Technology & criminal justice reform

Tumml recently hosted a roundtable on “Criminal Justice Reform & Tech” in partnership with Verizon, Microsoft, and Nixon Peabody. The discussion brought together entrepreneurs, nonprofit administrators, legal experts, and philanthropic leaders. Our goal was to answer the question, “What is it like to build effective tools that support criminal justice reform – and get someone to buy them?” Specifically, we talked through strategies and pitfalls for delivering technology solutions to improve the criminal justice process and its outcomes.

Our participants identified a number of best practices and opportunities where technology can play a role in supporting meaningful, positive change in the criminal justice space.

Start with small, discrete projects
The technologies that have made the most notable impact in the space are often focused, discrete projects that help bridge the gap between the promise of a law and that law’s actual implementation on the ground. A good example is Clear My Record, a free, nonprofit service for people with a criminal record in select California counties. This website provides tactical support to the Clean Slate initiatives rolling out in California to help certain individuals with nonviolent criminal histories to expunge their records – reducing the hurdles to employment opportunities, housing, etc. The website provides an important service, as the state has not yet been able to implement an automatic record-clearing process (so individuals currently need to initiate the process themselves).

Other possible interventions suggested by event participants include the idea of creating a tool to help individuals get one free background check a year (as one can already do with a credit score), so that they could monitor their own records and redress issues if they were to arise. These technology tools do not necessarily have to function as a standalone business, but could perhaps function as the offshoot of another business, or perhaps a nonprofit.

Work with community partners
Participants emphasized repeatedly that those creating tech solutions need to work with community advocates in the space. This is a very resource-constrained environment, and so it is important that people looking to help target their efforts to the most important issues – which they can best identify by engaging with community partners and constituents. At the same time, it is important to understand that these individuals may be very busy (“chronically and critically understaffed,” as one participant put it). For example, public defenders could certainly benefit from access to technology tools, but they are also frequently overwhelmed, managing three or four thousand cases per person, in some cases!

Re-shape the data story
In the criminal justice space, data is most often used to identify immediate risk, and the data taken into account is mostly negative (arrests, violations, debts, etc). This information does not capture the entire picture and rarely takes into account the bigger, longer-term risks. For example, keeping someone in jail until their trial might cause them to lose their job, children, etc. – and might ultimately drive them towards other negative life choices. Generally, fines and fees represent adverse consequences when people cannot pay them. The participants noted that new technologies that could help capture more data – and perhaps draw a more holistic picture of an individual – could refine how district attorneys and judges make decisions.

Technology by itself is not going to overhaul the criminal justice system. But targeted initiatives, launched with the support of community partners, and using/delivering the right data can be effective steps in the right direction.

Photo credit: Ben Sutherland, Flickr Creative Commons

Infrastructure & startups

Tumml recently hosted a roundtable on “Infrastructure & Startups” in partnership with Verizon and JP Morgan. The discussion brought together policy makers, tech leaders, and urbanists. Our goal was to answer the question, “How do you sell to or partner with government to solve infrastructure challenges?”

Our participants agreed that – regardless of your particular infrastructure solution – success in this space often revolves around (1) contracting with the right customer, (2) finding a sales channel partner, and (3) communicating positive community impact.

Contracting with the right customer
Identifying the right government customer can be a major challenge for infrastructure startups. Government stakeholders need to be “bought into” the relationship in order to make it work. A few tips:

• Master contracts: One startup noted that, in the Northeastern US, they created individual agreements with municipalities that bordered each other. The product roll-out was hampered by the sometimes conflicting needs of each city in the region. When expanding to the West Coast, they decided to negotiate a “master contract” with a number of adjacent cities. The regional agreement (with sub-agreements to meet the needs of each city) helped to drive consensus and streamline a chain of command for approvals – delivering a project that the whole region could get behind. As an example, Ford GoBike employed a master contract with the Metropolitan Transportation Commission and five Bay Area cities to operate the bike share system in the Bay Area.
   
• Generating inbound demand: Generating customer interest – particularly from the government – can be challenging. Another infrastructure startup used a “Reverse RFP” to source customers. They solicited proposals to be one of the first innovative cities to work with their startup. Through this process, the company was able to identify enthusiastic partners. And some of their best government clients turned out to be smaller cities that went “above and beyond” to roll out the product – putting up money for advertising and citizen education initiatives. Neighborly recently adopted this strategy for its new Environmental Impact Bonds Challenge. Two “winning” cities will work with Neighborly to structure, market, and underwrite financings to support green infrastructure improvements.

Finding a sales channel partner
Sales channel partnerships can also make the process of delivering private infrastructure improvements easier. 

• Project management firms: A number of participants mentioned how project management firms, such as AECOM and CH2M, often serve as gatekeepers on important government projects or initiatives. It can be helpful to build relationships with these firms, as they often “pre-vet” and recommend service providers. For example, startups like GreenBadger (a LEED accreditation software tool) can look to these project managers as a resource to connect with potential customers.
   
• Technology service providers: Major government service providers, such as Microsoft and Verizon, often subcontract out to smaller vendors in order to meet contract requirements (for example, to meet minority and local employment thresholds, or to provide enhanced services). For example, big data startup Valor Water Analytics and smart metering company Aclara recently announced a formal sales partnership to deliver hardware and software for water utilities.

