Venture Capital 101 for For-Profit Social Entrepreneurs

While the world of traditional venture capital and social venture capital still operate on a somewhat different set of objectives, the fundamentals of venture investing are largely shared. What's more, there is a similar set of trends shaping the context in which both fields operate. This post is a 101 for aspiring for-profit social entrepreneurs who are just starting to figure out the game.

Check out the presentation below, "The New Face of Venture Capital," which is an excellent overview for the concepts in this post.

1. Stages of Investment. One of the most important things to recognize is that just as there are different stages of an organization's development, there are different stages of capital. Investors make decisions about how to fund based on their priorities and risk tolerance. For example, seed stage investors tend to like working closely with entrepreneurs or organizations, and have a higher tolerance for risk. Later stage investors may be able to put in more money because there is more information (about revenue, customers, growth) and therefore, less risk. When social investors talk about the growth of a "funding food chain," they're referring to the fact that the goal in social venture capital is to provide more funding opportunities at each stage, and to make sure the different people allocating those dollars can be sharing information about potential deals.

2. Exits. Venture investors get paid when there is an "exit" or "liquidity event." This usually means one of two things -- either an acquisition, where a larger company buys the company they invested in -- or a public offering where the company becomes listed on a stock exchange. The nature of exits dictates a lot about the nature of investment markets. In the dot com bubble, exits were all IPOs with huge returns, so investors threw in an enormous amount of cash. In today's web space, exits are usually acquisitions, and the somewhat smaller returns mean more activity in comparatively smaller angel investing. Exits are a big challenge for social enterprises. Few grow to the scale that warrants a public offering, and even those that do don't love the idea of being ruled by a share price related solely to financial return. Acquisitions can often offer a better route, but sometimes (if not many times) larger companies don't share all of the social and environmental priorities of the companies they buy.

3. Bootstrapping. This is something that social enterprises are, by necessity, familiar with. Bootstrapping is when a company decides to take little to no money and instead builds out their business model or takes on contract work to pay the bills while they grow. As the cost of starting certain types of web-based businesses has come down, bootstrapping has become a desirable option for even some companies that could raise external financing.

4. Pivots and Achieving Product-Market Fit. Product-Market Fit is what happens when the problem you've identified locks up with the solution you're proposing, and your company begins to really get traction. For most startups, that takes some experimenting. There is a growing chorus of folks are trying to build expectation of pivot into the normal venture model. In other words, your business plan is probably going out the window, and the most essential skill you can develop is to listen to customer feedback and adapt quickly. Unfortunately, most of the early stage funding competitions in social entrepreneurship reward extensive plans and careful pitches rather than successful adaptation.

So what do you do with this knowledge? First, it's important to remember that the most important thing is to flush out the problem you're trying to solve and your working answer. Everything else has to follow that. Second, when assessing the market opportunities for your solution, it's important to think about what type of business you're actually building, and wether venture investment with its need for exit-based returns is the right fit.

For those who want to learn more about this sort of thing, search around Slideshare, an incredible resource for these sort of presentations, or check out the new book "Mastering the VC Game."