Tips for sustainability-oriented entrepreneurs seeking capital
Turning an idea into a reality is rarely easy. Entrepreneurs must build teams, processes and, of course, products that will scale to attract customers and investors. They notoriously juggle too many balls, often with too few hands to catch them.
And yet, increasing numbers of entrepreneurs willingly are adding another task to an already impossibly long to-do list: having a positive environmental or social impact. These sustainability-oriented entrepreneurs are critically necessary given the global challenges, such as climate change, that society faces today.
Yet, sustainability-oriented entrepreneurs face additional challenges in scaling their ventures, as they have to manage both real and perceived tradeoffs that come with defining, maintaining, communicating and scaling an impact mission. These tradeoffs, at a high level, are between performance and social/environmental impact.
Can fast-growing meal kit companies keep their commitments to local produce and minimal waste at a national scale? Can fashionable clothing be made both affordably and with fair labor practices? Will electric or hydrogen vehicles reach an accessible price point for everyday consumers?
To achieve this kind of success, capital is often necessary. Aspiring sustainability-oriented entrepreneurs must know how to get their startups financed and scaled up.
Here at the Sustainability Initiative at MIT Sloan, we’ve developed a free guide to help sustainability-oriented entrepreneurs unlock capital. Our guide, along with hundreds of other curated tools and resources to help sustainability leaders of all types, is part of SHIFT, a platform created by MIT that enables sustainability leaders to find, compare and choose the best resources to help them realize their goals.
7 lessons for unlocking capital
Our research into sustainability-oriented innovation ecosystems, including interviews with over 75 entrepreneurs, corporates and investors in both the agribusiness (think AgTech and FoodTech) and energy/cleantech industries, has helped us appreciate the distinct challenges that sustainability-oriented innovators face in raising capital. Further, we’ve identified key practices that entrepreneurs must consider proactively to successfully develop sustainability-oriented innovations.
The guide includes seven practices for sustainability-oriented entrepreneurs across industries. For each of the seven practices, we include quotes from leading investors and entrepreneurs, a supplementary checklist of guiding questions and case studies of startups successfully implementing these practices. Here’s a summary.
- Build a balanced team to avoid a technology-push approach. Investors are looking for a clearly articulated strategy and plan of attack, not just a cool technology, no matter how defensible or innovative. The ability to execute on that plan is determined by your team. When asked to rank priorities for early-stage investment criteria, cleantech and agtech investors rank "team" above other factors such as product, market and deal economics.
- Tell stories to communicate the market value of your product. In addition to communicating the broader social or environmental benefits of a product or service, sustainability-oriented entrepreneurs must focus on addressing specific customer needs and pain points. Specific and tangible product stories, augmented by case studies, images and quotes, can help give customers a feel for functionality and benefits.
- Pitch sustainability as a side dish, not the main course. For most investors, sustainability is simply not one of the high-ranking factors on their list of priorities. Successful sustainability-oriented entrepreneurs must, therefore, emphasize the economic value of their business in order to attract private-sector capital. Even in domains that are highly relevant to sustainability, such as cleantech, foodtech and agtech, details of positive social and environmental benefits must not come before exit potential and expected returns.
- Reduce the capital-intensity and risk of your technologies. The best entrepreneurs find ways to reduce the capital intensity of their ventures, especially in industries where capital costs can be higher (even if they pay back over time through resource efficiency and risk mitigation). Example strategies include raising non-dilutive capital (government or foundation grants), conducting in-market pilots and using off-the-shelf technologies or infrastructure.
- Beware of macroeconomic factors. Macroeconomic factors such as energy prices and commodity cycles can affect industry dynamics and, therefore, customer willingness to adopt and pay for new technologies. Macro factors also can influence investor willingness and ability to raise and deploy capital. Entrepreneurs must understand how relevant macroeconomic factors will affect their business, including their customers and the pool of investors they are targeting.
- Benefit from government subsidies but don’t depend on them. Although subsidies can help accelerate business development, they also can become major sources of risk in the eyes of investors. Entrepreneurs must be aware of how regulations will affect customer perceptions and their ability to raise capital from investors.
- Get involved in the ecosystem. Sustainability-oriented entrepreneurs proactively must attend conferences, workshops and industry events to meet and connect with the key enablers of their space, such as potential employees, board members and investors.
A broader effort to SHIFT practices
Beyond raising capital, a key challenge right now for sustainability practitioners, and especially entrepreneurs who have extremely limited time and resources, is navigating the sea of sustainability tools and frameworks that can help them. That’s why we created SHIFT.
In addition to our guide, SHIFT includes a range of tools for sustainability-oriented entrepreneurs. For example, SHIFT provides curated resources to help entrepreneurs build a business model, measure their impact, acquire customers and build a team. SHIFT also includes tools for corporate sustainability leaders.
If you’re a sustainability-oriented innovator or investor, we’d love to hear what you think of our guide and the rest of SHIFT. Get in touch at [email protected]