However, these larger channel partners come with their own challenges. Some speakers gave the caveat that between executive turnover and reshuffling of departments, it can be difficult to build an effective working relationship with a large corporate partner.

Communicating positive impact
We heard repeatedly from public officials in the room that it was critical for startups to communicate their value to government stakeholders.

• Show don’t tell: Infrastructure is critical for communities, so government must ensure that it remains accessible and operational. “Show me, don’t tell me, how you achieve public good,” said one regulator. Another public official noted the value of outlining your impact on “communities of concern,” demonstrating how a business could help the city achieve its equity-related goals.
   
• Mitigate risk with pilots: Government is not usually an early adopter. One participant suggested building proof points with private customers before pursuing government as a customer. An entrepreneur in the room noted that DARPA-like challenges (including non-dilutive grants) and designated “testing zones” for new ideas could facilitate innovation.

As a startup, selling to and partnering with government to solve infrastructure challenges can be hard. But building smart partnerships, targeting enthusiastic customers, and using data to communicate your community impacts can make the process easier.

Photo credit: Jerry Yang, Flickr Creative Commons

Housing access & affordability

Why can’t tech solve America’s affordable housing problem?
We recently hosted a roundtable in partnership with Verizon and JP Morgan on “Housing Access & Affordability,” where we brought together policy makers, tech leaders, and development experts. Our goal was to discuss the question, “What role (if any) can tech companies play in tackling the housing crisis?” 

The general conclusion was that no tech company – big or small – is going to solve the housing crisis. Most attendees agreed that the most impactful role tech can play is actively supporting and educating employees about housing policy initiatives. But, while no ingenious tech product or service will single-handedly move the housing needle, attendees identified three areas where startups are (or could be) delivering real value in the housing market.

Finance
Crippling college debt, lower real incomes, and limited housing supply means that many consumers can’t afford to buy homes. The median home price in Los Angeles County is approaching $600K, and $1.3M in San Francisco (yikes!). This represents a real opportunity for private business to step in. For example, a new platform called Landed is offering down payment assistance to teachers – with the backing of some large partners. There was also some discussion of new “fractional ownership” startups that are appearing on the market, offering tools to help streamline the process of buying property as a group.

 Unfortunately, helping people buy existing homes won’t increase the supply of housing – which is particularly problematic at a time when the US Federal government is cutting funds to important housing-related initiatives and organizations. That said, we are seeing platforms like Fundrise emerge to drive private capital towards the construction of new housing – the company estimates that its new housing eFund will translate into the construction of between 250 and 750 new homes over the next five years. It doesn’t seem like much of a logical leap before we see tech companies like Neighborly (a crowd-investing platform for municipal bonds, and a Tumml alum) begin to offer investment opportunities in new public housing.

Construction
According to a recent McKinsey study, the construction industry is experiencing a serious productivity problem: over the last 20 years, construction labor productivity has grown only 1% a year, compared with 2.8% for the world economy and 3.6% percent in manufacturing. The study identifies opportunities to address this issue in areas such supply chain management, materials innovation, process automation.

One of the roundtable participants noted that a few developers like Berkeley-based Nautilus Group have acquired their own factory to build modules that make the construction process less time and capital-intensive. We also discussed the rise of the “modular housing startup.” The big question around these potential solutions is scale (ie their ability to produce large-scale real estate projects).

Additionally, with the cost of urban land contributing significantly to the expense of new construction, one developer in the room observed that materials and process innovation would have a hard time making a meaningful dent on housing costs – although he’s hopeful! Additionally, many consumers and communities have expressed interest in supporting real estate projects that minimize construction waste and utilize “green” materials and processes – so there could still be good business reasons to start a company in this space.

Engagement
Ultimately, the panelists concluded that, unless regulations change significantly, there is little hope for meaningful movement on the issue of housing access and affordability. “Third rail” policies like Prop 13 in California, as well as local building and permitting rules, must be reexamined. Otherwise, there will be little need for housing innovations in financing or construction. But no one could point to any technologies that were effectively mobilizing citizens around these issues. That’s not to say there aren’t entrepreneurs out there trying to crack this nut. One roundtable participant observed that harnessing people’s self-interest is key to activating them around housing/new construction policy. We hope to see more companies in this space – using technology to activate constituents to deal with the heart of our housing and affordability crisis.

When considering the housing crisis, the problem is primarily regulatory and the solution will likely require significant civic action. And the tech community has a role to play – as both innovators and just plain voters – in addressing one of the greatest challenges of our generation.

Photo credit: Ian Ransley, Flickr Creative Commons

3 strategies for talking about your competitors

As first published in VentureBeat.

Entrepreneurs know to expect questions about the competition in every investor pitch. And differentiating yourself is key – not only by the content of your answer (how your company is different), but the method of delivery (how you talk about those differences).

The world of startups is quick to offer advice on how to format your competitive landscape analysis. It’s a standard slide recommended in any deck (the trusty 2×2, the petal diagram, etc). But there is a striking lack of guidance around how to talk about that competition. Here are three tips on how to get it right:

1. Don’t trash talk the competition
Yes, you need to communicate why your product is different from competitors. However, the age-old advice “show don’t tell” is key.

Focus on your company. Whether you highlight your differentiated product, first-mover advantage, or unique expertise, stay away from insulting another company. Specifically, steer clear of negativity toward another founder, sharing any breaking scandals, or disparaging their culture.

The more time you spend talking about a competitor, the less time you are talking about your own company. You want to keep a potential investor’s attention on you, while also demonstrating you have a firm understanding of what it will take to be successful.

At a recent startup festival this spring, Stripe cofounder Patrick Collison demonstrated his maturity in this exact situation. While Collison was explaining the founding story of his company on stage, the moderator jumped in to share a personal horror story about Stripe competitor Paypal. The moderator then asked Collison point blank: “Did a similar experience lead to you founding Stripe?”

Collison’s answer was telling: “Well, I don’t want to speak about any particular competitor. With Paypal in particular, we owe them a great deal for having done so much to create the online payments space.”

It would have been easy to trash the competition here. But Collison’s smooth side-step allowed him to come across as a class act, while simultaneously directing attention away from a big competitor and toward his own impressive achievements.

2. “We don’t have any competition” doesn’t cut it
Yes, of course your product is a special snowflake. But “We don’t have any competition” is not the answer that will satisfy an investor.

Do your homework. What need are you meeting? How do people meet this need currently?

As you will need to come up with a list of companies vying for the same customers, you will similarly need to come up with a strategy for how to talk about them.

What’s more, having competitors proves to investors that this is an attractive space. If dollars are flowing into similar companies (especially if the investor you are pitching missed out on a successful earlier entrant), they may be even more likely to invest.

At a recent startup competition, I saw the founder of a housing startup give a compelling pitch about their smart home solution. However, his answer to the competitor question – “We really don’t see any other competitors in this space” – landed flat with the judges. While differentiated, the company certainly has direct competitors.

All companies face some form of competition. Refusing to acknowledge this signals either ignorance of the competition or arrogance. Moreover, talking about the growth of the industry could have demonstrated that this is an attractive space for investment. (Of course, it’s a balancing act — you also don’t want to convey that a market is overcrowded.)

3. Talk about predecessors with humility
Every company’s entrance into a market is paved by somebody. Speaking about predecessors with humility and grace shows the maturity, vision, and leadership needed to steer the ship.

At a recent conference, I saw the founder of a glasses startup exemplify this approach perfectly. As a glasses company, the inevitable question is, “How are you different from Warby Parker?” The founder’s answer spoke volumes.

“Warby Parker is a great company. They have done a ton for the industry and showed the potential to rethink this space. But let me tell you about what we do and how we’re different.”

He went on to explain how their product – 100 percent custom, made-to-order glasses – competes with expensive designer glasses and addresses an entirely different market segment than Warby Parker.

While this founder certainly appeared to have a fantastic product, it was the way he spoke about Warby Parker that stuck with me. His ability to articulate and frame the problem enables the audience to not only understand the difference between the two but to understand the need for both. His response sounded like that of a seasoned tech CEO, one who is not lacking for confidence in the product and vision.

For entrepreneurs out there, the pitch is everything. And investors are buying into both the idea for the company and a partnership with you as a founder. By doing your homework and speaking about your competition with respect, insight, and humility, you’ll communicate maturity to set that relationship off to a great start.

A belated welcome to Charlie Kannel!

One of the first questions startups face is how to incorporate. Check out our story in VentureBeat about the Public Benefit Corporation model – it dispels some of the most common myths about the legal structure. The story was co-authored by our new Portfolio Advisor Charlie Kannel. We're so pleased to welcome him to the team (although he's been with us since February so we're a little behind on this!)

In other news, Government Technology featured Julie & Clara on its "Top 25 Doers, Dreamers, and Drivers of 2017." And check out our impact page, which includes an updated "urban challenges" framework and stats around our portfolio companies.

You can read more updates from Tumml here, as well as stories we're following. For example, TechCrunch wrote about Tumml alum Scrumpt's work delivering healthy meals to kids.

Should you incorporate as a public benefit corporation?

As first published in VentureBeat.

Incorporating your business as a Public Benefit Corporation (PBC) means you can include public good as part of your company charter in addition to maximizing shareholder profit. Today, there are almost 4,000 Public Benefit Corporations (PBCs) across the U.S., including well-known brands such as Patagonia, Kickstarter, and This American Life. This corporate structure exists across 31 U.S. states, with California introducing the option just five years ago, allowing businesses to focus on both profits and benefits for society. And startups are increasingly showing interest in this business structure.

We’ve witnessed the growth of PBCs first-hand. In fact, six of the 38 early-stage companies we’ve incubated are PBCs. Yet, in our experience, many founders do not understand how they actually work. So to set the record straight, we’ve compiled a list of the five most common misconceptions about PBCs.

Myth 1: Public Benefit Corporations and Certified B Corps are the same.

Many entrepreneurs treat the decision to become a PBC and a Certified B Corp as one and the same. However, they are very different creatures.

PBC is a legal incorporation status (like a C Corp or LLC). PBC documentation encourages a corporation to consider the interests of multiple stakeholders (society, workers, the community, and the environment) in addition to shareholders when making decisions.

Certified B Corporation or “B Corp,” on the other hand, is a third-party certification similar to Fair Trade or LEED. B Lab, a non-profit, administers this credential and independently assesses companies based on social and environmental criteria. Companies typically pursue certification because of the additional credibility brought by third-party review.

