Post-investment support: The why

Venture capital (VC) funds are about more than just money these days. You could even argue that they are about everything butmoney. VCs can add more value to their portfolios by providing tangible guidance, key connections, and operational support, drawing from their wealth of experience. This post-investment support is key to giving startups a fighting chance. It’s the same for social impact funds. In fact, we think it may even be more crucial here, as startups operating in frontier markets often face greater danger of failure than their more developed counterparts due to a variety of factors: unstable markets, not many (or any) past projects to learn from, low-income consumers, underdeveloped infrastructure and value chains, and too many more contextual risks to list. But you get the picture.

Mercy Corps Ventures invests in social enterprises trying to improve income and/or access for consumers living in the most vulnerable communities at the base of the pyramid. Last year the ventures we supported reached over 1.2 million people in these markets.

Challenges in frontier markets

The businesses we invest in have a relatively short window of time to ensure success. They are pre-seed, post-ideation and they have anywhere from 16 to 24 months to really test their idea, penetrate the market, and position themselves to successfully raise follow-on fundraising. The stakes are high, and there’s a great sense of urgency — these entrepreneurs are addressing today’s most pressing challenges, like poverty and climate change, not just advertising startups like in the U.S. Add to this pressure the fact that they are trying to reach consumers that are underserved, in communities where adoption can be difficult and behavior habits are unknown. Trying to manage or invest in a social enterprise in these areas, especially for profit, is a difficult endeavor to navigate.

Even more so when you take these additional factors into consideration:

• Funders (especially social capital) want to see their money is deployed efficiently, with a clear path to impact, and investment de-risked (nice way of saying find winners).
• Founders and management teams are constantly juggling priorities at the center of the urgent/important matrix, such as talent, go-to-market strategies and sales processes, finance systems, time and resources for networking (follow-on investors, grantors, partnerships).
• Investment teams want to know more about the entrepreneur, their investment, what’s working (and what’s not).

Quick qualification: Much of this will not apply if your fund strategy is ‘spray and pray’ — an approach of limited governance, limited oversight to a large amount of investments, most of which are abandoned after the initial investment round.

De-risked investments and pay-off

The costs of providing post-investment support are not inconsequential. It takes a healthy combination of time and money to 1) create an approach that works for your portfolio thesis, 2) find funding for the support, 3) network with potential partners and investors, and most of all 4) dive into the inner workings of the business models. How these manifest will depend on the number of sectors you invest in, the geographic reach, your fund size, the stage of your investments, and more.

Our experience (and others) over the last four years has shown the investment in support to yield clear returns in measurable areas (follow-on funds raised) and tougher to measure ones (stemming from strategic and tactical advice).

It’s different for each startup, but identifying the gaps that post-investment support can fill — and filling them — can allow the management team to focus on the core of the problem they are trying to crack.

The pay-offs:

For funders:

• Increases potential for success of the capital invested
• Can create systems for reporting of clear key performance indicators
• Can track the insights gleaned by (and thus the performance of) the investment team, especially in patient investing where impact and financial results can be years in the making

For entrepreneurs:

• Experienced strategic and tactical partner to tap for input on key decisions and brainstorming
• Ecosystem champion for investor and partner networks (if performing well)
• Unofficial therapist and hugger to lean on when the inevitable frustrations and challenges arise

For investors:

• Insights into the entrepreneur and team (their approach to running the business, ability to stay on track, remain focused)
• Lessons on the business model to inform future investments and understand specific challenges (e.g. go-to-market strategies for insure-tech)
• Ecosystem and portfolio company knowledge sharing (maintaining confidentiality of course)

For many startups, the path from ideation to series A, when they can finally start to feel more comfortable about their growth and funding, is quite taxing. They must first prove their product, understand how to capture their market, and then prove that they can do so over and over again.

We believe, alongside many of our collaborators, that helping them in key areas (seen as recurring bottlenecks) will either accelerate success or reveal that company building or the business model (usually a combination) is the root cause of slow growth.

What’s next?

This blog is the first in a series of three exploring the why and the how of post-investment support, along with some illustrative examples to show you what we mean. In the next blog, I’ll cover how we approach the assessment process and what we offer to meet the specific needs of enterprises in our portfolio. Stay tuned, send experiences, ideas, or even shade.