This Q&A was taken from the February edition of The Investment Clinic’s LIVE Q&A webinar series with Piers Cumberlege of Global Sustainable Capital Management, UK. Each month, CEO and founder, Brindusa Burrows, sits down with an investor to discuss impact investment and fundraising. When you join the LIVE webinar you can also submit your own questions to be answered. Click here for more information.
Join our next Live Q&A on March 20th with Julianne Zimmerman of Reinventure Capital, US: “Investing in Women Entrepreneurs and Founders of Color: Practice and Prospects.”
What is it like to be on both the business and the investment side? Are there any things that you have used in your investment career that you’ve learned from the business side and vice versa?
“I’ve been backwards and forwards between the financial investment world and the corporate world. One of the main lessons and tools that I’ve brought across is on looking closely at operations management. A good investor will bring operational value added to an investee company. Entrepreneurs looking to raise investment should definitely ask investors what value they can bring, over and above the money.”
How can small impact deals appeal to large ticket investors?
“The reality of it is that the investor has a challenge: deploy capital from a fund or other source into investments, while keeping in mind the base level of cost associated with the investment. This cost is related to the due diligence time, an investor’s time, legal costs, etc. of putting the deal together and unfortunately it costs pretty much the same to do a $100k deal as to do a $1M deal.
Think about planning your investment in a phased way over the longer term so that you’re looking at a bigger number and have a strategic view of where you want to take your business. It de-risks it for the investor, it’s a bigger number for the investor, and it’s also helpful to you because it gives you line of sight to capital as your business is growing and frankly, it also gives you the opportunity to talk to other investors.”
Does this mean that the entrepreneur also commits for the bigger number? Does it also mean that you’re committed to go back to the same investor for the rest?
“It depends on how the entrepreneur and the investor want to structure it. Any self-respecting investor is going to agree to fund phase 1 but will want “first refusal” in subsequent investment. They may also ask for some form of text in the shareholder’s agreement, the initial investment agreement, or for other instruments that give them the opportunity to deploy capital further down the road. However, reciprocity is important in this relationship and the entrepreneur should make sure that the deal is not only one-sided.”
What does alignment of interest mean and how can an entrepreneur think about this with an investor right from the start?
“In order to have a clear alignment of interest, the entrepreneur and the investor have to have a timeline and a very clear understanding of how the business itself is going to create value. The investor has to believe in that and both have to work together to decide how long they will be on this journey together.
Building trust is very important and in order to do that, one thing I would strongly encourage an entrepreneur to do is: plan in advance and reflect on how long it takes to build trust with the investor. It takes time to get to know people, and I always recommend a minimum of 6 months, where you can really prepare yourselves to get into a very close relationship with each other and that close relationship, once established, is based on that alignment of interests.”
What is sustainable agriculture to you? How do you achieve your goals through your investments ?
“My focus as an investment manager at Global Social Capital Management UK is in investing in agricultural projects, mainly in Africa and Latin America. Our typical investment ticket size is between $10M-$20M, with some flexibility. For us, sustainability is not just a label or branding piece, it’s something fundamentally engrained in our business approach and investment thesis.
When we’re looking at an agricultural investment, there are many different dimensions you could look at with sustainability, but you also have to understand the broader picture of value around the investment, which includes people, land, crops, etc.
At GSCM, we use a very detailed questionnaire which essentially addresses a whole series of different core elements of the sustainability matrix, helping us to identify risks and an overall risk score. This allows us to then work with the investee company to reduce these risks through different actions, effectively turning them into opportunities for value creation. Sustainability is not just ticking some boxes, it’s about actually putting in place active programs that create value in the business we’re investing in.”
Does this risk scoring translate to a change in investment size or does it only imply that you engage in a set of activities to de-risk over time?
“Clearly as we look at the risk, if we feel that some of those risks are very substantial and that they’re risks which are actually going to seriously impair the value of our investment then yes, we have to price our investment accordingly. But there are many ways of managing risk or how you approach risk: sometimes you manage it, sometimes you insure against it, sometimes you price on risk or sometimes you just take a very strong operational view. For these sustainability risks, our approach is to take an operational view and to work through them with the investee company.”
How does an entrepreneur, who comes from a jurisdiction that has either political or currency volatility or a situation that is out of their control, reassure an investor or work with them to address these types of risks?
“It’s important to understand that there is an intermediate category of investors, a hybrid. These are people that have at least a toe in the water of the African continent, if not more and they understand the risks, GSCM is an example. If you are an entrepreneur in a similar situation, you should be looking for intermediate capital, essentially Western or Northern fund managers who are comfortable addressing your country’s risk.
The other thing that’s critical is getting those investors to come and visit you. Do everything you can to try and make that happen because when they set foot on the ground, they start to realize that there is a reality, a practical reality of the way things operate on the ground which is not the televised media’s view of the world. While it’s tough, business is continuing and that’s your expertise: navigating that tough environment. Put the news they’re seeing into perspective and show your reality.”
How can you prove you’ve got a team to execute your business plan, when, one of the reasons you’re raising money is to get a team?
“One of the ways you can prove your capabilities is to point to previous team experiences that you’ve had. These don’t necessarily need to be in an entrepreneurial venture, they can be anything that shows the way you behave in a team and the way you can construct a team. That being said, you do need to find those references and try and share them with your investor to allow them to get of sense of how you work. You can also identify the other potential members of your team.”
Brindusa Burrows has 20 years of international career experience working in business and corporate affairs for global corporations (JTI), international organizations (UNECE, IFRC), international non-profits and think-‐tanks (CASIN, World Economic Forum, IOC) and as a serial entrepreneur (The Ground_Up Project, The Ground Up Centre). [Read more…]
Piers Cumberlege is a senior international executive, Board Director with Global Sustainable Capital Management UK, and senior board director and company advisor who has built wide cross-sector expertise over the course of a global career working in and with MNCs, private equity management, governments and civil society organizations. [Read more…]