As we shared last month, we at the Accelerator are hoping to bring a bit more transparency to the world of seed-stage impact investing in India. To that end, we’re interviewing funders about what they’re really looking for–and not. Our first interview is with Dave Richards, Managing Director of Unitus Seed Fund (read more about Dave and Unitus below).
Firstlight.vc: What sectors are you focused on? Within those sectors, what types of companies are you particularly interested in? What do you avoid?
Dave: We are sector and geography agnostic within India. We are looking at startup companies in livelihoods, education, healthcare, energy, mobile services, etc. A critical criteria for us is that the business must have potential for providing benefit to a significant scale of BoP [Base of the Pyramid] populations. Businesses we particularly like include: livelihoods-related, services, involve technology and address big challenges with innovative approaches.
We are looking for businesses which are beyond the concept stage and have at least a small pilot completed. Our sweet spot is funding “scaled pilots” in order to validate replication, refine operating processes and better understand unit economics before seeking growth capital to rapidly expand scale up.
We are still trying to figure out how we might invest in products businesses and businesses which will require a lot of Capital Expenditures (although we think there are some interesting opportunities to innovate with lease financing to address this). We really like healthy recurring revenue “subscription” models as they provide easier adoption by customers and typically larger life-time value of customer which provides more flexibility for investment in customer acquisition which is a critical investment for every business.
How many investments have you made in the last twelve months, and what was the average size of those investments? What about the next twelve months?
We just launched in October 2011! We are hoping to announce our first few investments in the next 30 days. We are making initial investments of $50,000 to $100,000 and then follow-on investments for businesses who make significant progress.We are expecting that we will be co-investing in many situations.
We have targeted to make an initial 3-5 investments by April 2012. Based on our learning, we will consider some much more substantial seed investment commitments.
Walk me through your diligence process and timeline.
When we are the lead investor, we are targeting a maximum of 4 weeks from accepted term sheet to investment close. This includes due diligence and investment-related documentation. Our due diligence is intended to be “right-sized” for the size of investment and the early-stage of the business. We focus primarily on interacting with the promoters and other key employees. We have a checklist of standard questions and documents we want to review which we send to the promoters. Then there will be other specific questions we’ll have and things to see based on the specifics of the business and situation. Overall, though we are most focused on what you are going to accomplish and learn in the next phase we are providing funding for.
How do you prefer that an entrepreneurs approach you?
Directly contacting us is fine (there’s a form on our website). Better is via an introduction from someone we know and trust who likes what you are doing. It is fine to reach out to us before you are ready to raise capital in order to educate us about what you are doing and let us get to know you.
What investment structures do you like? What kind of ownership and decision-making power do you expect?
We prefer to invest via convertible preferred stock.We only make minority investments and want the management team to have a significant ownership interest in the business to keep them motivated as owners. We expect to approve overall operating plans but don’t expect to micro-manage the business execution. We also expect to have typical investor protections and the right to participate in future investment rounds.
How much cash do you have to invest right now, and where does it come from?
Our initial capital comes from Unitus Investment Management, the non-profit, mission-related investment vehicle for Unitus Labs (also a non-profit). This capital was generated from our ownership stake in Unitus Equity Fund, so we are re-investing our returns from previous investments in social enterprises. We have not announced our total capital commitment to Unitus Seed Fund.
How do decisions get made within your firm? Who makes them, at which points?
We source seed investment opportunities through our various networks including the Unitus family, other investors and other relationships. Once we determine an investment opportunity is a good fit, I present to our investment committee. Our investment committee approves for us to move ahead with creating a term sheet and then once accepted, we complete due diligence to confirm our understanding of the business. If everything checks out, then we setup appropriate investment-related documents and make the investment.
What are some of your Big Red Flags when you look at a company? What have been some deal-stoppers in the past?
We are looking for a management team with sufficient previous operating experience and capability to learn and adapt quickly as needed in order to build the business to the next level and beyond.
- For hybrid models (where you have both for-profit and non-profit entities), the scale-up of the for-profit business cannot be dependent on scale-up of grant funding for non-profit.
- High customer acquisition costs (in proportion to revenue) are something which can be symptomatic of a difficult-to-scale business.
- Business needs to have a strong and defendable value proposition.
- Businesses that rely on “elephant hunting” (closing a few big customers/distributors) sales strategies are very challenging as a key execution element is out of entrepreneur’s control.
What risks are you willing to take? What aren’t you?
Generally, we want to see customer demand already demonstrated through a reasonably successful completed pilot. We are less interested in longer-term financial forecasts and pricing models as these will likely change. We are more interested in unit economics and how it can be improved to enable capital to be used for efficiently in order to grow as well as to have efficient operating costs in order to have sustainable competitive advantage. We are willing to take more risk on quality management teams and big impact opportunities.
If you are an impact investor, how do you balance financial, social, and environmental return? What are your financial return expectations?
We are looking for businesses where the social impact (in our case, improving lives of BoP) is inherently built into the business operating model. That is, as a business scales, so does the social impact. Our capital is patient capital. We are not looking for an early exit. But, we do require an exit opportunity.We encourage our portfolio companies to demonstrate potential for market-rate financial returns, not because we are expecting this for ourselves, but because if the business wants to reach its impact potential, it is most likely going to need to raise future upstream capital from mainstream investors. Overall, we believe in a future where strong financial returns can be realized alongside strong social impact. We view environmental return as a bonus, not a requirement. That said, we don’t like businesses that provide environmental degradation.
More about Dave Richards and Unitus: Dave is Managing Director of Unitus Seed Fund, is CEO of Unitus Labs, and blogs at DefeatPoverty.com. He has been an entrepreneur and involved in many Internet, digital media, mobile and enterprise technology startups. Based in Seattle and Bangalore, Unitus Seed Fund is part of the Unitus family which includes Unitus Equity Fund, Unitus Impact and Unitus Capital.