Example 2 of the neat info coming out of CB Insights: 146 Startup Failure Post-Mortems. Not trying to be negative here, but there is a possibility of learning something from others' troubles.
The graph above shows back when they only had 101 tanked dreams in the data set. #1 cause of wreckage: "No Market Need".
Potential AFI Investors take note: that's why one of our key "qualification" metrics is that the company be up and running, products on the market, and high proven customer demand. Which, interestingly, we're actually seeing a lot of. In the food subsegment of the LOHAS (lifestyles of health and sustainability) market, many, many of the firms that come to us have this problem: "Customers want 5-10 times what I can produce, but I need working capital / equipment / people to satisfy demand." That's a good problem to have!
One of the best email newsletters we get is from Anand Sanwal at CB Insights. They look at data from the professional investing world and spin it around in most interesting and clever ways.
Example 1: Let's say you are an entrepreneur looking to use the typical Silicon Valley / tech / VC model for raising money and you're at "Seed" stage. Of course you're special, but what have over a thousand other companies who've been where you are experienced?
Anand and team looked at a cohort of companies that raised seed in '09 and '10, and followed them through November of this year. What they found was that 77% of the companies "are either dead, the walking dead (bad outcomes), or became self-sustaining".
Of those 1,027 companies studied, 40% raised a second round, allowing them to chase that gold ring; 12% exited (yaaaay!), and 48% went zombie or "self-sustaining".
Here's a telling comment: Anand says being self-sustaining is "a potentially good outcome for the company but probably not good for their investors". Wow! "self-sustaining" gets lumped in with "dead"! Too bad those investors used financial vehicles that equate the two!
What's this mean for investors? What's this mean for entrepreneurs? Maybe we're reading the data wrong, but we're just not sure about this investing model for either investors or companies, especially in the food and ag space. Looks like bad odds, unless the company and investors figured a way - other than seed equity - to work together. Is that possible? (Spoiler alert: it is!)
Example 2: coming soon: why CB Insights thinks that companies fail.
There is a terrific organization in New York City called the Local Farms Fund, a high-impact, socially responsible farmland access venture co-founded by nine Slow Money NYC visionaries and Working Farms Capital (which manages and develops farmland ventures looking to prosper from the long term growth of local and organic foods). Local Farms Fund connects sustainable, early-stage farmers with access to land in what must be the most expensive region for land in the country. Wouldn't it be great if we had something like this in Austin?
14 page pdf from Merrill Lynch's Global Wealth and Retirement Services describing impact investing, the investment landscape, investor demand, and corporate response to that demand. Mainly focused on ESG, but of interest to the general impact investor as well.
Forbes recently ran a piece by Alicia Robb, who is a senior fellow with the Ewing Marion Kauffman Foundation. She was moved to address the issue of female representation in angel investing, a topic that was prevalent at the Angel Capital Association's (which gets photo credit here) annual summit. Women have long been under-represented in the field of angel investment, and it appears to impact the amount of investments in women-owned business. The numbers are improving, but there's still much room for improvement:
"Females have historically made up less than 15% of the angel investors in the United States. The University of New Hampshire’s Center for Venture Research estimated that women angels represented 19.4% of the angel market in 2014, which was a significant increase from the 12.2% number from just two years prior. Women-owned ventures accounted for 23% of the entrepreneurs that were seeking angel capital and 19% of those entrepreneurs that received angel investment in 2013."
Click here to read more.
A "unicorn" is venture capital slang for a company with a valuation of at least $1B. Conventional wisdom says that one "unicorn" can "make" a fund, or a VC's reputation. One can argue that the majority of the VC industry is built around searching for, and swinging for the fences in hope of, that unicorn.
But, Christopher Calnan writes in the Austin Business Journal, they're tough to find, and for the moment at least, don't bother looking in Central Texas.
... Invest in a Social Enterprise. Clare Jones of the UK's Clearly So, an impact investment house, asks in Fast Company 6 invest-focused questions:
Clare's questions were in response to Jean Case's March '15 Fast Company article asking 6 questions for entrepreneurs to consider prior to starting a social enterprise:
Crowdfunder.com CEO Chance Barnett opines eloquently on the relative merits of crowdfunding, angel investing, and venture capital in this Forbes piece. $34B is expected to be crowdfunded in 2015, just over (hey, what's a couple billion dollars here and there) VC's $32B.
