Impact ventures are early-stage technology enabled startups that have a specific purpose to improve the lives of people or the planet through their core product or services. An example of this could be a fintech startup that’s designing fair and affordable financial products for people on lower incomes who are not well served by the current market. LP investors (Limited Partners in funds or LPs) are increasingly seeking to allocate capital to impact venture because it offers them the opportunity to invest in organisations that are creating a fairer and more sustainable future whilst meeting their financial risk/return objectives.
Whilst this is still a nascent market, LPs are trying to better understand how impact can be a driver of value and financial returns (our view on this in this blog) and how to assess venture capital firms (VCs) on their impact credentials.
To help address these questions and bring this topic to life, Big Society Capital hosted a virtual panel discussion with three co-founders and CEOs of VC backed organisations: Jimmy Williams, CEO and co-founder of Urban Jungle; Nat Whalley, CEO and co-founder of Organise; and Tony Jamous, CEO and co-founder of Oyster.
All three organisations have impact on people at the heart of what they do and are all successfully scaling their businesses with funding from VCs.
Highlights of our discussion:
Impact is a driver of commercial value and long-term success and needs to be embedded at the heart of the organisation. All three founders describe impact as core to their organisation and embed social mission in everything they do. They were unanimous in their belief that the commercial success of their organisations is directly driven by the amount of the impact they have on people and that their impact and revenue are intrinsically linked. As their businesses scale, they see their impact growing in importance as there is a clear trend driven by large scale institutional investors increasingly wanting to allocate capital to impact.
Impact investors matter. Having impact investors (typically impact VCs) at every stage of fundraising is important as it helps ensure strong alignment between founders and funders - ‘ideally all capital would be impact capital’. However, currently it is difficult to get impact investors at every stage because there aren't enough impact managers out there. Founders share the importance of having impact focussed VCs round the cap table and in some cases, they have declined investment where funders didn’t really get their mission.
Finance first/ traditional VCs hold a lot of power. Whilst impact VC is a preference, in practice, when it comes to market perception, having traditional VCs round the cap table early helps gives ‘the market’ confidence on a startups valuation which is important as businesses scale. So, whist impact startups want impact investors sometimes they need traditional investors. The double edge sword is that there is still a perception amongst many VCs that impact means lower returns so, founders of impact startups have to work harder to find the first investment.
VCs need to engage in impact. As impact venture starts to take off there are a number of reasons why VCs need to engage which include:
- As more impact ventures successfully scale, new impact founders will become increasingly selective about who they raise capital from with a bias to impact VCs.
- Impact ventures are likely to fair competitively in a marketplace where increasing amounts of mainstream capital is shifting focus to impact.
- Disengagement presents a retention risk issue for VCs themselves and we’re already seeing traditional VCs lose talent as individuals spin-out or move to more mission aligned impact VC
Impact VCs need to have sound business building credentials AND impact credentials. Good VCs add a huge amount of value beyond just investment and in the early –years, a good investor can be the difference between success and failure. Whilst impact alignment is important, it cannot come at the expense of business building expertise. Impact VCs need to have it all.
Want to hear the full conversation? You can watch the recording of this fantastic discussion here: