One of the biggest challenges cited for impact investing is the measurement and management of impact. However, if you’re an early-stage venture investor, you’re in a great position.
Arguably, impact measurement and management gets infinitely more complex the larger a company or portfolio grows. But investing at an early-stage allows you to be in close contact with the management teams of your portfolio companies and to help them determine and frame their impact from the get go.
As an impact investor, robust impact measurement and management is important for three main reasons:
- It helps to keep companies accountable to their mission
- It allows you to understand whether your investments are actually creating impact
- It ensures the impact information you report and benchmark is legitimate and reliable
At BGV we’ve been impact investing for eight years – our approach to impact has certainly evolved over that time, and continues to do so. Here are our top nine pointers for assessing, measuring, and managing impact as an early-stage investor.
Assessing impact pre-investment
1. Have outcome orientated investment themes
As an impact investor, your role is to support companies seeking to make the world a better place through their products and services. Those solutions will have real world outcomes, and it can help to frame your investment themes with this in mind.
Think big and ask yourself – what outcomes do I want to see in the world?
It may be gender equality or fairer access to finance. At BGV our themes are – a sustainable planet, a better society, and healthy lives. These serve us better than simply saying we invest in ‘health’ or ‘education’ for example, because not all startups working in health or education are necessarily delivering positive impact by default.
The UN Sustainable Development Goals (SDGs) can provide inspiration to narrow your focus if needed.
2. Clarify the impact hypothesis and target users
Just as you ask yourself what are the outcomes you want to see in the world, you also need to ask this question to any potential investee companies.
Depending on what stage they’re at, the founders should at least have an impact hypothesis and an idea of how they can deliver this. Nesta’s Standards of Evidence suggests that company’s at the beginning of their journey should at least be able to – ‘Describe what they do and why it matters, logically, coherently and convincingly.’ Another term or framework for this is ‘theory of change’.
Going one step further, it’s also useful context to ask a company to specify their target users of their product or service, and to clarify whether they are underserved in relation to the outcome. i.e. Does their product or service help people who need it most (and where there is greatest potential for impact) or is it simply providing an alternative to people who may already have many options?
3. Assess the team based on their commitment to the problem, not the solution
Often people ask us ‘but how do you know if a company is genuine about their impact mission?’ There isn’t a silver bullet here, but after a few conversations with a founding team, it’s usually quite obvious.
When investing at an early-stage there is usually very limited product or traction to assess an opportunity on. In which case a large part of the decision comes down to the founding team and assessing whether they’re committed to the problem or the solution.
As with most early-stage startups, pivoting is expected. We think this is fine, so long as the company is always trying to solve the problem they first started with. However, if it’s the solution the company is most excited by, then there’s a risk they will try to shoe-horn it into any industry or problem where it works.
Therefore ask yourself – is this team really passionate about the problem they’re trying to solve, or is it the solution they’re in love with?
4. Is the impact innate to the business model?
Another way to assess a company’s potential impact is to look at the business model.
In an ideal world, a startup’s commercial success should directly correlate with their intended positive impact. That is to say that the more of a product or service a company sells, the more impact they have.
Some impact investors refer to this concept as ‘lock-step.’
One way to do this is to use the B Impact Assessment which includes a range of questions on an enterprise’s business model and whether it’s designed to contribute to achieving particular SDGs.
Measuring and managing impact post-investment
5. Require a legal commitment to the stated impact and suggest becoming a B Corp
As an early stage investor you may be able to request your investee companies to incorporate their purpose into their articles of association. We do this at BGV – requiring the company to include a mission-lock, which is to clearly state their impact mission and to acknowledge that it sits alongside their commercial purpose to achieve value.
Once companies are more established you can encourage them to apply for B Corp status, which also requires similar legal amendments, helping companies protect their mission through capital raises and leadership changes. Other benefits of companies becoming a certified B Corp include a globally recognised and independent verification of their mission, which can help attract customers and talent, and the opportunity to learn from a community of like-minded peers.
6. Set reporting expectations with key impact metrics
Firstly, be aware that if you’re investing across a range of companies and sectors, it will be difficult to create a portfolio wide one-size fits all approach to impact measurement and reporting. For example, a sustainability company’s impact will be accounted for in a very different way to that of a health-tech startup.
However, it can help to map out a few general milestones on the depth and type of reporting you expect from companies at various stages as they grow. Very early-stage companies will have limited data whereas at Series A and beyond it should be much more comprehensive – again, Nesta’s Standards of Evidence can help you here. It can also help to have a discussion with founders to ensure your expectations on reporting and milestones are aligned with theirs and are realistic for them to report on.
At an early-stage, we find it helps to ask the company to set one key impact metric unique to them and to report on that over time. For example ‘number of patients using our app on a monthly basis.’
As mentioned above, generally we would expect successful companies’ impact and commercial success to be closely linked. Therefore their impact metric may be a commercial one – for example ‘number of customers.’
7. Use industry standard frameworks
Needless to say, don’t try and reinvent the wheel by devising your own impact framework. There are a number of globally recognised ones that can be taken advantage of.
The UN’s SDGs are a great place to start. You can use the 169 targets to map your companies against the 17 goals. (Although it’s worth noting that LGBTQ+ focused outcomes require a different framework, as the SDGs do not cover LGBTQ+ inclusion. Stonewall has a useful resource for further reading on this.)
As mentioned, Nesta’s standards of evidence helps to clarify the quality of impact data you collect. While other go-to places for more complex impact measurement frameworks are the Global Impact Investing Network’s IRIS and the Impact Management Project.
8. Consider qualitative as well as quantitative approaches
Most impact is best communicated through both qualitative and quantitative methods. So while reporting is essential, also consider speaking directly with your companies to ask them specifically about their impact. Prompting them to collect stories and testimonials from their users can really help to bring their impact to life.
9. Consider ‘unintended consequences’
Finally, although an impact-driven company is pursuing positive outcomes, they still need to be aware of negative unintended consequences. As an investor, you should also ask this question on a semi-regular basis to get the full picture. You should ensure both the company and you have a clear understanding of the various risks associated with the venture’s operations and ways in which they are mitigating them.
‘Consequence scanning’ is a useful methodology to help companies think about responsible product development and encourage critical thinking, as well as the Ethical Explorer from Omidyar Network. The Impact Management Project’s ‘risk’ categorisation also provides a useful framework.
If you’d like to chat with other impact investors about impact measurement and management, join us in the Tech for Good Investing Linkedin Group.