The first rule of being a social entrepreneur is to not call yourself a social entrepreneur.
I recently posted a piece explaining why people invest in startups. I toyed with the idea of adding a fifth reason, but that reason is so problematic that I decided to ignore it for the sake of helping founders be most effective at fundraising. Instead, I will address the dilemma in this post.
Calling yourself a social enterprise when seeking investment is a horrible idea. Tweet This Quote
We all want to make a positive impact on the world, even for-profit investors. So rather than donate to a charity addressing the same problems, we invest in a for-profit with potential for returns.
But calling yourself a social enterprise when seeking investment is a horrible idea, as is courting self-prescribed “impact investors.” I should know, I was/am both of these things. What I’ve learned over the years is you can achieve the same business and impact goals without the labeling – and the labeling will significantly hurt your chances of success in fundraising.
Somehow, when we put our “impact” or “philanthropy” hats on, we magically forget about results and sustainability of the business. But to get past our rational investment filters (which may include third parties like accountants, wealth advisors, spouses, and so on), an investment has to stand on its own from a returns perspective. Instead of one plus one equaling three, it ends up equaling 1.5 in our final calculus.
My advice to founders is to bake the impact into the profit model. Tweet This Quote
Investors are notorious for “kicking the tires” and not actually investing. Impact investors are even worse, because they don’t realize the psychological trap they have put themselves in.
My advice to founders is to bake the impact into the profit model. The more profit you make, the more impact you should be making and vice versa. In other words, if you are a social entrepreneur, it should be impossible for you to make good money and not have an impact. You should be obscenely profitable, or you are not doing your job as a social entrepreneur.
You should be obscenely profitable, or you are not doing your job as a ‘social entrepreneur.’ Tweet This Quote
My advice to “impact investors” is twofold:
- Stop talking to other impact investors.
- Filter your possible investments by the impact you want to make, but make your actual decisions based on return on investment.
If founders have a baked in profit-impact model, then you will be in good shape on both fronts. If not, then you shouldn’t invest.
This originally published on Medium.