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In a market characterized by uncertainty, many entrepreneurs are now asking themselves a simple question: can I raise follow-up capital? And if so, what's the best way to do it? And, according to Bloomberg, this path may not be easy as investors tell the founders that they have to face down or flat rounds and a lengthy fundraising process.
Sarah Cone, founder and managing partner of Social Impact Capital, sees it differently. The Cone company is already investing in the start-up phase and has completed investments in 19 companies with portfolio companies, including Milk Run, an on-demand marketplace for regional products, and Judy, a unique company, the plug-and-play prepper Kits. Every investment of social impact capital has raised follow-up capital or has left.
I spoke to Cone recently to learn a little more about her success.
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As any entrepreneur will tell you, one of his biggest challenges is to raise capital late. Describe your company's approach to coaching and supporting your portfolio companies.
As a seed stage company, we have a front row seat for this very exciting process. First and foremost, we focus on introducing late stage companies and other related investors, helping with investor materials, presentation and processes. Collecting late-stage donations differs significantly from collecting early-stage donations. That's why we like to roll up our sleeves and help.
Another element of this support comes from our investment in the start-up phase and during our due diligence process. We ask our founders a very important question: what metrics do they need to increase their Serie A and what will they do to achieve them? If you take this into account at the beginning, you can reduce the burden of collecting donations in the late phase.
Has the pandemic changed this strategy or affected your portfolio companies' ability to raise follow-up capital?
Our strategy has hardly changed. In fact, it only accelerated what we focus on: investing in a world that needs to be improved; a world with social and ecological volatility. Our portfolio has received three follow-ups since COVID-19 success, and in general there seems to be renewed interest in the reputable types of companies that we have always preferred. A handful of our companies are thriving with COVID-19, most are unchanged, and since we invest in manufacturing, some frontline workers have been able to support and manufacture hand disinfectants and face shields.
In recent years, there has been significant growth in so-called "mega-rounds", in which venture capital with a deficit is used to drive excessive growth. What advice do you give to entrepreneurs who are facing such a later round?
For many entrepreneurs, we ask them to focus on a simple metric: the economics of healthy units. At every stage of the business and fundraising cycle, buying growth must be understood within the dynamic of a healthy, unified economy. If the single economy makes sense, it may make more sense to step on the gas. If the unified economy doesn't, it may make sense to be more careful.
We understand the pressure and competitive dynamics of a particular space or industry. Assuming that a start-up's competitor collects $ 100 million in a mega-round, it can be pressured to do something similar to stay ahead of the competition because of the risk of being excluded from the market.
In today's world, consumers are demanding more from brands they trust. Explain the social impact capital thesis of investing in companies that fit this form.
We do not believe that social impact alone is a convincing motivation to make a decision. That is why we only invest in products that are also better on another axis and generally cause lower costs. Sustainability is really just another way of saying, reducing waste and improving efficiency. So sustainability often only creates more profitable supply chains.
Related: How much is too much when negotiating term sheets?
What advice would you give to entrepreneurs starting new businesses with a view to sustainability and social impact?
There has never been a better time to start a business than now. When you do this, you focus on two things: First, understand the efficiency achieved through sustainability and its impact on creating a more profitable supply chain. Second, focus on the single economy as you grow. Your business is a business; First and foremost, you should try to get what you need in your next round of funding.
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