. The company’s philosophy is that finding a caregiver is not only a hiring decision, it is like adding an extended family member. It is a major decision to let someone into your home and family life. Caregivers post their profiles on myBestHelper’s web-based or mobile-based platform, providing information about their skills and caregiving experience, as well as about their work style, hobbies, and interests, to help give families an idea of whether they would be a good fit. Families who post jobs on the platform, meanwhile, are asked to describe the work and tasks they require, as well as what kind of person they are looking for.
Essential Resource Type of Essential Resource Who is the Essential Resource for? Type of Access to the Essential Resource
Information for finding a caregiver Decision making Families, parents Convenient, efficient, choice
Childcare and caregivers Managing change, connection Families, parents Convenient, efficient, choice
Salaries, wages Means of exchange Caregivers, women, newcomers to a country, people new to the workforce Employment
The access to essential resources matrix, on the next page, is another way to visualize the impact outcomes that could be achieved by the venture you are evaluating.
Here is an example of the matrix completed for the myBestHelper example:
This shows the many essential resources and types of access that myBestHelper provides, and gives us a starting point for assessing the breadth and depth of the impact. It also tells us what data, metrics, and information we should be gathering to measure this impact.
BUSINESS IMPACT CANVAS
Modeled after the business model canvas, the business impact canvas2 helps us identify where in a venture’s business model there is impact or potential for it.
The impact a company has on its stakeholders, customers, suppliers, and broader community can be through the value proposition—that is, the products and services themselves—or the customer segment it is serving (if, for example, it intentionally serves low-income populations or marginalized communities). Its impact can also be in how it reaches and interacts with its customers—for example, by focusing on personal touch.
Impact can also be evident through a company’s supply chain by being more sustainable, ethical, or inclusive. Affordability or accessibility are examples of impact through the revenue model or cost structure.
COST/BENEFIT ANALYSIS FOR ALL STAKEHOLDERS
The cost/benefit analysis for all stakeholders is a tool that enables you to examine the cost of a venture to multiple stakeholders, as well as the benefits, in terms of essential resources.
For each type of essential resource provided by the venture you are evaluating, ask yourself, “Does the customer benefit from access to this resource? Do partners, suppliers, employees, the community, and the planet benefit from access to it?” You should also ask yourself whether the venture, its products, services, or activities will represent a cost or any negative impact to stakeholders.
IMPACT SUMMARY
These are the four areas of impact I look for in a venture.
Business impact
Social impact
Qualitative impact
Macro impact
By categorizing the impact I identify through the tools mentioned above into these four areas, I am able to summarize a venture’s impact in a quick, succinct way, paving the way for measuring and assessing the impact with the appropriate systems or tools.
Business impact : These are the more traditional measures of business and commercial success that are easily measured and accounted for, such as profit, sales, and number of customers—typical business metrics.
Social impact : These are measurable shifts and changes directly connected to your business’s positive impact. They are quantifiable, discrete changes, such as number of people impacted, number of jobs created, and number of affordable homes developed.
Qualitative impact : Quite often, qualitative impact is what really matters. It is captured intrinsically, emotionally, and intuitively. Such intrinsic-,
emotion-, and intuition-based outcomes are practically impossible to measure with numbers, but can be assessed and captured through stories and narrative. Although qualitative impact is often considered intangible, it is nevertheless critical and important.
Macro impact : This captures systems-level change, which is big picture, likely to be indirect, and is therefore harder to measure. Often closely linked with an entrepreneur’s vision and mission, macro impact is worthwhile to note and identify, as it can provide direction that influences business in the long term, and social impact in the short term.
Summary
Knowledge, awareness of risk and impact, and the information derived from applying this toolkit give us as much information as is possible at this stage. Now, it’s time to get started.
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1 “Business Model Canvas,” Strategyzer AG , accessed April 8, 2016, http://businessmodelgeneration.com/canvas/bmc . Creative Commons license http://creativecommons.org/licenses/by-sa/3.0/
2 Creative Commons license http://creativecommons.org/licenses/by-sa/3.0 /
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INTEGRATED INVESTMENT RELATIONSHIPS
I N 2012, I began building a new business to bring a diverse community of investors together. The business model evolved into Pique Ventures, an impact investment and management company, and Pique Fund, an impact venture fund, which is a private fund that pools investment dollars from several investors.
The way I find investment opportunities has evolved since 2012. Before Pique Fund was formed, when it was still an idea and loosely resembled an investor network, I began looking for entrepreneurs and ventures that could be potential impact investment opportunities. I put out general calls to people in my network by sending e-mails and evaluating almost anyone and anything that was introduced to me as a potential investment opportunity. I spoke at local events and considered entrepreneurs who came to speak with me at those events and the ventures they were building as prospects to be presented to the network of investors I was planning to assemble. I didn’t have much of a process, but it was a great way for me to learn. As time went on, I began to develop a smart, effective approach for identifying emerging entrepreneurial leaders and potentially investable ventures.
Soon I started to refine how I would find opportunities. Now my process is different and looks like this:
I no longer immediately act upon opportunities when I first meet an entrepreneur. Instead, I meet them several times after an initial meeting to see how they’ve progressed and to begin to test how committed they are to the venture.