While some PBCs are not Certified B Corps and vice versa, many are both. Several companies, including Patagonia and AltSchool, hold both labels. It should be noted that if a Certified B Corp goes public, B Lab requires that company to reincorporate as a PBC within two to four years (Etsy, the first Certified B Corp to go public, is dealing with this deadline now).

Myth 2: Public Benefit Corporations are nonprofits.

By definition, all PBCs are for-profit companies. However, nonprofits and PBCs are often confused because their charters both explicitly mention a socially beneficial purpose. Specifically, nonprofits are driven by a stated “charitable purpose” and PBCs spell out a “public benefit” purpose. In spite of this similar language, nonprofits and PBCs are completely different types of companies. While a nonprofit’s sole mission is pursuing its charitable purpose, PBCs must balance their benefit to the public with the financial objectives of their shareholders.

There are two other key differences. The first is that nonprofits are tax-exempt by the IRS, while PBCs are taxed like any other for-profit company. The second is how these entities generate income. Besides grants and donations, nonprofits are allowed to self-fund through earned income to a limited degree. But if nonprofits engage in “more than an insubstantial amount of unrelated business activity,” they can jeopardize their tax-exempt status. As for-profits, PBCs can raise cash from operations as well as investors and use that money to scale.

For example, HandUp – an online platform for direct giving to people experiencing homelessness – decided to become a PBC (rather than a nonprofit) to generate revenue as well as raise equity funding.

Myth 3: Public Benefit Corporations have trouble raising venture capital (VC) funding.

Some entrepreneurs worry that becoming a PBC will scare away venture capital money.  But, in reality, PBCs have had many large-scale fundraises from VC investors.

For example, in 2015, AltSchool, a PBC focused on personalized ed-tech, raised $100 million from investors including Andreesen Horowitz, Founders Fund, and Mark Zuckerberg. That same year, Cotopaxi, an outdoor gear e-commerce PBC, closed a $6.5 million Series A from Greycroft Partners, New Enterprise Associates, Forerunner Ventures, and others. Ultimately, VC firms that have invested in PBCs include a “who’s who” list: First Round Capital, Foundry Group, Sherpa Ventures, Union Square Ventures, and many more.

There is also a growing number of PBCs with successful exits: Plum Organics reincorporated as a PBC the same year it was acquired by Campbell’s Soup, and Laureate Education became the first PBC to IPO a couple months ago.

Myth 4: Public Benefit Corporations can be sued by the public.

Another misconception among entrepreneurs is that incorporating as a PBC exposes a company to additional liability. Specifically, founders are afraid they could get hit with lawsuits from the public saying the company has not pursued its “public benefit” mission vigorously enough.

In fact, only shareholders can bring lawsuits to enforce public benefit goals. And, to take that action (via a specialized proceeding), the threshold is high. In most states, a minimum of 5 percent of shareholders is necessary to launch a proceeding.

Additionally, the PBC structure can potentially act as a shield from lawsuits. Company directors can be protected when prioritizing “public benefit” over immediate shareholder interests. For example, Patagonia’s decision to donate all 2016 Black Friday sales ($10 million in total) to mission-aligned nonprofits is far more defensible due to the company’s PBC status. To justify a decision that may sacrifice profits, PBCs including Patagonia must simply be able to show that they considered multiple viewpoints.

Myth 5: It doesn’t matter where you incorporate your Public Benefit Corporation.

Some entrepreneurs assume that it doesn’t make a difference where incorporation takes place. If they are located in California (or anywhere), why not incorporate there? But the reality is that state jurisdiction matters.

If a business is incorporating as a PBC and expects to seek VC financing, many startup lawyers will recommend incorporating in Delaware.

First and foremost, Delaware is familiar. Most VC-backed startups are incorporated as C Corps in Delaware. The Delaware PBC model shares similar investor-friendly terms to the Delaware C Corp, so incorporating there can make investors more comfortable.

Second, Delaware offers maximum flexibility for entrepreneurs. Most states’ PBC legislation requires a company to complete annual public benefit reporting and to make their reporting publicly available. However, in Delaware, such reports must only be published every two years and need not be made publicly available.

So if your company is considering becoming a PBC, make sure your decision is based on facts and not myth.

Disclaimer: This article does not constitute legal advice. Consult a legal professional before making any decisions regarding your incorporation status, pursuit of third-party accreditations, etc.

Winter recap

Happy 2017! We have been heads down supporting the Tumml portfolio of companies, and authoring some articles on issues facing urban innovator. Check out our story for Fast Company about how startups can build trust with their investors, as well as a three-part series on fundraising for mission-driven startups (you can read parts one, two, and three on the Living Cities blog). And we're excited about Julie's profile as one of the "25 Disruptive Leaders" improving economic outcomes in America's urban areas.   

You can read more updates from Tumml here, as well as stories we're following. For example, Bloomberg published an interesting piece about the "survival economy" and how Detroit's neglected poor rely on time banking, skill-sharing, and giveaways to get by.

Photo credit: Onasill ~ Bill Badzo

The one email every founder should know how to write to investors

As first published in Fast Company.

So you raised your first round of funding. Good for you! Seriously, it takes a tremendous amount of work to close a round, so you should feel great about that. But regardless of the size of your round or the stage of your company, the hard truth is that you’re probably going to have to fundraise again.

