Navigating uncertainty: How impact-led startups can secure funding in 2023

Olivia Sibony, Head of Impact at Angel Investment Network, shares her insights on how impact-led startups can navigate the current investment landscape.

Investor interest in impact-focused startups has grown in recent years. According to research by Dealroom, impact startups are now worth a combined $2.3T. At the same time we are seeing a new tougher investment climate, with angel investors far more cautious about deploying capital. Q1 was the slowest quarter for startup investment since 2020.

For impact-led startups where profitability is balanced with making a difference, this can make fundraising a tough and challenging endeavour. Especially in a climate of higher interest rates and ongoing inflation. 

While the short term picture is tough, impact led startups need to focus on the long term, something they are naturally good at! The changing profile of investors should be one source of comfort. More than 4,000 investors have become signatories of the Principles of Responsible Investing (UNPRI), a United Nations’ supported organisation. This is responsible for more than $120 trillion US in assets under their management. The UNPRI has a commitment to “incorporate ESG issues into investment analysis and decision-making processes.”

So impact-led startups should take heart and have a laser-like focus on the key factors that could win over investors. Having helped hundreds of impact-led startups raise investment I think there are five key factors that should be considered.

1) Profit should be paramount

One of the key reasons impact led startups fall down as often as profit can sometimes come across as an afterthought. In order to be able to make the change you want to see in the world, a business model needs to be able to scale and win the backing of investors. Therefore the potential for profitability needs to be paramount. Investors will need to see how they can make a viable return even if they are also motivated by other factors. By having this front and centre of your proposition will ensure your pitch and proposal can stand out. 

A great example is Beyond Meat, the Los Angeles–based producer of plant-based meat substitutes founded in 2009 by Ethan Brown. The company’s initial products were launched in the United States in 2012 and just seven years later, the company went public in 2019, becoming the first plant-based meat company to do so. They tackle the challenge of meat consumption, one of the largest contributors to carbon dioxide, but also were able to demonstrate to investors the huge global opportunity in meat substitute products. The early investors were smart to back it.

At an earlier stage is Twin Science, an award winning education company that develops children’s STEM skills for sustainability, with both physical kits and a digital app as monthly subscriptions to schools as well as families. A clear profitable pathway is baked into their model with ongoing subscription revenue. They are achieving this while boosting the next generations’ science skills and potential to build a sustainable future. 

2) Don’t be afraid to make the case for ‘patient capital’

However at the same time you should feel emboldened to make the case for the sustainability of the long term, versus the traditional hockey stick growth that could be at the expense of environmental concerns. Indeed perhaps the downturn in tech valuations could be the right moment for a re-evaluation of how we assign value? After all Unicorn births are at their lowest level for 6 years.

In this new model, profitability is still central, but the growth trajectory would look very different in the future. Impact founders are likely affecting systemic change at a fundamental level and this requires a new way of working that is more collaborative and non-linear. In the long term, this makes a business more agile and able to navigate uncertainty, thus making it a more attractive investment with ‘patient capital’. 

3) Make sure you can measure the impact

Investors are now becoming increasingly wary of claims not backed up by evidence. Whilst in the past ‘self certifying’ enabled many companies to commit a lot of ‘green washing’, the move to more recognised standards is moving apace. The “Big Four” accounting firms — Deloitte, PwC, EY, and KPMG now have a new reporting framework for environmental, social, and governance standards (ESGs).  

Sustainable Development Goals are a good framework for understanding where the focus is needed to address the world’s biggest social and environmental challenges. But it’s not a measurement tool. Start-ups such as Vested Impact are bringing together Big Data, automation and qualitative input to create holistic impact measurement tools for companies. 

When you talk about metrics to investors, make sure to put equal weighting on your impact metrics as your financial ones. Investors will want to see clear evidence of how your startup is measuring up in the claims you are making about the impact you have. 

4) Ensure your processes are as purposeful as your business model

It is critical to avoid having good intentions being let down by a flaw in your operations and processes. One that could be quickly exposed by a knowledgeable investor. This involves a rigorous assessment of your supply chain to ensure there are no loose links that could shatter your credentials. Investors, alongside conscious and well informed consumers will be able to shine a light on anything that doesn’t add up.

Think through the end to end life cycle of a product or service. For example, it is not enough to merely produce solar panels if they are not produced in a way that is in itself carbon-efficient or that they might end up unrecyclable. if you run a mental health app, what are your people policies like around recruiting, benefits and inclusivity?

Similarly if you create sustainable building materials that use a Circular Economy model, are the machines you use to transform your materials energy-efficient? Are you paying a fair price for your materials and paying your suppliers in good time and are you treating your employees well? 

5) What collaborations can help you grow?

 Impact founders are often tackling the “wicked problems” which are particularly challenging to address. And doing it alone is just not an option. Impact founders would benefit from thinking outside the box in a non-linear way: thinking about the system they operate within, what other organisations, entrepreneurs, groups or movements also care about this? It is a fundamental move from competitive advantage to ‘collaborative advantage’.

