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  • Print publication year: 2017
  • Online publication date: October 2019

3 - Seed Stage Investing: High Impact, But Not for the Faint of Heart

from Case Study 1

Summary

To meet a promising entrepreneur, be convinced their venture will thrive in the market, and subsequently invest at the ground floor; this is the exciting vision of seed stage investing. In this chapter we will explore some of the opportunities and “how to's” of investing in seed stage companies. Although a risky proposition, seed investing has nonetheless attracted investors who want to put their capital where it may be the only chance these ventures have to build and grow a potentially great solution to some impact challenge. An entire ecosystem of venture capital and angel investing has developed to support seed stage technology start-ups and other companies with large-scale potential.

As the market for impact investing has grown, however, it would appear the capital available for seed stage investing has not kept apace.

In the authors’ conversations with industry players, it is clear that many believe social entrepreneurs need capacity-building support to make their ventures “investment-ready,” and point to accelerators or incubators as a solution. Others advocate for philanthropic dollars to fill the funding gap while an organization tests its product and establishes a customer base. On the capital side, many interpret the seed stage gap as an investor issue; the economics of investing in a round of $500,000 or less in an early stage social venture just doesn't make sense considering the extensive due diligence, term sheet negotiation and ongoing monitoring of investments required by this type of investing. In addition, it can be very difficult to generate the deal flow to match an investor's financial and impact-based expectations as well as their geographic or issue area focus.

Compounding these issues, the whole discussion can be somewhat opaque, with outsiders gaining little visibility into funds, investors, ventures and deals within the seed stage landscape. This creates a level of uncertainty and reluctance to invest in the absence of such transparency and data. Each of these factors contributes to the frustration experienced by both investors and entrepreneurs trying to increase funding flows between impact investors and promising social entrepreneurs. But there are, nonetheless, opportunities in the exciting, risky, “deep end of the pool” that is seed stage impact investing. And for many, “going direct” is what impact investing is all about. Let us walk through some of the characteristics, both the challenges and opportunities, in this category of investment practice.