Right off the bat, that's potentially bad news. Fewer deals are getting done right now than just a few years ago. According to the National Venture Capital Association, "8,000 deals were completed in 2016, representing a 22% year-over-year decline and the lowest count since 2012, a clear indication that venture investors are being much more critical of their investment opportunities." It’s particularly tough for entrepreneurs trying to make it from seed stage to Series A (the dreaded Series A crunch). So how do you compete for dollars?

The short answer: by email.

The slightly longer one: by figuring out how to engage your existing investors right now—when you’re not actively raising money. This way, when the time comes, they'll not only invest in you again, but they'll connect you with other investors and serve as glowing references in the process.

And pulling that off may come down to writing one simple email—continuously.

Why You Need Regular, Standardized Email Updates
To be sure, there are multiple strategies you can (and ideally should) use to keep your investors engaged. But one of the most important and low-effort things you can do is send out a standard group update email in a consistent format. This should happen regularly, on a monthly basis. There are startups that send quarterly investor updates, and that’s okay, but monthly is better.

Here's the thing, though: If you wait until you need to raise again to talk to your investors, they won't be happy. Investors probably won't be paying attention to your every move. And they may not respond to your update emails even if you send them regularly. But more likely than not, they are reading them. This information is how they evaluate your performance—and whether you're worth pouring any more money into.

When it comes to investor communication, put one person in charge, ideally a founder. Founders are busy too, but they should never be too busy to talk with investors. And the information you should be tracking for them should already be at your fingertips.

To marshal it into a quick, effective monthly email update to investors, you just need to follow a few basic rules:

• Keep the format consistent. Use the same subject line so it's easily searchable.
• Longer isn't better. You want an email short enough for an investor to read in the car from one meeting to another.
• Stick with the same categories and metrics. Identify the ones that matter most to your business, then compare this month's stats with last month's.
• End with one or two "asks" at the bottom. Investors are always saying they want to be helpful—let them prove it.

This is a rough template of what this type of email looks like:

Hello all,

[One-paragraph introduction sharing whatever your focus has been over the past month.]

Top priorities:
[Priority #1]
[Priority #2]
[Priority #3]

Product:
We've made [summary of latest product updates]. See them at this link.

Money in bank:
We have $[_____] in the bank. This gives us a runway of [__] months at our current burn rate.
[Any other relevant funding updates.]

KPIs:
Revenue last month: $[_____]
Revenue this month: $[_____]
[Other important metric last month]
[Other important metric this month]

Other updates:
[Big win #1]
[Press coverage #2]
[Other update #3]
[One ask for investors—in bold.]

Best,
[Name]

Still Send The Email When Things Are Going Badly
When things are going poorly, you may be tempted to skip the email updates. Don’t! Investors will know something is amiss if you stop communicating with them, and that may affect how much they trust you. Also, you waste an opportunity to engage them in finding a solution to your problems—for instance, by connecting you with a strategic hire, bridge financing, etc. If things are going badly, now is the time to fix it.

A second caveat: Don’t deviate from your structured email format when things go wrong. You may be tempted to write a long explanation for what's happening, what corrective actions you're taking, and why it’s all going to be okay. Don’t! You want to be transparent with your investors, but you don't want them to think you are becoming unhinged. And a long, rambling email will send that signal.

You Need Investors' Trust All The Time, Not Just While Fundraising
If you wait until you need something to reach out to your investors, you've already screwed up. You've just shown them you aren't capable of maintaining even your basic business network, so they should stop investing any more time and money into you. Here's how Julian Counihan at Red Sea Ventures put it: "Startups that are not speaking to their investors are throwing away a free call option. You don't know if you'll need it, but it costs nothing and is extremely valuable."

This is particularly true when it comes to bridge financing, short-term funding to tide you over until you can find longer-term investments. Bridge financing only happens on the basis of trust—and often when things are going south. At times like that, you need an investor who will take a risk on you when every sign indicates they shouldn't. To win that leap of faith, there's no substitute for regular, forthright communication.

So take the time to build trust with your investors now. It’s never too late to start writing those update emails, and sometimes a clear-cut formula is exactly what you need.

Image source: Fast Company

Mapping the money (part 3)

As first published in the Living Cities Blog.

Structural Barriers to Raising Capital for Early-Stage Purpose-Driven Businesses
In yesterday’s blog post, May Samali described two types of challenges preventing purpose-driven businesses from accessing money. In the final part of this three-part series, she provides a window into two additional structural barriers that constrain purpose-driven entrepreneurs during capital raising—namely, the dearth of impact deal data and the “slow no” dragged-out due diligence process. Read Part 1 and Part 2 of the series on our blog.

Last year, I met with an entrepreneur who recounted a story about pitching his business at an event for impact investors. “I was told by everyone there would be an impact investor. But of the 100 people sitting in the room, only five were actually impact investors and 95 were there to learn about impact investing.” His story is not uncommon – rather, it is indicative of a broader trend and reflects the results of a survey of early-stage, purpose-driven companies and funders I conducted at Harvard University last year. Entrepreneurs running purpose-driven businesses are often subject to a fundraising process that lacks transparency and accountability, and is long and laborious.

Dearth of Impact Deal Data: No Guidance For Entrepreneurs As They Search for Funders
As was discussed in Part 2 of this series, funders willing to seed purpose-driven businesses are few and far between. So how does an entrepreneur go about finding the needle in the haystack? It isn’t an easy process due to a lack of access to impact investment deal data and capital networks.