I pass on opportunities that are at the idea stage. Things change quickly, and an idea today may never become an investable venture.
I get many referrals. I found that entrepreneurs and venture opportunities that were referred to me by people in my network who knew me and whom I trusted, especially other investors, tended to be of better quality; they had been through one stage of vetting already by the person who referred them.
I began to track and follow entrepreneurs and ventures that I was interested in. Rather than wait for entrepreneurs to come to me, I started to keep my eye on people who I thought were interesting and had the potential to be strong leaders in their field.
This approach to finding opportunities is centered on the intention to form investment relationships over time. As with anything, honing your integrated investing skills requires practice. In this chapter, I’ll walk you through some places to start investing and how to start building investment relationships, as well as some of the common forms of documenting investment relationships.
Getting Started
The world of investors is typically split into accredited investors and retail investors. The types of investments available differ for each type.
To be an accredited investor doesn’t mean you need to pass an exam or be certified by a third-party organization. Instead, it means you must satisfy criteria set by an investment regulatory body. In the US , this is the Securities and Exchange Commission; in Canada, it is a provincial securities commission.1 Accredited investor criteria typically apply to corporations, trusts, banks, and individuals, and are usually based on a minimum net worth or annual income threshold.
In the US , an accredited investor is defined in the Securities Act of 1933 as someone who has individual net worth (or joint net worth with their spouse) that exceeds $ 1 million at the time of investing in the securities of a company. A person’s net worth, for the purposes of the accredited investor definition, excludes the value of their primary residence. Alternatively, there is an income-based definition of accredited investor, which is an individual with income exceeding $ 200,000 in each of the two most recent years, or a joint income with a spouse exceeding $ 300,000 for those years, and a reasonable expectation of the same income level in the current year. So in the US , you can be an accredited investor based on minimum net worth or minimum annual income. Accredited investor definitions may differ from country to country, but most typically have similar criteria.
Retail investors, on the other hand, are individuals who meet neither the net worth threshold nor the income threshold. Retail investors are sometimes referred to as non-accredited investors, and are not permitted to invest in private investment offerings. In some countries, and certain provinces of Canada, retail investors can invest in the private offerings of their friends and family—but this isn’t legal in the US .2 Retail investors can access private impact investing opportunities only if the investment products have been designed for retail investors and meet certain regulatory requirements.
The average person is a retail investor and not an accredited investor. Because of this, it is difficult for them to access impact investment opportunities, particularly in private companies. The regulations were originally designed to protect investors from fraud and scams, but in my opinion, they now create an inequality in access to investment opportunities. Whereas accredited investors have access to a wide variety of investment types, retail investors are limited. Fortunately, the investment landscape is changing—but it’s happening slowly. I talk more about this in the section below on investing through a crowdfunding portal.
One of the best ways to start investing is with others. Alternatively, you can invest directly in ventures on your own by identifying and contacting entrepreneurs directly, evaluating opportunities, and conducting due diligence. There are many benefits to investing with a group. It gives you the chance to meet other investors, learn from their experiences, and possibly be mentored by them, and you get to share the effort and work. Research by Rob Wiltbank for the Kauffman Foundation in 2007 showed that investment returns were higher when at least twenty hours of due diligence and evaluation on a private venture were performed; the more hours spent, the better the returns.3 A group of investors can share and split the work that goes into due diligence, saving you time, money, and effort.
Investment Clubs
An investment club is an informal way for investors to organize themselves in a group and invest together. Clubs focused on investing in private ventures are presently limited to accredited investors. Retail investors can organize themselves into an investment club and invest in publicly traded stocks and bonds of values-based companies or invest in mutual fund units. Members of an investment club might identify investment opportunities together, or work off the strengths and expertise of individual members. If one or more members of the investment club have more experience identifying opportunities or has greater access to deal flow through their network, it may be advantageous to rely more heavily on that member’s connections.
The main benefit of an investment club is the flexibility in the amount you invest and the goals of the club. The key is finding or forming the right group for you. The challenges of an investment club are in finding the right fit and mix of people that you feel comfortable and aligned with. You need to find people you trust and get along with, and make sure that there is a mix of people with diverse backgrounds to cover different aspects
of running the club and evaluating investment opportunities. Ideally you want a group of people who can also learn from each other.
The National Association of Investors Corporation4 provides resources to people in the US who want to join or form an investment club.
The following are the key features of an investment club, and the steps to forming one:
Gather a minimum number of people together to invest as a group, create a big enough pool of investment dollars, and have enough variety of experience and connections for deal flow.
Set a schedule for meeting regularly.
Take the time to get to know each other as investors, especially if you aren’t well acquainted. Clubs might form with people who already know each other and are friends, or with one central person who is the mutual connection for all the members. It may start with a couple of people getting together and bringing some other friends along with them. In all cases, though, knowing someone in a business or social capacity is different from investing with them, so it is worth spending the time to get to know each other as investors.
Encourage everyone in the club to share with the group what their individual and mutual goals are.
Have a candid conversation early in the formation of the club about how much each person is willing to invest.
Designate someone as the club manager and identify another person as their backup.
Keep good records and have a system of keeping track of when members joined the club and how much they will invest. Keep track of what the club invests in.