9 Principles Of Venture Capital Jumping On The Impact Train

Interest in the impact VC sector has taken off in the last 12 months. We believe that the risk-return profile of Venture Capital asset class combined with an Impact Investment mindset can support this transition and create triple-bottom-line returns and help achieve these global goals.

We know that we need capital now more than ever that can be invested into solutions that can be used as a force for good. We need LP investors to start viewing the VC asset class not from a risk perspective but as an opportunity enabler that has a real chance to solve the world’s most pressing challenges if combined with a systemic impact lense. The scientific evidence points to the fact that we simply cannot isolate financial return from other effects: there must also be a transition from short-termism to thinking more clearly about longer-term outcomes that are for the benefit of the greater good and this requires the primary purpose at the outset to shift from solely financial gains to equal gains for people, planet and profits.

Global society has diminishing room for failure, as the latest report from the Potsdam Institute for Climate Impact Research shows, and so we need to outline the bare minimum of what constitutes Impact Venture Capital, to create an orientation line.

Whilst benchmarking and a framework exists for most public market funds, there remain issues around the definitions, rules, and principles (for example on the difference between ESG and impact investing). This is further exacerbated by the lack of general principles in the impact venture and impact VC space. Below we have developed 9 principles as a start. 

These principles are by no means exhaustive, but we do hope to at least trigger some intelligent conversations and lively debate that can set a baseline standard for good practice.

9 Principles Of Venture Capital Jumping On The Impact Train

Principle 1: Any investment should yield a monetary return and solve a problem for the greater good.

This definition is intentionally very broad. With the Sustainable Development Goals, we have a guideline as to what greater good means.

Principle 2: Transparency is the underlying principle. The public markets function because there are rules for disclosure and we are now seeing ESG statements required. The transparency of impact outcomes, in public and private markets, is often murky and unclear, but in private markets, there is an additional problem that little needs to be disclosed.

Transparency has the dual effect of keeping founders focused and also gives investors a level of comfort. In an ideal world, a straightforward statement of positive and negative effects would be provided on the annual statement, but the methods and definitions are not clear nor agreed yet. Being transparent does not have to mean perfect outcomes straight away, indeed positive effects and outcomes may take time over the investment lifecycle and impact might only be achieved after the investment has been exited. Nonetheless, these statements will make funds and startups future proof, since the market will expect these (and likely other positive/negative effects) to be disclosed in the future.

Principle 3: The societal problem is so significant that it is able to create a new market or support the development of a new market or markets.

The business model and mathematics of classic Venture Capital dictate that business models and business operations have to be able to scale quickly – and allow for “10x” exits within a fund lifetime of 10 years. Impact Venture Capital has to take the mindset of 10x across financial, societal, and planetary returns. This is at odds with purely local solutions, many of the Social Entrepreneurship or even Zebra movements. That doesn’t mean that these companies are not valuable, quite the opposite, but they might need different funding sources. 

Principle 4: A fund and startup have to be sustainable by design

When we think about creating companies, we usually think about the business model in terms of financial returns. In our current system, a company or fund can still be asked to choose between financial sustainability and all other sustainability metrics. This is why Impact Venture Capital Funds and impactful startups, need to create organizations that simply do not have the ability to drift from their mission “to do good”. Intentionality is not enough. We have to bake fail-safes into companies and impact funds. Obviously, we would like to see regenerative design approaches more often than purely sustainable approaches, but sustainable design is – for many – already a leap forward.

READ ARTICLES: Why Sustainable Investing Is A Win-Win |  Pymwymic: Pioneering the Change in Venture Capital  | What You Might Not Know About Impact Investing and How It Can Help Stop the Climate Crisis | Impact Investing Isn’t One Size Fits All

Principle 5: A solution creates positive impact and positive catalytic effects – negative impacts have to be minimized.

Many solutions are great, but no solution has only one effect and often effects are positive and negative. Funds and entrepreneurs need to address both. This requires a systemic view. A good example are electric cars. Batteries are problematic – and in fact, the discussion around changing to electric cars has for a long time been dominated by the negative effects of sourcing the raw materials and the environmental impact. Whether this is justified or not is of no concern in this case, but funds and companies need to take this into account in their operations and be transparent about them.

Principle 6: Equality and Inclusiveness

There is statistical evidence that diverse and inclusive teams perform better. Diversity in every form and shape needs to be at the core of the investors and startups. 

Principle 7: Set ambitious targets, measure and report effects according to global standards

Both companies and funds have to report their activities and impact like public companies. There is no global standard at the moment, but there are plenty of decent frameworks available. Private companies make up the larger part of the economy and while we can attribute most of the GHG emissions to a few large multinationals, emissions are not the only problem we face.

Financial targets are fairly easy to measure, but in order to provide a holistic view, we need to use triple-bottom-line principles wherever possible. We also acknowledge that this might be sometimes on a case-by-case basis, rather than standardized metrics. This must involve the use of both quantitative analysis as well as developing robust qualitative analysis – however, there is no need to invent your own metrics either. 

Principle 8: Payback for all stakeholders is based on a triple bottom line principle. 

Principle 6 enables principle 7. We can only incentivize and pay against triple-bottom-line targets when we measure and report. We are aware that intrinsic motivation and intentionality “to do good” should be the driving force but at the end of the day return on investment talks. Impact needs to be part of this return on investment thinking. Success needs to be equated with triple bottom line principles.

Principle 9: All shareholders are responsible and accountable over the lifetime of their engagement.

Agreeing to all the above principles means that funds and entrepreneurs are accountable during their engagement. This creates a positive circularity if there are rules in place that punish bad behavior. 

Conclusion

VCs have an inherent need to differentiate their approaches to find an edge to raise capital and stand out. This is why we did not aim to create a set of definite rules, instead, our intention with these principles is to start a discussion. VCs, more than any other asset class, invest in the future value of game-changing companies, in human potential, and in the future, we want to live in.

Fund Managers and Founders have already realized that an “impact story” is the next trend topic. Similar to the Blockchain, AI, or E-Commerce stories of the past, large sums will be invested because it “sells”, and that’s fine – if it equally benefits people and the planet.

We would like to thank Karl Richter, Zarmeen Pavri, Eline Sleurink, Peter Jarvis, and Joel El-Qalqili for their input.