Of the purpose-driven entrepreneurs I surveyed, 80% rely on personal and professional networks to raise capital. However, compared to the tightly networked world of technology startups and venture capital (VC), the world of purpose-driven business and impact investing is very dispersed. This is partly because the social impact field is younger than the technology startup sector. In addition, purpose-driven entrepreneurs are not generally connected to wealth networks, including angel investors and family offices. This is a problem – it’s been proven time and time again that networks get deals done.

In the absence of strong networks, these entrepreneurs resort to investor databases and other online sources to connect to funders and answer questions such as: Which funds invested in purpose-driven businesses last year? How many investments did each fund make and on what terms? Unfortunately, traditional investor databases are not as relevant to purpose-driven businesses – for instance, a list of the most active impact investors is not available via CB Insights, CrunchBase, Mattermark or PitchBook.

To make matters worse, the few impact-oriented platforms in existence – such as Enable Impact– are underdeveloped and insufficient. Although Enable Impact provides a list of self-identified funders on its platform, being listed does not necessarily mean funders are active or have any investments. Instead, a listing merely indicates a willingness to identify as an “impact investor.” In reality, very few of the investors on Enable Impact have made actual investments in purpose-driven businesses in recent years, despite professing support for impact investing. A good case is IMNPACT Angels, Minnesota’s first impact angel investing network, which made only one investment within its first two years of operation. It is currently on hiatus.

This lack of transparency around finalized deals in the impact space is a big problem – it creates a situation in which early-stage, purpose-driven enterprise founders do not know which funders to target.

Dragged-Out Due Diligence Process: The “Slow No”
Fundraising is a very resource-intensive activity requiring significant amounts of research, networking, pitch practice, and waiting for answers on the part of entrepreneurs. But the process is made even more difficult by many funders who are notorious for taking months to say “no” to purpose-driven entrepreneurs – sometimes up to a year or more. Therefore, given this context, it is no surprise that due diligence is a major pain point for purpose-driven businesses.

To add insult to injury, funders often provide euphemisms for “no,” giving these entrepreneurs the impression that there is still a chance, albeit minuscule, of successfully raising money from them.

So why does this happen? There are three main reasons:

• Pain aversion. Funders prefer to postpone letting down the hopes of purpose-driven entrepreneurs. Many funders see themselves as benevolent creatures in the ecosystem and do not like to say “no’” and, as a result, they can inadvertently string along these entrepreneurs.
• Different time pressures. Most funders do not face the same time pressures as entrepreneurs and therefore have little incentive for speeding up due diligence. This is especially the case for the earliest stage investors in purpose-driven businesses – that is, individual angel investors, many of whom are retired or investing as a hobby, and do not feel the same urgency about getting the deal done as investors with a fiduciary responsibility.
• Opportunity preservation. Many funders avoid giving conclusive responses to early-stage entrepreneurs in order to preserve their opportunities and options later down the track.

What Can Be Done To Overcome These Barriers?
Collectively, these two structural barriers hamper the ability of purpose-driven businesses to raise money and grow into companies that can change the world. Improving fundraising for purpose-driven businesses requires increasing deal transparency, which in turn leads to shortened fundraising cycles and an awareness of who is actually doing deals. Increasing transparency of deal information also makes funders more accountable for their deals or inactivity. Ultimately, information is the great equalizer!

This blog post draws on original research conducted by May Samali and published in a Harvard Kennedy School Mossavar-Rahmani Center for Business and Government Associate Working Paper No. 59 titled ‘*Mapping the Money: An Analysis of the Capital Landscape for Early-Stage, For-Profit, Social Enterprises in the United States’. Full citations for the data and statistics throughout this blog post are available online.

Image source: Thomas Galvez

Mapping the money (part 2)

As first published on the Living Cities Blog.

Fundraising Challenges Faced by Early-Stage Purpose-Driven Businesses
In this second blog of a three-part series, Tumml's May Samali delves into the fundraising challenges faced by purpose-driven entrepreneurs in their earliest stages of development. In yesterday’s blog post, May mapped the capital landscape for early-stage, purpose-driven businesses in the U.S.

Convincing funders to part with their money is hard – just ask any entrepreneur that has attempted to secure external seed capital. But the fundraising process is especially difficult for early-stage, purpose-driven businesses facing a “pioneer gap.” Why is this the case?

Over the next two blogs, I will explore the four main challenges entrepreneurs face when trying to raise money for their purpose-driven businesses. My insights are informed by the results of a survey of early-stage, purpose-driven companies and funders I conducted at Harvard University last year. This week’s blog post focuses on the first two difficulties confronting businesses when pitching to funders – the “goldilocks phenomenon” and the “chicken and egg” problem.

Goldilocks Phenomenon
Financial Returns Are “Too Little” or “Too High”… But Never Quite Right
By definition, purpose-driven businesses contribute to solving social problems while generating profit. But, too often, purpose-driven businesses are forced to respond to funders’ discomfort with their projected level of financial returns. These early-stage entrepreneurs face a “goldilocks phenomenon” – they are accused of either making too much money or not enough money.

“Too Little” Returns
Purpose-driven businesses face an additional hurdle when pitching to traditional venture capital (VC) firms and angel investors. The dominant thinking among this group of funders is, “If you’re doing good in the world, you must be compromising my profits.” While there are some funders that are an exception to this rule, many VCs believe that purpose-driven investments cannot produce the “hockey stick returns” they are looking for. Similarly, most angel investors overlook purpose-driven businesses, believing there are inherent tradeoffs between social and financial returns. The data speaks for itself—only 5% of U.S. angels listed on AngelList are interested in “mission-driven markets.”

As a result of this bias against purpose-driven businesses, many enterprises intentionally avoid using the “social enterprise” label or terms such as “mission-driven,” “purpose-driven” or “impact-oriented” when pitching for funding. This reality is captured in a comment made by the Vice President at Core Innovation Capital, a Los Angeles-based VC firm focused on financial technology: “A company catering to underserved consumers that emphasizes its strengths as a financial technology company, rather than emphasizes the mission that informs its product or strategy, is more likely to receive traditional VC funding.”

“Too High” Returns
On the other side of the spectrum, some purpose-driven businesses with strong financial projections are dismissed as “too profitable” by funders.

Some impact investors do not fund businesses that can tap into mainstream venture capital – even though, in reality, hardly any purpose-driven businesses can access VC. As for foundations, many of their charters contain a blanket rule against providing capital to for-profit entities (including purpose-driven businesses). Foundations’ resistance to for-profit models persists, despite the creation of special financial vehicles – namely Program-Related Investments (PRIs) and Mission-Related Investments (MRIs) – that authorize foundations to provide grants or equity investments to “commercial ventures for charitable purposes.”

However, because foundations can only directly invest in for-profit entities qualified as PRIs, many foundations refrain from doing so. Foundations are hesitant to invest in for-profits due to the uncertainty of whether they would qualify as PRIs as well as unwillingness to use resources to acquire a Private Letter Ruling from the IRS. In reality, foundations underutilize PRIs and MRIs due to fear and a lack of understanding of these vehicles.

The bottom line? When it comes to financial returns, for-profit, purpose-driven businesses are stuck between a rock and a hard place.

The Chicken and Egg Problem
Entrepreneurs Need Proof Points To Get Funding, But Need Funding To Get Proof Points

The second challenge leaves entrepreneurs equally stuck. To access capital, entrepreneurs must overcome a double standard that exists in early-stage, purpose-driven financing. My conversations and survey results show that early-stage funders require more proof points from purpose-driven businesses than traditional investors require of other startups – including strong market traction, a fully-fledged business model, and revenue. These entrepreneurs must prove that social impact and financial returns can actually coincide. The frustrating result is that many funders reject purpose-driven entrepreneurs on the basis that their businesses are “promising, but too early.”

These funders overlook the fact that it takes early-stage, purpose-driven businesses significant amounts of money and time to reach the requisite number of proof points in order to receive investment dollars. As a result, most entrepreneurs cannot get past the chicken and egg problem of how to create a large enough dataset to prove their business model really works. As one entrepreneur put it, purpose-driven businesses “have to figure out a way to get one million dollars in order to raise one million dollars.”

Ultimately, there is a shortage of risk-adjusted catalytic investment capital from investors that are willing to provide the first $1-5 million to prove a concept. Given this situation, purpose-driven companies should target impact-agnostic investors in the near-term and work to build a strong business case for impact investors in the longer-term.

Check out tomorrow’s blog for a window into the third and fourth challenges constraining purpose-driven entrepreneurs during the capital raising process.

This blog post draws on original research conducted by May Samali and published in a Harvard Kennedy School Mossavar-Rahmani Center for Business and Government Associate Working Paper No. 59 titled ‘Mapping the Money: An Analysis of the Capital Landscape for Early-Stage, For-Profit, Social Enterprises in the United States’. Full citations for the data and statistics throughout this blog post are available online.

Image source: Kevin Dooley

Mapping the money (part 1)

As first published on the Living Cities Blog.

The Capital Landscape for Early-Stage Purpose-Driven Businesses
Popularized by business pioneers such as Ben Cohen and Jerry Greenfield of Ben & Jerry’s, Jessica Alba of The Honest Company, and Blake Mycoskie of Toms Shoes, purpose-driven businesses leverage the power of the marketplace to create social, economic and environmental value. In this three-part series, May Samali, Director at Tumml, an urban ventures accelerator in San Francisco, explores the challenges facing early-stage purpose driven businesses. Her first post provides an in-depth look at how these businesses are raising capital, and highlights the “pioneer gap” they face in their startup phase.

Throughout my career, I have witnessed the power of purpose-driven businesses to address pressing challenges such as unemployment and climate change, all while producing financial returns. But I have also noticed that purpose-driven businesses struggle to access funding, especially in their earliest stages of development. For example, I have encountered entrepreneurs who have been strung along by impact investors, only to be turned away after 12 months. I have also heard the complaints of founders who had to pay $4,500 just for the opportunity to pitch to an impact angel network. These stories are not uncommon, yet there is very little research on the funding challenges early-stage, for-profit purpose-driven enterprises in the U.S. face. In response, over the past year at Harvard University, I surveyed 60 companies to better understand the capital landscape and challenges facing entrepreneurs in this space.

The “Pioneer Gap”
When a purpose-driven business is in its startup phase, its ability to access seed capital is critical. Without that initial funding, promising startups cannot grow and realize their full potential. However, there are fewer documented exits in the purpose-driven entrepreneurship space, so funders gravitate towards later stage businesses where the risk of failure is significantly lower than the earlier stage.