Are they maybe in a different industry, contributing to the same big challenge from a different angle? Think of all the different stakeholders who care about the same broader challenge and how you could join forces with them, whether as a one-off or bigger collaboration, to get more traction, kudos/reputation and find new ways to move the dial. This could delay the need for immediate investment and indeed put you in a stronger position to get investment as a result.

The need for impact-driven startups to win financial backing for their problem-solving innovation has never been greater.  With the right approach they can win the backing of investors and ensure profit and purpose can walk hand in hand.

Join the world’s largest angel investment network, where global angel investors meet the great businesses of tomorrow.

Five red flags investors look for in evaluating startups

In a more competitive funding landscape, angel investors are critically evaluating startups with a more ruthless lens than ever. It is crucial that founders don’t get their fundraise off to a false start by having something that is a fundamental red flag for a potential investor. Understanding and addressing these common concerns can significantly boost a startup’s chances of securing funding.

We spoke to angel investors and experts on our network to get their take. From a lack of passion and commitment to inadequate industry knowledge, we delve into the key indicators that may raise doubts in the minds of angel investors.

1. Lack of passion and commitment

Angel investors want to see founders who are deeply passionate about their business idea and are committed to making it a success. If a founder appears disinterested, lacks conviction, or demonstrates a lack of dedication, it can raise concerns.

According to Xavier Ballester, Director at Angel Investment Network’s Startup and Property Divisions: “Investors want founders that are passionate and committed to their startup. This comes through so clearly from the investors I speak to and is more critical than ever in today’s tougher funding landscape. Investors want to see that the founders they back are willing to work hard, make sacrifices, and persist through challenges.” 

2. Inadequate industry knowledge

Investors expect founders to possess a deep understanding of their target industry and market. If a founder demonstrates a lack of knowledge about key industry trends, competitors, or customer needs, it may raise doubts about their ability to navigate and succeed in the market.

According to experienced investor Noel Duigan: “The lack of experience of the founders, or their team is the main red flag for me. Often you are investing in the founders rather than the company. If the founders don’t have any skin in the game, that’s pause for consideration.”

Noel Duigan
3. Not having your finances in order

Founders asking for too much money can be a red flag for investors. Similarly overly optimistic or unrealistic financial projections can also set alarm bells ringing. If the numbers don’t align with industry benchmarks or seem too inflated without a clear justification, it may indicate a lack of understanding or a willingness to mislead. 

 According to Ballester: “It it really important to be realistic about valuations, particularly in the present climate. Many businesses are now needing to re-evaluate their plans and potential funding pathways. What was 8x last year may now only be 5x. It is vital valuations are rooted in fact, not fantasy. You will be far more likely to gain the interest of prospective investors with this approach.”

According to angel investor and acclaimed author David Pattison: “Some pre investment red flags for me include: When the opening conversation is just about how much and when? Also if a team that is rewarding itself too well on other people’s money.”

David Pattison
4. Lack of traction

Investors look for evidence that the startup’s product or service has market demand and validation. If a founder cannot demonstrate any customer traction, industry interest, positive feedback, or a well-thought-out go-to-market strategy, it may raise concerns about the startup’s potential for success.

Duigan says: “Lack of traction in their space will often mean stalled growth and is a red flag.  Have a look at their runway and burn rate, you don’t want it short and wide. That could spell either bad margins or high overheads.”

5. Poor communication skills

Effective communication and active listening are essential qualities for startup founders. If a founder struggles to articulate their ideas clearly both in person and through vital communication tools like the all important pitch deck, this is a big red flag. Similarly if they fail to actively listen to feedback or input from others, or exhibit poor interpersonal skills, it may hinder their ability to build relationships with investors and stakeholders.

According to Marla Shapiro, CEO of HERmesa – a UK based angel syndicate: Investors want a super clear, concise story that gets us excited to ask more questions and set up the first call.  As one of our members says, “pitch decks are meant to be commercials, not novels!”   

Marla Shapiro

According to Addy Windsor-Clive, investment manager at Regenerate Ventures: “A pitchdeck that isn’t in a suitable format asking the typical questions a VC would ask is a red flag for me.”

Ultimately people buy people and Shapiro puts it succinctly:  “We really try to invest in nice people.  We are putting our own money into the business and we are going to be with these founders for the next 3, 5, 7 years.  Life is too short to invest in jerks!”

While these red flags can raise concerns, it’s important to stress that they are not necessarily deal-breakers. Founders can address these issues and improve their chances of securing investment by being transparent, receptive to feedback, and continuously learning and improving.

The reality is many won’t learn. But by recognising and proactively addressing any red flags, startup founders can ensure they can have a head start in attracting angel investors. Putting rocket fuel into their fundraising strategy and turning entrepreneurial dreams into reality.

Join the world’s largest angel investment network, where global angel investors meet the great businesses of tomorrow.