He writes, "What’s more, the current equity crowdfunding market is limited to accredited investors only. But what happens when an entirely new class of investors of potentially 250 million Americans poised under Title III and Title IV of the JOBS Act are empowered to participate and invest for the first time under new equity crowdfunding laws? The potential growth and impact could be staggering."
Barnett continues, addressing the potential for new hybrid VC / crowdfund approaches; transparency issues in private company investing; and new potential "venture exchanges".
We'd call this a must-read for anyone interested in the evolution of this space.
Then, if you really want to get your wonk on, try this one: "Why Choose? Why Not Do Both A Rule 506 Offering Followed by a Regulation A+ Offering?" by Jim Verdonik.
Transcript of story on PBS Newshour, actually from June 18, 2014.
Some interesting facts from the story:
Here's a detailed overview of the online lending space from Forbes, 9/23/14, "Alternative Online Lenders Fill Funding Needs For Small Businesses", which includes some very interesting charts and graphs.
Cleantech investor Rob Day argues in greentechmedia that impact investors who seek less than market returns actually hurt the overall proliferation of impact investing by refusing to demand replicable, attractive returns.
He closes with "Whether it's to help establish new scalable implementation platforms for clean technologies, or to help establish new venture financing models for the backing of clean technology innovations, there's a critical role for impact investors to play in unlocking big scalable capital. Bringing such follow-on capital is in fact a major, explicit goal for many impact investors.
For those who do want to have that impact, however, this ongoing argument around how much returns-sacrifice to accept rather misses the point, in my view. Sacrificing returns often fails the test of replicability. Buying down risk, if done the right way, is, on the other hand, key to establishing replicability.
So impact investors, do you want your efforts to be amplified with follow-on capital? Then consider taking on more risk -- not sacrificing returns."
Equity research firm Ocean Tomo recently released data on "intangible market value", that is, the value of assets within the S&P 500 that are NOT captured on the balance sheet as tangible assets: cash, property, plant, equipment, inventory, and the like. And the number is astounding: 84%!
Equities.com reports on those findings, linking the failure of Generally Accepted Accounting Principles (GAAP) to properly account for either the value contained by tech firms in information, relationships, intellectual property, or "eyeballs" to the value contained in social enterprises like soil remediation, ecological activity, and social capital.
We find this so interesting: we often hear that small, local, sustainable businesses are "hard to value" because of the lack of "traditional" assets, which seemed odd in the light of astronomical valuations for tech firms proudly proclaiming their lack of business model or revenue plans. What do you know, it turns out that most of the entire market's valuation is mostly made up of something else, something special, something "intangible".
Maybe we just need to look in different places to find the "value" and the opportunity for significant increases in that value, in our local sustainable food companies!
One hour recorded webinar from the Angel Capital Association hosted by with panelists Bonny Moellenbrock, Executive Director of Investors' Circle; Kenneth Merritt, Managing Director of North Country Angels; and Michael "Luni" Libes, Founder of Fledge LLC.
This is one of the most thorough, and interesting overviews of Impact Investing we've seen. Highly recommended.
The Q&A part, at the end of the webinar, starting at around minute 33, is particularly illuminating.
Writing the AFI blog, and working on AFI in general has been strange these last many months because of the lack of frustration one would normally expect from that four letter word "w-o-r-k". But one thing certainly has my goat (which should not be confused with my goatee, which those that know me know has recently gone the way of Sampson's hair...) is what I consider the arbitrary and liberty-infringing position of the Securities and Exchange Commission regarding "Accredited Investors". Click that link for the SEC's definition; we can just think of it as "rich folks".