As a result, these businesses face a “pioneer gap” – a financial burden shouldered by new companies in their early stages of pioneering new business models for social change. According to JP Morgan and the Global Impact Investing Network (GIIN) Impact Investor Survey in 2016, impact investors allocated only 4% of their available capital to seed and start-up stage businesses. Similarly, on Enable Impact – an online platform connecting purpose-driven entrepreneurs and impact investors – the overwhelming majority (84%) of the for-profit, purpose-driven businesses in the U.S. are “early-stage”, but only 8% of all self-identified impact funders in the U.S. are interested in early-stage businesses.

Capital Landscape for Early-Stage Purpose-Driven Businesses
So, given the “pioneer gap”, how are purpose-driven entrepreneurs capitalizing their businesses at the earliest stages? My conversations and survey results reveal five key insights:

1. Purpose-driven businesses choose a variety of legal structures
Company legal structure is important as it affects the ability of companies to access capital. The findings demonstrate that for-profit, purpose-driven businesses adopt a variety of legal structures. The most popular legal structures are C corporations (48%) and limited liability companies (25%). Interestingly, 12% of companies I surveyed are structured as public benefit corporations, a new legal denomination enabling companies to build “purpose” into their legal DNA. Given the variety of legal structures used by purpose-driven businesses, the “purpose-driven” label is a not a legal delineation.

2. Purpose-driven businesses raise less money than traditional technology startups
The size of seed fundraising rounds for purpose-driven businesses varies greatly. For the majority of companies (60%), the seed round is half a million dollars or less, with more than half raising less than $50,000. Only 14% of companies I surveyed have raised seed rounds of more than $1 million. In comparison, the average seed round for traditional technology startups is much larger – in the first half of 2016, the average size was $1.14 million.

3. Friends and family are the top source of capital for purpose-driven businesses
The companies I surveyed receive capital from 175 different sources – which fit in 12 main categories (see graph below). This diversity in funding sources is indicative of the democratization of seed funding and the lack of large institutional seed funders of purpose-driven businesses.

The three most common sources of external capital for purpose-driven businesses are friends and family (67%), angel investors (52%), and incubators and accelerators (40%).

Notably, despite the ascent of early-stage venture capital in the U.S. in recent decades, only 7% of purpose-driven businesses surveyed actually receive venture capital. Similarly, only 20% of companies receive capital from impact investors. Impact investors demonstrate a strong preference for investing in the later stages – certainly after commercial viability has been established and preferably once market conditions are well prepared for sustainable scaling.

4. Convertible notes are the most common type of capital raised by purpose-driven businesses

The three most common types of capital raised by entrepreneurs to fund their businesses at the earliest stages are convertible notes (59%), equity (43%), and grants/donations (39%). Equity is almost three times more common than debt (16%). This result is not unanticipated, given the need among early-stage companies for longer-term capital without short-term repayment commitments.

5. Purpose-driven businesses rely most heavily on networks
The three most common categories of resources used by purpose-driven businesses to identify and connect with potential funders are personal and professional networks (80%), incubator and accelerator networks (42%), and pitch and business plans competitions (38%). Less than 10% of companies I surveyed use impact investing intermediaries and platforms such as GIIN and Enable Impact to identify potential funders. These results demonstrate a significant reliance on networks as part of the fundraising process.

Want to know more about the difficulties purpose-driven businesses face during fundraising? Check out tomorrow’s blog to learn about the various challenges these businesses encounter in raising capital.

This blog post draws on original research conducted by May Samali and published in a Harvard Kennedy School Mossavar-Rahmani Center for Business and Government Associate Working Paper No. 59 titled ‘Mapping the Money: An Analysis of the Capital Landscape for Early-Stage, For-Profit, Social Enterprises in the United States’. Full citations for the data and statistics throughout this blog post are available online.

Photo credit: Moyan Brenn

Tumml'ing into 2017! Our year in review

With the holidays approaching, we at Tumml wanted to take a moment to thank you for your continued support!

2016 was a big year for our urban innovators. Chariot was acquired by Ford and is now expanding to five cities in 2017. Valor Water Analytics raised a $1.6M seed round, Neighborly announced its Bond Challenge winners, and ArtLifting launched a partnership with Starbucks. Most recently, Hive Lighting absolutely crushed its Kickstarter fundraising goals (raising $329K of a $35K goal with over a week still to go – yes, you read that correctly). 

Collectively, Tumml's 38 startups have created $190M in enterprise value, created 448 community jobs, and impacted 102 major urban areas. 71% of Tumml's startups have a woman or person of color on the founding team.

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Tumml recently completed its Tumml Clean Energy Prize, where we supported five awesome startups tackling some of the toughest clean energy challenges in our cities. We hosted a number of community events (a fundraising bootcamp, SPUR panel, etc), and spoke at events/judged pitches everywhere from DC, to Aspen, to Oakland. Tumml and its entrepreneurs have also gotten some great press along the way (in outlets like The Today Show, NBC, Stanford Social Innovation Review, The San Francisco Business Times, and The Wall Street Journal). You can read more about what we've been up to and the stories we've been following here.

We're wishing you a happy holiday season and a wonderful new year!