Although venture capital in the developing world is notably different than in the developed world, there are still some things to be learned from the Silicon Valley venture capital process. Some of the key criteria venture capital investors look for are:
- TEAM - Probably the most important of all criteria. An experienced entrepreneur and management team must be skillful, smart, and willing to adapt their business to changing conditions. Venture and social impact investors realize they are investing in imperfect companies and incomplete teams - that is part of the risk.
- VALUE PROPOSITION - Must be unique, defensible, and solve a real problem. We often ask, "Is this a product masquerading as a company, or is this a value proposition capable of generating whole families of products and services?"
- BUSINESS MODEL - Credible financial assumptions and rational forecasts serve as the foundation for any business model. From there, we ask whether enough money is being raised and analyze the smallest economic unit on which the company can profitably operate and how much financing it takes to get there. It is surprising how often the costs of scaling up makes the economic unit more of a vision than a reality.
- GOVERNANCE - Is the legal structure of the company able to accept multiple forms of investment? Are there checks-and-balances in place for key decision the company will face? Is the company supported by key advisors and outside board members who will both guide the management team and open doors of opportunity? Finally, is the company held to closely or by too many related parties? All of these issues are especially present with candidates for social impact investing.
- VALIDATION - Although a normal course in venture investing prior to any funding going in to the company, validation is a significant issue with social enterprises. Often, social impact investors rely on company-reported information only. It is a hugh mistake and could "taint the well" for future investments if our community is not careful. Impartial validation and reporting is one of the missing pieces in the social impact "market". It strikes to the core of what can help scale the market - investor confidence.
Another way to build investor confidence is to exceed expectations. In the small and growing business (SGB) sector, this is more about setting achievable expectations than chasing developed market rates of return. Still a larger portion of impact capital has a financial-first mandate and puts the conversation about investing in local SGBs on par with returns that are expected from investments in the developed world and its corresponding market efficiences, low cost of capital, stability, liquidity mechanisms, etc. A simple "risk adjusted return analysis" of investments in a developing country quickly shows risks going to infinity sooner than liquidity can rationally be earned. A concludsion is that we need to change the expectations and mobilize capital from sources that have accurately set expectations of return.
One of the other problems of overly high return expectations is the resulting "screen" that portfolio managers have to use when evaluating SGB investment opportunities: