Real Deal No. 2: Getting Impact Investments Done (Coming to Terms)



The second episode of Impact Alpha’s three-part Real Deal webinar series, “Getting Impact Investments Done – Coming to Terms,” explored how investors and entrepreneurs can work together to create simple, efficient financing agreements that meet the needs and interests of both parties.

Listen to the replay of the 30-minute show.

Joining David Bank, editor of ImpactAlpha, were Shelley Saxena, founder of Indian healthcare enterprise SevaMob, and Andy Lower, founder of ADAP Advisory Services and ADAP Capital, an early-stage investor in SevaMob.

Saxena, an Atlanta tech entrepreneur, returned to his family’s hometown in Uttar Pradesh to found SevaMob, a mobile health services and micro-insurance startup for low-income Indians. (See related story: SevaMob: Mobile Services to Spread Health Care Across India.)

Last year, ADAP led SevaMob’s bridge round of financing, which raised $227,500 through a convertible note. It was intended to help SevaMob expand services and meet milestones toward a goal of Series A financing this year. From start to finish, the deal took 90 days to close – an unusually quick transaction; many impact investments can take 12 or even 18 months to finalize.

In the webinar, Saxena and Lower emphasized the need for investors and entrepreneurs to get comfortable with early-stage business risk, particularly in emerging economies like India, where SevaMob operates. Some investors in such enterprises insist on complicated investment terms and contract clauses to mitigate those risks. Lower maintains that complex clauses and onerous terms can actually increase risks, slowing business growth, distracting the entrepreneur and causing other unintended consequences, while providing little added security for investors.

“They are nervous about the risks so they put a lot in the terms,” Lower explained. “But it’s the entrepreneur who has a ton of skin in the game that is taking on [the most] risk.”

Investors should of course be responsible in their due diligence, but also accept the unavoidable “unknowns” in the business. ADAP provides post-investment advisory services to help mitigate some of those risks, as a partner to the entrepreneur after the deal is done. (Such post-deal strategies will be the topic of the third webinar in the series – register here.)

Fast and simple

In the case of SevaMob, many of these “unknowns” were already known. The company had identified operational inefficiencies in its early model, and was on the path to correcting these before signing the agreement for the bridge loan. Quick financing was the key to proving the sustainability and scalability of SevaMob’s new model. In the year since the bridge financing, the company has expanded its healthcare and insurance operations from one site in one state in India to 15 sites in six states.

Mission alignment

To close the investment so quickly, ADAP used a simple convertible note, without the side letters or most of the additional terms that other investors require. ADAP coordinated on behalf of the other four investors in the deal, who all accepted the same terms. From there, ADAP proceeded with his final “gut check”:

  • Are all parties aligned on core values?
  • Do all parties understood every word of the contract?
  • Does each party feel they and the communities SevaMob serves will benefit?
  • Do the terms of the agreement lay a foundation for future investments for SevaMob?

Agreeing on the basics of the note is relatively straightforward, including the loan interest rate and term, the discount rate for investors if equity conversion kicks in, and terms for conversion.

Ron Boehm, principal of Boma Investments, the early-stage investment company of Boehm and his wife, Marlys, said such a “gut check” is the most important part of investing in young companies, particularly in immature and developing markets. Boehm, like Lower, is a non-practicing lawyer.

“A lot of people give lip service to the fact that a business is in a developing country or a place where the laws and banks are difficult to deal with,” he said. “If it is too risky in the first place, protecting yourself legally to make up for the risk is a questionable endeavor.”

Boehm acknowledged that he has more flexibility because he is investing his own family’s money. As a fund manager of other people’s money, Lower said he has to fulfill his fiduciary responsibility. He added that the best way to put money to work effectively in impact investing, however, is to focus on the entrepreneur foremost: “If I want that money to work, I have to be smart about how I’m using everyone’s time. The best way [to do that] is making sure [the entrepreneur] has the best chance of success.”

Saxena seconded Lower’s point of view, saying that investors should not minimize how much entrepreneurs invest and take risk with their businesses. He described SevaMob as his “Plan A, B, C, and D”. “This is my retirement plan,” he said.

Register here for the third discussion, “Buyer’s Remorse or Investor’s Delight,” Wednesday, June 10 at 9 PT/noon ET.

See the replay of the first webinar in the series, “The Four Hour Due Diligence.”

 

Catch the second episode of ImpactAlpha’s #RealDeal video series about getting impact investments done, this Wednesday, June 3 at 9 am PT/noon ET.

In the half-hour show, we’ll check in on how SevaMob is doing since ImpactAlpha profiled the company in January, “Mobile Services to Spread Health Care Across India.” Last year, SevaMob closed financing of $227,500 as a bridge toward Series A round of investment.

The financing was led by Andy Lower of ADAP Advisory, who said at the time, “We believe in the massive potential of Sevamob’s disruptive primary healthcare model.”

Andy and Shelley will join me to talk about “Coming to Terms: Simple term sheets and structures can make

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