Laura Hill is one of SWAN’s most experienced investors, and been an active investor for 10 years. Listen to this webinar to learn what her investing experience has taught her.
Carbon credits are part of the overall solution for reducing CO2 in the atmosphere and have attracted significant interest from investors and companies.
When considering investing in a carbon-credit related startup company, it may be helpful to consider the following Pros and Cons.
- The world must find ways to slow global warming.
- Startups developing carbon reduction products may find that their customers can benefit by selling credits generated when using the company’s products. This may incrementally lower the sales friction encountered by the startup.
- A startup can directly deploy carbon reduction technology and benefit from selling credits. For example, the startup can own and operate wind or solar power generation facilities or can own and operate systems that capture and utilize the methane gas that is emitted from waste disposal sites, coal mines, or livestock farms.
- Thinking big picture, carbon credits are an indirect approach to reducing carbon entering the atmosphere, and most often don’t reduce CO2 at the source, where the CO2 is most concentrated. And the purchasing of carbon credits allows buyers to avoid reducing or eliminating their own emissions and may be motivated more by a need for greenwashing marketing campaigns than a financial commitment to slowing global warming.
- If the company’s primary mission is to sell carbon credits, consider that carbon credits are unregulated and vary widely in quality and impact. There is no standard way to measure, verify, and certify the emissions reductions or removals that carbon credits represent. Some carbon credits may be based on dubious or fraudulent projects that do not actually reduce or remove greenhouse gases from the atmosphere.
- Carbon credit marketplace startups face the same challenge that every marketplace startup faces, namely, achieving a balance of supply and demand, and having to be equally successful with two disparate marketing campaigns.
- A carbon credit selling startup may be creating credits planting monocultures of trees, which are inherently damaging to the environment by decreasing biodiversity has negative impacts on soil quality, water availability, and wildlife habitat, thereby reducing the resilience and adaptability of forests to climate change and natural disasters. Insect and bird populations around the world are plummeting precipitously in part due to the destruction of the biodiverse habitats that they depend upon. Read more
Under “new” IRS Section 174 capitalization rules, a portion of R&D expenses cannot be expensed for tax purposes in the year when they are incurred. Rather, current-year R&D expenses get spread out over several tax years, including years when early revenue might have resulted in a positive net income.
For example, a hypothetical startup incurred a $350,000 income tax bill in a year when GAAP accounting showed that they were unprofitable. That $350,000 payment to the IRS burned investor-provided funds that could not be used to grow the company.
Melinda Oster, CPA and highly experienced Tax Partner at Atchley and Associates, discussed 174 in an informative webinar which covered:
- Understanding the motivations behind Section 174’s adoption.
- A breakdown of the key provisions of IRS Section 174, including eligible expenses, qualifying activities, and their tax implications.
- Best practices and strategies to ensure compliance with IRS Section 174 while maximizing your tax benefits.
- Examples showcasing the tangible benefits and potential pitfalls associated with IRS Section 174.
Technologies that support Virtual Power Plants can provide interesting investment opportunities for angel investors.
Electrical power demand varies dramatically over the course of a day, and that demand is out of sync from when renewable electricity is generated. If demand and supply could be brought into sync, there would be less demand for non-renewable-fueled power-plant capacity.
An emerging solution is Virtual Power Plants (VPPs) that can draw on and aggregate behind-the-meter Distributed Energy Resources (DERS) at peak-demand times. A VPP can balance electrical loads and provide utility-scale and utility-grade grid services like a traditional power plant)
DERs are equipment located on or near the site of end-use (for example, behind the meter) that can provide electricity at a small scale when needed by the grid. For example:
- Electrical vehicle batteries that were charged with demand on the grid was low.
- Residential solar/battery systems that store power during the day when residential demand is low.
Projections show that VPPs in the US will be able to exceed the capacity of all US nuclear power plants.
The questions vary depending on the specific interests and priorities of each impact investor, but they generally revolve around understanding the startup’s mission, impact measurement, scalability, financial viability, risks, partnerships, and accountability.
Here are some questions you may ask:
1. What is the mission and purpose of the startup? Investors need to understand the company’s core values and the specific social or environmental issue it aims to address.
2. What is the potential impact of the startup’s product or service? Investors need to know how the company’s offerings can contribute to positive change and create meaningful social or environmental benefits.
3. How does the startup measure and track its impact? Investors are interested in understanding the metrics and methodologies used by the company to assess and report its impact. They want to ensure the startup has a rigorous and transparent impact measurement framework in place.
4. What is the size of the target market and the growth potential? Investors need to evaluate the market opportunity and scalability of the startup’s impact. They want to understand if the company has the potential to reach a large number of people or create significant environmental improvements.
