Venture Capital: Impact’s matchmaker
Solve, an initiative of the Massachusetts Institute of Technology (MIT), aims to connect impact focused start-ups with sources of capital
• Solve is a marketplace for technology entrepreneurs and investors and is based at the Massachusetts Institute of Technology
• It focuses on projects aiming to solve pressing global problems
• An awards programme singles out the best projects
A miniature robot called Daisy is inserted into a water pipe and travels through it, experiencing and recording pulling forces from the suction arising at leaks. It is the invention of Pipeguard Robotics, a start-up that aims to solve water network leakages by mapping data on leaks before pipe networks lose more water or cause structural damage. The company was one of the winners of the Solve challenge of 2017, an award series housed at the Massachusetts Institute of Technology (MIT) and founded in 2015 by MIT president Rafael Reif. The awards platform seeks to identify and help new entrepreneurs with good ideas and match them with funders.
Daisy is a smart instrument that could attract substantial demand from water companies all over the world. It is a product with a specific focus whose characteristics and benefits could be modelled economically using stable performance parameters. That feature differs from the type of impact investment opportunities that require sophisticated predictions of human behaviour and thus may well raise more objections.
Nevertheless, Daisy has not gained any serious funding. By contrast, many technology start-ups in settings such as Harvard Business School or Stanford University in California attract enormous amounts. One example that also uses robotic technology is the software and hardware kit devised by a Stanford start-up, Drive.ai, in the trendy field of self-drive vehicles. In 2017, that company stated it had raised $50m (€41m) in a series B venture capital round.
A particular perception of impact investment may be one explanation for this type of funding gap in the sector. Many start-ups operating in Silicon Valley, as well as in other hi-tech enterprise clusters based at or around leading universities, have still not engaged with it – a reluctance Solve has been established to demolish.
“There are several notable examples of entrepreneurs who care deeply about the social or environmental impact of their business but shy away from approaching impact investors because they fear that they will look less profitable if they are labelled ‘social entrepreneurs’,” explains Alex Amouyel, who started as Solve’s first executive director in September 2016.
Solve aims to explode that mindset. The organisation describes itself as a marketplace for global technology entrepreneurs and funders working on initiatives addressing the world’s most pressing problems. “MIT’s mission has always been about solving world challenges – and it’s always been a school of practical application. We recognise that in the 21st century, there are complex, multi-dimensional challenges,” says Amouyel. Hence, overcoming them may mean drawing on ideas, cultures and experiences more divergent than those in a typical US business school campus – the scene of many groundbreaking early agreements between angel investors and well-known technology companies.
Thus the platform has another unique feature. It is appealing to individuals and SMEs anywhere – not only in US technology havens but in remoter areas of both developing and mature economies. “Our Solvers could be an MIT student, an entrepreneur in Myanmar or a refugee in Lebanon. They can be of any age, for profit, non-profit or a social enterprise. What we do is select the most promising innovators.”
With its base in MIT, Solve’s activity is distinct from some of the technology start-up and funding mechanisms that also raise money around Kendall Square in Cambridge, Massachusetts. For example, a new start-up accelerator built by MIT, known as The Engine, announced in 2017 that it had closed its first investment fund for over $150m. This is separate from MIT and will be used to support start-ups developing breakthrough scientific and technological innovations with potential for societal impact.
During the last round of awards, Solve received 1,000 applications from 100 countries and selected 38 winners. They presented solutions on Solve’s four global challenges for that year: brain health; sustainable urban communities; women and technology; and youth, skills and the workforce of the future. Many of the MIT Solvers, such as Pipeguard, develop a new tool. Alternatively, they might devise solutions to improving or raising the use of technology among key workers such teachers, farmers and doctors. Most are innovators and entrepreneurs working in their communities but not getting the access to networks, capital and resources to significantly accelerate their work.
The for-profit inventors are typically seeking pre-seed and series A investments. Many large investors may consider the sums sought by these innovators as small in scale, ranging from $500,000–1m – a gap Solve also aims to help close. The role of the hub is to interconnect the innovators with these networks and resources. “We’re like a trading platform that is not only concerned about trading funds but works as a matchmaker – a broker between innovators and people who have resources to support innovators who want to realise environmental and social goals,” says Amouyel.
Funding sources Solve aims to extract range across the whole spectrum – not only angel and venture investors but also institutional investors. Not all the help provided is financial. Some is about technology or organisational development or helping sell or distribute the product. Thus the platform also helps start-ups link up with foundations, grant bodies and government agencies.
The organisation aims to breach several attitudinal barriers. The first is a perceived lower return. “Investors think that they need to accept discounted returns for investing in social enterprise. This is not always true,” says Amouyel. One example is Generation Investment Management, an equity fund using sustainability criteria founded by former US vice president Al Gore, which has outperformed benchmarks.
Secondly, many investors want a three to five year exit but that may not be typical of impact investments. “They also think there isn’t a clear pipeline for funding social enterprises, which is where Solve can really help,” says Amouyel. Some of these perceptions may not be in tune with their own experiences backing conventional start-ups also in flux. Are they being too critical?
“Early stage impact investment is very fragmented and it’s hard for entrepreneurs to find those pools of money. But in a traditional Silicon Valley situation, any hoodie with an idea can get backing,” says Amouyel. Most of the time it fails. Investors make a loss, and the start-up changes its business model. “They know one of the small cheques they write out will be a new success story. That’s what you could and should do in early-stage social enterprise. Some will succeed and have tremendous positive social impact and great returns,” she says.
If Solve achieves its objectives, impact investment will make use of such innovation to move away from its marginal position, and financial professionals drop their assumptions on financial models in the impact investment sector, for instance. These may be inconsistent. “In several industries like biotechnology, many early-stage enterprises secure millions in government or foundation grants for R&D – but no biotech investor thinks they are a less appropriate venture as a result. On the contrary, they view this as a great sign.”