Social Innovation Forum
The Social Innovation Forum (SIF) launched its 4th annual Social Business Accelerator on January 19, kicking off 12 intense weeks of programming for the six social impact businesses in the cohort. Curious about what goes on in an accelerator? Interested in learning more about impact investing? We’ve launched this blog series, Insights into Impact Investing, to offer a glimpse inside our Social Business Accelerator and share some of our learnings from our work in the emerging field of impact investing.
At the Social Innovation Forum’s March 8 accelerator session, we welcomed a panel of speakers to offer their insights into topics related to valuation, financing, and the social impact goals of investors. Joining SIF were Ramana Nanda, a professor at Harvard Business School specializing in entrepreneurial management and finance, Geraldine Alias and Erin Kerr, both Portfolio Managers at Choate Investment Advisors, and David Sand, Chief Impact Investment Officer and Chief Investment Strategist at Community Capital Management.
Ramana Nanda: Entrepreneurial Finance
The session began with Professor Nanda’s presentation on entrepreneurial finance. His presentation focused on three broad questions:
- How much external financing does a startup need to raise?
- What is a reasonable valuation and what are appropriate terms?
- Who is the appropriate investor to raise money from?
Professor Nanda mentioned that it is difficult to know a company’s valuation through forecast. For example, leading VC firms have oftentimes passed on initial rounds with companies like Apple, Ebay, FedEx, and Google. He advised that startups think about raising cash as a method to get to a decision point based on experimentation and resulting information. Cash on the balance sheet can also act as “an insurance policy on a bad contingency.” Professor Nanda also advised that since VCs like “asset-light businesses,” so should entrepreneurs. A startup with higher profits and lighter assets can grow faster without raising external finance.
David Sand: Financing Needs of Early Stage Companies
David Sand shared followed Professor Nanda’s engaging presentation with his own insights into the needs of early stage companies, particularly around the opportunities and considerations associated with debt financing. Community Capital Management is the largest impact fixed income firm in the United States, and its client portfolio focuses heavily on affordable housing. Sand spoke about alternative financing trends for early stage social enterprises, including the growth of online lending, crowdfunding mechanisms, and royalty finance.
Erin Kerr and Geraldine Alias: Growing Interest in Socially Focused Investment Opportunities
Erin Kerr and Geraldine Alias followed Sand by providing background on Choate Investment Advisors. One of their main points centered on the growing interest of their clients in socially focused investment opportunities, where they described the sophistication of their client base which is increasingly expecting more details surrounding these investments. As a result, there are more opportunities for them to source direct social impact investments. Alias also stressed that an important consideration is that their clients “want to do good, but also want to see positive investment returns.”
Interactive Discussion
Once the session broke out into whole group discussion, our Entrepreneur cohort asked the panelists many questions related to valuation and financing their businesses. In response to several questions, Professor Nanda stressed that there should be a balance between seeking an aggressive valuation up front as opposed to a lower valuation and “doing it in steps.” There is always a tradeoff within rounds between cash flow and control rights, and a higher valuation will most likely involve more stringent terms. According to Alias, “When it comes to negotiating a valuation, when both sides have gotten to the point of feeling uncomfortable, you’re probably in the right place.”
One entrepreneur had a question regarding forecasts, and how “best- and worst-case scenarios” should fit into these forecasts. The panelists responded by saying that investors are really just looking for a path towards a successful investment. They are aware that most startups fail and that they will lose out on the majority of their early stage of investments. However, they will be intrigued if an entrepreneur can showcase a realistic path towards profitability. According to Alias, “As an entrepreneur, your forecasts need to stay within reality. In order to do this effectively, be aggressive without being egregious.”
Another entrepreneur asked a question regarding FDA approval, and how that should impact the valuation of her company. Professor Nanda pointed out that FDA approval takes care of technology risk and reimbursements, and that market size should now drive the valuation. When considering valuation, science-based ventures often “work backwards” through technical milestones. Entrepreneurs should be seeking to raise right after a milestones such as FDA approval.
Following the discussion, Geraldine Alias ended the session with a final but important insight into impact investment trends. She pointed out that there has been a growing push from investors for impact metrics. These investors want to make sure that their investments are on-mission, and that they are holding entrepreneurs accountable for their expressed impact. Impact metrics speak to the importance of quantifying impact in a rigorous way, as well as the significance of a larger impact story. Gathering and analyzing impact data in a rigorous way is still difficult and unclear for many entrepreneurs. However, it is a vital practice to prevent the dilution of the field of impact investing. If true impact is rendered meaningless, then that could hinder a growing movement.
About The Speakers
Geraldine Alias is a Portfolio Manager at Choate Investment Advisors. As a Portfolio Manager, Geraldine focuses on investment research and works closely with clients and the Wealth Management Group to provide tailored solutions for their wealth management needs and investment goals.
