The following is an extract from a recent interview that Beth, our wonderful co-founder, did with Ariana Huffington’s Thrive Global.
An Interview With Vicky Colas
As a part of our series about “Social Impact Investors”, I had the pleasure of interviewing Bethany Larsen, Co-Founder and Chief Investment Officer for Charm Impact.
What are your “5 things I need to see before making an investment” and why?
Before accepting a company for due diligence, we expect to see that these companies work in the clean energy sector and are at the stage where we are funding entrepreneurs on their journey to scale. We have a strong positive bias towards local founding teams and those where women are represented in leadership / senior management roles and/or are empowered through the company’s activities.
Then, the five things that we absolutely must see before making an investment are the following:
We need to like each other (and this works both ways). We hope to build long-term partnerships with our borrowers, so we need to make sure that we can collaborate and have honest, open dialogues right at the outset.
We also need to see that the team has the experience and expertise to implement and manage the project they propose. While we invest very early in the company life cycle, we do not fund R&D or proof of concept projects. We expect the companies will have tested the product and proven their ability to implement, at least on a small scale, before we will approve a loan.
This may seem obvious, but the business model needs to be commercially viable. If the company does not have a good handle on their basic unit economics and/or does not understand how they’re going to make money off of the project (and pay us back), then that is a massive dealbreaker. Do they really understand the cost of customer acquisition? What is the viability of their customer base? Have they understood the expected loss rate of their sales and how this impacts their unit economics?
We also need to see a vision for growth/scale. Our business model relies on the assumption that we can build long-term partnerships with our borrowers, providing a series of loans of increasing size until they can “graduate” from us onto other larger funds. If they do not have a clear plan for how they will grow after their first loan, then we would likely pass.
We need to see proof of the demand for the product from the company’s customers because we need to be confident that they will sell their products fast enough to repay us within 24 months. Can the entrepreneur clearly articulate the market need? Do they understand the potential size of their market? As we focus on local entrepreneurs, what do you know about the market and your customers that gives you an edge?
We also need to see that the products are affordable for customers. Our borrowers are often working in rural or poor urban settings and we need to ensure that the entrepreneurs we are supporting are not exploiting their customer base (even inadvertently!) due to lack of available alternatives.
Borrowers must have a clear understanding of the problems their customers are facing and how their solution is solving those problems. If this is not articulated clearly and explicitly, that is a huge red flag. All of our entrepreneurs have close relationships with their customers and are incredibly passionate about solving problems rather than pushing solutions.
So, what is the problem you are solving? Can you demonstrate an intimate understanding of your customer base? How is your solution addressing their pain points? How is it unique or differentiated from other available solutions?
We need to see that entrepreneurs have a clear understanding of the competition they’re facing and how they are different/better. We’ve had entrepreneurs tell us, “We’re the only ones doing this!” just to go online and find five direct competitors within minutes. Side note: don’t try to hide your competition!
So, we need to see an understanding of the competitive landscape. Who else is doing it (both directly and globally)? What have you learned from your competition to avoid making their mistakes? Do you have an understanding of the local nuances of competition, such as the impact of government schemes that can distort the market? What is the next best alternative (e.g. diesel fuel) and how do its price fluctuations affect the demand for your product?
Most importantly, it’s about showing us that you know your business back to front, rather than trying to tell us what you think we want to hear: that never turns out well!
Are you able to identify a “tipping point” in your career when you started to see success? Did you start doing anything different? Are there takeaways or lessons that others can learn from that?
I think the biggest tipping point in my career until this point was graduate school. I was surrounded by brilliant people and bombarded with new ideas — people joke that it’s like drinking water from a fire hose, and they’re not kidding. I was completely overwhelmed and insecure, and somehow that experience forced me to get a better idea of what I wanted to do and who I wanted to be.
It was through this insanity that I was learning more about impact investing and diving deep into impact measurement. By graduation, I was known as a bit of an impact measurement nerd, and that specialization opened the door to a few impact finance opportunities: building an impact finance research initiative with my professor, trying to launch an impact fund, and eventually Charm Impact.
My takeaways from this are:
Find your niche. For me, it was all about impact measurement. This is a big pain point for the industry, so even though I was coming from a nonprofit background (which does make it more difficult to break into the industry, unfortunately!), I was able to find a skill that made me interesting. There are many areas of expertise that are valuable beyond having a finance background. Figure out where you are most useful.
Network like crazy. Once you’ve found your niche, make sure everyone knows what you want to do. All of the opportunities I’ve had in social finance were through friends, professors, and meeting people at different impact finance conferences and events. So, get out there and talk to people and make sure that, when there is an opportunity or an opening, people think of contacting you first.
Make your own opportunities. It’s difficult to break into impact investing. It’s a small, niche community. The great news is — we need more of pretty much everything. The financing need is huge, the industry is young, and we are all making this up as we go. SO, if you see a gap and an opportunity to throw your hat in the ring, do it. Don’t waste time second-guessing yourself. If you can’t get a job in the industry, go make more jobs.
Get your ass into the arena. There is this amazing quote by Theodore Roosevelt that Brené Brown shares in her book Daring Greatly:
It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.
I love this. It’s framed on my wall, so I read it almost every day. It’s important to know that everyone is afraid of failure. You’re not alone. None of this is about not being afraid; it’s about knowing you will fail but having the courage to put yourself out there and do it anyway. That’s the only way you’ll make it in this industry.
To read the full interview, you can find it on Thrive Global here