5. What is the business model and revenue generation strategy? Impact investors need to know how the startup plans to generate sustainable financial returns while delivering positive social or environmental outcomes. They want to assess the viability and long-term sustainability of the business.
6. Who are the key stakeholders and partners involved? Investors are interested in understanding the startup’s network of stakeholders, including customers, beneficiaries, suppliers, and strategic partners. They want to evaluate the company’s ability to collaborate and create synergies with relevant organizations.
7. What are the potential risks and challenges in achieving impact? Investors need to identify potential obstacles that may hinder the startup’s ability to achieve its intended impact. They seek to understand the company’s risk mitigation strategies and the management team’s ability to navigate these challenges.
8. What is the exit strategy for the investor? Impact investors often seek to understand the startup’s plans for future liquidity events, such as an IPO or acquisition, to ensure they can eventually realize financial returns on their investment.
9. How does the startup ensure accountability and transparency? Investors need to know how the company ensures accountability to its impact goals, stakeholders, and investors. They may inquire about governance structures, board of directors structure, impact reporting, and the company’s commitment to ethical practices.
10. Has the startup received any third-party certifications or recognition for its impact? Investors may be interested in knowing if the startup has obtained certifications or awards from reputable organizations that validate its impact claims. This can provide additional assurance and credibility.
These are the questions that SWAN digs into before investing. SWAN makes a first investment in 6 to 8 companies per year. A team of 10 volunteers publishes a twenty -page deal memo for each investment opportunity. Joining SWAN as an Angel or Associate member and helping with a deal memo is a great way to learn how to assess an impact-startup investment opportunity.
The SWAN Impact Network now has a Director of Impact reporting, Meagan Packard. Meagan is doing a wonderful job of advancing our Network’s understanding of how to assess and document the impact potential of a company before our angels invest. She is also coaching companies on how to measure impact in ways that creates actionable information that helps the CEOs to maximize the impact delivered.
Meagan pointed me to a well-written article that supports what I have been saying for years. SWAN focuses on impact investing, and not on ESG (Environmental, Social, and Governance). Impact investing comsiders a company’s business primary product or service offering. ESG considers how the company’s operations interact with society and the environment.
You can read more in the Stanford Social Innovation Review at ESG is Not Impact Investing and Impact Investing Is Not ESG.
A Perspective from Bob’s Desk.
Executive Director, SWAN Impact Network
Likely you have seen headlines, such as the Wired article, “The Bad Times are coming for Startups”. The article starts with these words, “Last week, the employees of Cameo, a startup that sells personalized videos from celebrities, gathered for an all-hands meeting. The news was not good: Nearly a quarter of the staff was being laid off.” And the article goes on to say, “Soaring valuations and booming IPOs made startups seem like a safe bet, inspiring hundreds of new venture funds. Now, the party seems to be over.”
Concerns about the economy (inflation, possible recession, delayed IPOs) are causing VC to give their portfolio companies tough-love advice. “Cut spending. Conserve cash.” These words are a complete turn-around from the Silicon Valley message to companies: “Grow as quickly as possible to create or disrupt a market. Gain market share by raising and spending as much as possible and don’t worry about getting profitable.”
This shift in mindset influences how we, who are most often the first investors in pre-seed companies, should think about investing.
How should early-stage startups think about all of this?
Starting a company during a time of economic uncertainty has a number of advantages. Fewer startups are created, so competition in your niche market may lesson. Hiring becomes less difficult when other companies have layoffs or hiring freezes. Service providers need to shore up revenue, and may be more accessible. And most importantly, when the economic outlook improves, which it always does, the VCs will have fewer companies at your stage of development to invest in, since your class of startups will be smaller.
How should early-stage angel investors think about all of this?
Since we think of a five-to-seven year window for return, companies starting today should exit in a much stronger economic environment. We should continue our search for promising companies. And we should place a greater emphasis on cash-efficient companies. And, we should require first closing investment amounts to be sufficient to carry the company for two years. Can the company make solid business progress in two years with limited funds? And we will need to work diligently at syndication to help the companies to get to the first close amount.
The SWAN Impact Network has earned a reputation for performing high-quality due diligence before we invest. And writing comprehensive deal memos is made easier for each contributor when a team comes together to work collaboratively. The team approach supports one of our key values, educating our members. Working on deal memos is immensely educational, especially for angels new to investing.
Here are some statistics:
- Over half of our current SWAN members have helped write a detailed deal memo
- One-in-five of our current SWAN members have been a deal lead and managed the writing of a deal memo
- For our two most recent investments, each effort had five first-time diligence contributors and a first-time deal lead, who were ably educated and supported by our more experienced investors.