Prior to joining Choate, Geraldine spent over a decade advising and investing in privately held companies. Geraldine was a Principal at North Bridge Growth Equity and at Volition Capital, and was a Vice President at Fidelity Ventures. While at these private equity firms, she led investments in software, communications, healthcare and information services companies, and served on several boards of directors. Prior to business school, she was an Associate at Battery Ventures, where she focused on media, e-commerce and communications investments. Before starting her career in alternative investing, she was a Business Analyst in McKinsey & Company’s Silicon Valley office.
Geraldine is co-chair of the Boston Symphony Orchestra’s Investors Committee and was a judge for the EY New England Entrepreneur of the Year Award in 2014 and 2015. Geraldine graduated from Princeton University with a BSE in Electrical Engineering and earned an MBA from Harvard Business School.
Erin Kerr is a Portfolio Manager & Chief Compliance Officer at Choate Investment Advisors. As a Portfolio Manager, Erin focuses on investment research and works closely with clients and the Wealth Management Group to provide tailored solutions for their wealth management needs and investment goals. As Chief Compliance Officer, Erin is responsible for developing and managing all compliance initiatives to ensure that the Choate Investment Advisors and its employees are complying with relevant regulatory requirements and internal policies and procedures. Erin is also a member of Choate Investment Advisors’ Sustainable, Responsible and Impact Investing Committee, which identifies attractive investments that also provide a social and environmental benefit. Erin is a CFA Charterholder and a member of the Boston Security Analysts Society.
Erin joined Choate Investment Advisors after receiving her MBA from the Boston University Questrom School of Business with dual concentrations in finance and strategy and business analysis. Erin graduated with honors and was inducted into Beta Gamma Sigma, an international honor society that recognizes academic achievement in the study of business for the top 20% of students. While attending business school, Erin worked in development at Boston University School of Law, specializing in cultivating long-term relationships with donor constituents. Erin previously graduated magna cum laude from Boston University with a BA in International Relations and an emphasis on European Political Economy.
Ramana Nanda is an Associate Professor of Business Administration in the Entrepreneurial Management unit at Harvard Business School. He teaches Entrepreneurial Finance in the second year of the MBA program and in HBS executive education offerings.
Ramana's research focuses on understanding the drivers of financing constraints for startups and on the ways in which the structure of the financial sector impacts innovation and entrepreneurship in the economy. One strand of research has looked at debt financing for small businesses. A second strand examines the financing of innovation and the commercialization of new technologies.
Ramana is a Faculty Research Fellow in the Productivity, Innovation and Entrepreneurship Program at the NBER, and a Faculty Affiliate at the SME Initiative of Innovations for Poverty Action. At Harvard University, he is a Faculty Affiliate of both the Center for International Development and the Center for the Environment. He received his Ph.D. from MIT's Sloan School of Management and has a BA and MA in Economics from Trinity College, Cambridge, U.K. He is a recipient of the 2010 Kauffman Junior Faculty Fellowship in Entrepreneurship Research and the 2015 Kauffman Prize Medal, that is awarded annually to one scholar under age 40 whose research has made a significant contribution to the literature in entrepreneurship.
Prior to starting his Ph.D., Ramana was based in the London and New York offices of Oliver, Wyman & Company, where he worked primarily with clients in global capital markets as well as in small-business banking. He continues to advise startup ventures on their financing strategies, with a focus on the biotechnology and clean energy sectors. He also works with philanthropic investors who use market-based solutions to address poverty and promote entrepreneurship in developing countries.
David F. Sand is Chief Impact Investment Officer and Chief Investment Strategist at Community Capital Management primarily responsible for business development, client and consultant service and the creation of new products. David has more than 30 years of investment management experience and is a trailblazer in ESG/impact investing. He is a well-regarded speaker, lecturer and author on investing and ESG/impact investing issues. He co-founded Access Capital Strategies serving as its president and chief investment officer from 1994 to 2010. In this capacity, he pioneered the development of market-rate, fixed income impact investments for institutional investors. He has worked as a consultant to Community Development Financial Institutions (CDFI's), non-profits and social enterprises. In the early 1990s, he was the founding project director for CERES leading the effort for transparency in corporate environmental reporting and engagement amongst NGOs, corporations and stakeholders. He received his bachelor's degree from Princeton University and a master's degree in public administration from Harvard University's John F. Kennedy School of Government. David serves on the New York Advisory Board for Enterprise Community Partners where he is Chair of the Loan Committee and is a former board member of U.S. SIF: The Forum for Sustainable Investment. David holds his FINRA Licenses: Series 7 & 63.
About the Author
Marissa Silapaswan was the Social Innovation Forum’s Impact Investing Fellow from October 2015 – April 2016. In this role, she worked closely with SIF’s Executive Director to support the Social Business Accelerator program, including conducting outreach and recruitment, managing a network of mentors, and coordinating meetings, workshops, and events.