Impact Investing, with Alex Pitt
Mustard Seed is an investment firm investing in founders driven to make a difference. They back founders who (much like us), passionately believe that business can, and should be, a force for good.
They have a unique ‘lock-step’ investment lens, which ensures that the Fund only backs businesses whose core product or service is inherently beneficial to society. Here, we speak to co-founder Alex Pitt, who offers us an insight into the organisation and explains how their people-focused approach to investing in companies drives outcomes.
How did Mustard Seed begin?
Mustard Seed started with my great friend Henry Wigan and I going to leading universities in 2013 and 2014, alongside our prior jobs, initially thinking we’d have coffee with a few entrepreneurial students – but each time there were 300+ people in the room! That’s when the seed was planted for what became Mustard Seed. The university events showed us that there was a massive lack of capital for funding great people with ideas, entrepreneurs who want to make a real difference in the world. We started investing personally with a few friends in some of these visionary entrepreneurs, and by the end of 2014 it had become too all-consuming to do as a hobby – so we launched full-time!
In order to create more opportunities for these entrepreneurs, we started inviting friends to join as Members. Today, we have 60 Members across the world who invest with us on a deal by deal basis, and a small Fund. What3Words, Winnow, Beulah, OLIO and Rubies in the Rubble among other portfolio companies, have all been through this process.
Mustard Seed invests across 5 areas that are in alignment with the United Nation’s Sustainable Development Goals. What would you advise to a founder looking to set-up and gain funding for a mission-driven business outside these 5 areas?
I think these areas are quite broad already – if anything, we might narrow down over time. We’ve tried to be pretty all-encompassing in terms of looking to find businesses that address the biggest problems in the world – across health, education, environment, family and community, and economic inclusion. I can’t think of many really acute problems in the world, maybe with the exception of global terrorism, that don’t sit within one of these areas. We always look at global challenges too, so we would never invest in business that will only solve a very local issue.
When you’re looking to invest, does the impact always have to come from the product/service itself or can it come from elsewhere, like the brand?
We always measure and report the social and environmental impact that is being generated at the core of the company’s business model. For example, Winnow Solutions has a device that measures food waste in commercial kitchens, and What3words have created a new and improved way of defining where someone exists, with very compelling applications in emerging markets.
We look for businesses that have a tightly correlated link between the business outcome and the social or environmental outcome. For example, every time Rubies in the Rubble make a sale, the environmental impact in terms of food waste reduction is directly measurable.
What can for-profit businesses achieve that charities can’t?
We’re not saying charities shouldn’t play a role, of course they play an incredibly important role in countless areas. We’re not saying impacting investing will ever replace the need for charity. I think impact investing is an important part of the jigsaw; the commercial focus and motivation is a very compelling one. We think that for ventures to be sustainable long into the future, they must be for-profit ventures driving strong commercial returns.
We certainly have investors who have joined our network because they are frustrated with the charity they’ve previously been giving money to, not delivering what they said they would deliver or failing to report to them properly. That’s something we are very clear about: we are trying to be really strong at reporting back on a regular basis the outcomes that are being achieved. We still have some way to go in this regard, but we have made a decent start.
I would also add that I think impact investing is still rather over-hyped, especially in early-stage venture capital. There’s a lot written about it and spoken about it at conferences, but actually when you look at it in general, the amount of capital that is actually being deployed is still quite small – and capital options for social entrepreneurs are very thin, which is one reason why we receive 3,000+ business plan submissions in our inbox per annum!
How do you measure return on investment?
Mustard Seed will always define a social or environmental mission statement for every company we back. We define it jointly with the founders before we invest, and it will be embedded in the articles of association of the company. It will be legally enshrined and there will always be metrics which we’ll be able to track, alongside the financial impact.
These impact metrics depend on business. For businesses tackling food waste like Rubies in the Rubbles, we would measure CO2 emissions reduction, and food-waste saved in GBP and percentage terms. For What3Words, we measure provision of addresses to people that previously didn’t have addresses and the impact this has on furthering the reach of medical aid. We’ll use different metrics in healthcare. Eventually we’d like to get to lives saved and improved patient outcomes. These metrics need to be simple too, and they need to be enforced – otherwise it defeats the purpose.
We’re putting together our first impact report at the moment, which will be a full consolidated study across our portfolio. Big Society Capital is an investor in Mustard Seed - they have been a massive enabler of social investment in the UK, and this report was one of a few very important conditions of their investment.
How do you choose who to invest in?
We have a two-hour discussion every Tuesday morning on all the priority ventures in our pipeline. We always discuss the people first and foremost – their motivations, backgrounds etc. And of course we look to define and quantify the problem that’s being solved, and the commercial potential. We obtain feedback from sector/topic/geographic experts within our Membership, which is one of the great things about having such a rich network of people with experience to tap into. And finally we make consensus-based decisions within our team.
We really like hearing personal stories behind why someone has started something. We tend to look for an emotive connection between the founder(s) and what they have started, which gives us comfort that they’re not just going to give it a try for 6 months and go back to their old job if it doesn’t work out. That’s really important.
People are just as important as the ideas themselves, if not more – we spend a lot of time getting to know them. There’s a period of mutual courting that might last up to 3 months, where we get to know the founders very well. One of our investors who I have learned a lot from gets himself invited over for dinner with founders before making a decision and observes how they act with their partner and children. He says it’s more important in his assessment than any psychometric tests. We haven’t gone that far yet but his approach certainly resonates. We also get references, including second order ones. If someone is asked for references, they will suggest people that will generally say nice things – we use second order ones to try and drill down. And we like people that are very down to earth and humble about the way they do things, with no sense of ego.
Connect with Alex via email: email@example.com.
Connect with Mustard Seed on Twitter: @MSeedImpact.