In general, the rule is that you have to be "accredited" to invest in private company "securities", where "security" certainly means private company stock equity, probably means royalty funding, and is generally not thought to mean simple lending. Their thinking is that only rich folks are smart enough to know whether it is a good idea to invest in this or that company. Ignore the fact that anyone, accredited or not, with half a million dollars rolling around in the console can go to the neighborhood exotic car dealer and buy a Lamborghini Avendtador (you be the judge as to whether that is a smart move), but the unaccredited person with $15k they'd like to put into the neighborhood vegetable farmer, can't. That "can't" really kills me, when I meet well intentioned Austinites who want to participate in AFI as investors, but we can't let them.
Fortunately, there are exceptions:
Do you know of other opportunities for Retail Impact Investors? Leave a comment or email email@example.com.
Lee Hower writes in the NextView Ventures blog about the sources of Venture Capital "Most of the dollars a VC firm invests come from outside limited partner investors (LPs). The actual partners of a VC firm (GPs) will typically invest a minimum of 1% of the total size of their fund."
He continues "but the bulk of the capital in the VC ecosystem comes from large institutions like pension funds, endowments of universities and hospitals, charitable foundations, insurance companies, very wealthy families (aka family offices), and corporations."
In case you're wondering, 100% of AFI's capital comes directly from the private individuals that decide, on their own, to invest in the companies introduced by AFI.
SEC Commissioner Luis Aguilar Presses the Need for Greater Secondary Market Liquidity
Crowdfund Insider reports on Commissioner Aguilar's March 4, 2015 speech to the Advisory Committee on Small and Emerging Companies in Washington DC. Writes author Anthony Zeoli: "Unlike traditional stocks and bonds which an investor can generally sell and trade at will in established exchanges (e.g. NASDAQ, NYSE, etc.), there currently is no marketplace to offer and sell most privately placed securities... "The more liquid privately placed securities can be made the more viable they will be to investors and the more capital which will ultimately flow to small business."
Financial advice and investment management services provider HIP Investor offers a framework, and set of steps, to move portions of your portfolio into "HIP" (human impact and profit") investments.
"The pickle- and jam-making set now gets the tech-startup treatment—with a do-gooder twist", writes Anne Kadet in the Wall Street Journal about the Food + Enterprise Summit held in Brooklyn recently. The event was a Pitch Competition organized by AFI's friend Derek Denkla, where a five judge panel heard business plans from artisanal food makers.
Could something like this be in AFI's future? We sure hope so... Fall 2015?
"NEW YORK, Feb. 27 /CSRwire/ - Over seventy percent of active individual investors (71%) describe themselves as interested in sustainable investing, and nearly two in three (65%) believe sustainable investing will become more prevalent over the next five years, according to a new survey published today by the Morgan Stanley Institute for Sustainable Investing. The new report examines the attitudes and perceptions of individual investors towards sustainable investing and considers the broader implications for investors, corporations and governments."
One question we at AFI often get has to do with investor returns, and whether investors need to accept sub-market returns
"In 2013, only 19% of U.S. angel investors were women and only 4% were minorities, according to the Center for Venture Research at the University of New Hampshire.
Pipeline Fellowship, an angel investing bootcamp for women, works to increase diversity in the U.S. angel investing community and creates capital for women social entrepreneurs.
Since its April 2011 launch, Pipeline Fellowship’s angel investing bootcamp has trained over eighty women."
Wired magazine reports that "Instead of just offering a product, discount, or small reward in exchange for monetary funding, crowdfunded projects can now offer equity in exchange for public funding—if they use ." And "cable TV station CNBC and analyst outfit Crowdnetic are partnering to release a new crowdfinance index, aiming to give the investing public a window into how this new market is evolving."
Interestingly, on 2/4/15, the number one company on their list (Plant Growth Net Zero Aqualife), with $5.0M of their target $5.2M raise committed, is a San Diego shrimp company in the "Organic Food & Beverage" Industry.
Saker Nusseibeh asks, in The Guardian, "what is the purpose of investment?", then goes on to suggest "that in employing our resources we hope for some personal gain but also some wider societal benefit. The purpose of investment then must be to act as a pipe that links a nation’s savings (personal savings, pensions savings, insurance monies and so on) to its future economic growth and wellbeing."
News from AFI; Links to stories on business-for-good, private-company investing, fundraising, & sustainable food.