From the Desk of Juan Thurman, Director, SWAN Impact Network
The SWAN Impact Network started 2020 excited about the year. We put forth aggressive goals and plans to achieve them. We had our first quarterly pitch dinner in person in February on the campus of St. Edwards’s University. They were great hosts and we had 3 interesting pitches, a good dinner, and a vigorous exchange of ideas.
The Impact of Covid
Then the pandemic hit. Like most, we were caught flat footed and at first did not know how to react. Then our Executive Director, Bob Bridge, and our amazing board snapped into action. We moved all our events online and in April offered a webinar, attended by 200 investors and entrepreneurs, that addressed investing during the pandemic.
Then, most importantly, we reached out to all our portfolio companies to see how they were impacted by the pandemic and if they needed help. We had productive, if difficult, discussions. Those conversations led to four of our portfolio companies receiving a follow-on investment to help them weather the covid-related economic crisis.
We found our footing mid-year and adjusted. We experienced a slowdown in Q2 that leaked into Q3. Fewer entrepreneurs applied and investors were more conservative with their capital, but we moved forward confident that things would get better and that impact investing is even more important now. The upside was that geography became less of an issue and we had more out of state and international applicants than ever before. In that spirit, our Angels selected and funded 3 new companies in 2020. And we are now, in January, funding two companies that began due diligence in 2020.
Our Good News in 2020
2020 had its share of silver linings and for that we are grateful to our angels, sponsors, entrepreneurs, associate members, interns, and the greater impact community. We ended 2020 with nearly 60 angels and having invested over $6M in social impact companies since our inception in 2015.
Some of our portfolio companies were able to raise venture capital in 2020 and one merged with a larger company. All our portfolio companies that went into the pandemic with trepidation have come out stronger and more resilient.
We have added board members and associates keeping diversity and inclusion in mind. Speaking of diversity and inclusion, we have added a chapter in Dallas and a new Executive Director, Heather Gilker, to run it. We are excited about SWAN in the big D.
Looking toward an Exciting 2021
We are off to a fast start in 2021. In January we are investing a total of over $1M in two companies from our 2020 funding cycles. And we are in the middle of our Q1 down selection process and will invite 3 promising impact startups to pitch to the network on February 11th.
We are also rebranding the network and have done a complete overhaul of our website. Southwest Angel Network has served us well, but as we continue to expand and see deals from of all over the US, we have decided to rebrand as the SWAN Impact Network.
Lastly, we have launched the SWAN Impact Fund. The fund will work alongside the network and invest in later stage deals focused on health tech and clean energy. Please keep an eye out for a more formal announcement in the coming months.
If you have impact investing in your 2021 plans or are interested in learning more please visit our website, swanimpact.org and connect.
2020 Follow on Investments:
2020 Initial Investments
Don’t Get Mad Get Paid
Thinking about becoming an impact investor? Are your thoughts and questions the same or different from others? What are they saying?
The Southwest Angel Network recently conducted a survey regarding what makes impact investing attractive and what holds back a decision to become an impact investor.
Here is what we learned.
Why SWAN angels joined SWAN
Survey Question: When you were personally considering joining SWAN what were the top two most compelling factors that most attracted you?
Survey Answers: For SWAN angels, by far the biggest appeal was a desire to make a positive impact on the world. Secondly, many of the angels had no prior angel investing experience and wanted to learn about investing. SWAN is structured to provide that education.
What potential angels liked about SWAN
Survey Question: When our SWAN angels have introduced SWAN to other potential angels, what are the ideas that most strongly resonate?
Answer: Just like the folks who have joined, potential angels like our impact mission, and the ability to learn about angel investing.
What holds people back from becoming Impact Angels
Survey Question: We asked our angels what their pre-joining concerns were and also what concerns they heard when introducing SWAN to potential angels.
Survey Answers: The primary concerns were the amount of investment dollars required , the amount of time required and their lack of experience in angel investing.
The good news is that SWAN assumes that new angels have no startup investment experience. We encourage new SWAN angels to not start investing until they have benefited from our educational webinars and have observed how our experienced angels think about assessing investment risks during our down-selection and due diligence processes.
Further, SWAN does not have a required minimum investment amount. Rather, we suggest that angels think top-down about how much of their assets they are willing to put into Impact investing, and then determine how to use that budget to build a portfolio of 20 investments over a period of years.
And typical of the 80/20 rule, some of our angels enjoy spending significant time advancing the mission of SWAN. And for others, the perfectly reasonable commitment of time is attending our quarterly pitch events, and reading the due diligence reports that SWAN has produced as the final step before we ask angels if they would like to invest in a company that has made it through our rigorous evaluation process.