Here’s why these social impact investment deals fell through

In the summer of 2013, Investors’ Circle Philly committed to investing half a million dollars in GoodCompany Group startups.
It was a big step for the two organizations, as that $500,000 was the first pool of dedicated capital for the social impact companies that complete GoodCompany’s business accelerator. (The local Investors’ Circle angel group, which focuses on social impact investing, had historically invested in GoodCompany startups but never earmarked an amount to invest.) It was a way to tackle the ubiquitous capital problem that all startups face.

Performance is not as clear cut with a social enterprise as it is with a tech venture.

“Applicants will know that there is money available for social impact here in Philadelphia,” GoodCompany Group head Garrett Melby had said about the effort. “That’s even more reason to come and more reason to stay.”
Two years later, the effort didn’t go exactly as planned.
While Investors’ Circle made offers to invest $500,000 in two companies ($250,000 each), both of those initial deals fells through, said local Investors’ Circle president John Moore. While the angel group eventually ended up investing in those two startups — Thread and BlocPower — the total ended up being just over half the original $500,000 set aside.
Investors’ Circle invested:

• $125,000 in a $2.8 million Series A for Thread, a company based in Pittsburgh and Haiti that turns trash into fabric, and
• $130,000 in Bloc Power, a New York City-based “Kickstarter for energy efficiency projects.”

So what happened?
It’s a story that speaks to the complexities of social impact investing, a growing space that some have called “the next venture capital.”
It’s also an instructive story, if Philly is to become a social entrepreneurship hub.

“Messier”

Though half the 11 companies in the summer 2013 class of GoodCompany pitched to Investors’ Circle, many of the companies weren’t ready for investment, Moore said. They were too early-stage.
This isn’t entirely surprising, as Moore said it’s been his experience that often it does take some time post-GoodCompany to become “investable.” Investors’ Circle waited one year after Wash Cycle Laundry graduated, for example, before investing in the sustainable laundry service. Wash Cycle took that year to develop its business model and acquire customers.
On the other hand, Investors’ Circle was ready to invest in Thread and Bloc Power, but the deals fell through. One reason? It’s not always in a social entrepreneur’s best interest to take angel or venture funding, Melby said.
That’s because, unlike traditional startups, there are many ways that a socially-minded startup can get funded. They can turn to angel investors or government grants or philanthropic institutions. That makes impact investing “messier,” Melby said, because each of those investors have different ideas about things like return and valuation. Compare that to traditional startup investment, where investors are more or less on the same page about deal terms.
Those factors came into play when Investors’ Circle was ready to invest, and at the time, it didn’t make sense for the companies to take the investment, Melby said.
“When we created this pledge with IC, we were both confident that any GCV cohort would develop investable opportunities and this cohort did not disappoint,” Melby wrote in an email. “What we did not anticipate was that the most promising graduates of that cohort would have access to other capital, in terms of concessionary investments from grant makers and earned revenue opportunities, that made them less interested in pursing seed stage venture capital at the time of their graduation.”

Tricky valuations

We spoke to Moore about the details of each deal.
With Thread, Investors’ Circle members were interested in investing $250,000 but couldn’t agree with the company on a valuation. They went back and forth on terms but the deal eventually stalled.
“They couldn’t get their heads around accepting the money at the valuation we were giving them,” Moore said.
Still, Investors’ Circle remained interested. Moore told Thread that if they closed some customers, they should talk again. That led to Investors’ Circle’s recent investment in the company. Thread had also found a lead investor (Pittsburgh VC Draper Triangle Ventures), which made it easier for Investors’ Circle to invest. In the end, two Investors’ Circle members invested a total of $125,000, Thread CEO Ian Rosenberger confirmed.
While Rosenberger declined to elaborate on the matter of valuation with this specific deal, he said that valuation with social impact startups is tricky. Different kinds of funders will have different viewpoints on how to measure a company’s value. It’s not as straightforward as just looking at profit.
That’s one of the hardest things about impact investing, said James Thompson, Penn professor and co-author of the Social Entrepreneur’s Playbook.
“Performance is not as clear cut with a social enterprise as it is with a tech venture,” he said.
That, coupled with the fact that the impact investing space is a new one, means that everyone is still trying to figure out how to weigh financial returns against social returns. There isn’t an industry standard, yet, at least, he said.

Lessons learned

With Bloc Power, Investors’ Circle had again planned to invest $250,000 but the deal fell through, this time, because of the form the investment would take.
Investors’ Circle had originally planned to finance Philly-based Bloc Power projects through a loan structure, but at the time, BlocPower’s local projects hadn’t begun. There was a lot of momentum behind that local project deal, so it was hard to switch gears and get people excited about backing New York projects, Moore said. Eventually, Investors’ Circle made a $130,000 equity investment in Bloc Power.
They also still have $250,000 set aside to invest in Bloc Power’s Philly projects, when the company launches them, Moore said.
Bloc Power founder Donnel Baird did not respond to a request for comment.
There were also two other very early-stage companies in which Investors’ Circle was interested in investing $100,000 each, but that was dependent on a few things, including the companies finding lead investors.
Why not just invest $100,000 in the companies?
“It doesn’t help these companies to give them part of what they need,” Moore said.
If a company needs to raise $500,000, sometimes it can actually hurt them to raise only half that because they won’t be able to make it to that next round of financing, he explained.
If GoodCompany were to run this kind of partnership again, Melby said he would want to work to anticipate these kinds of complexities.
GoodCompany has not held a summer accelerator since 2013, since Melby has been running city accelerator FastFWD. He’s now working on a climate change-focused accelerator as part of the White House’s Climate Data Initiative.