A common aspiration of mission-driven startups is to create impact by building a product or service for underserved or vulnerable populations. However, in many of these cases, traditional venture revenue models don’t succeed - because the end consumer is unable or unwilling to pay for products or services.
In these cases, assuming that the end user is the only viable customer can create trade-offs between successfully scaling the business and seeking impact. As a result, the venture is forced into strategic choices that limit the ability to scale organically or hamper the investment case (for example, choosing to create more impact by selling exclusively to a group with lower ability to pay). Ultimately, both impact and returns remain low.
More recently we’ve seen founders, who are driven by a desire to create impact at scale, experiment with creative third-party payer models to great effect. A third-party payer is someone willing to pay for the service who is not the direct service user, such as an employer buying a service for the benefit of its employees. Where successful, this helps to evolve a viable impact model into a winning business model; helping to scale both impact and financial performance. Below we highlight two strategies to doing this, which are yielding results for startups in our portfolio.
Find a third party who has a vested interest in the outcomes being created
In cases where a payer is interested in the social or environmental outcomes a startup is creating, there is a good chance that a viable business model exists. One payer that immediately comes to mind is government. With a vested interest in social and environmental wellbeing, governments can be a viable source of revenue.
In the UK, the National Health Service (NHS) is an attractive customer for many health startups. One example is Second Nature, a behavioural insights programme designed to help users at risk of diabetes to manage their weight. Their initial revenue model was a direct-to-consumer approach, with a monthly subscription fee of ~£50. While the product was effective at combatting diabetes, this financial hurdle would have excluded many people on lower incomes who could potentially benefit. Driven by a desire to make the technology available to all, Second Nature partnered with the NHS; scaling the offering to 50+ Clinical Commissioning Groups (CCGs). This achievement is remarkable both from an organisational growth perspective, but also from an impact achieved perspective.
A second case is the dynamic between employers and employees, with employers having a natural interest in promoting positive outcomes for their employees. Wagestream, a platform to help employees manage and improve their financial wellbeing, leverages this dynamic to enable its business model. One of their core products is around earned wage access (EWA), whereby employees can draw down earnt, but unpaid, wages between pay days. This has several benefits such as reducing stress and improving financial freedom and wellbeing. The model only works if employers are on board as the service is offered as a benefit through the employer. Wagestream’s data suggests that companies benefit from the positive impact on employees (lower attrition and higher productivity) and so there is alignment between employee and employer outcomes. This alignment enables Wagestream’s business model, helping them to generate strong financial and impact performance.
Find a third party who has a vested interest in the activities which generate the outcomes
The second archetype is to find a payer that is interested in the activities that generate impact, independently of whether they’re willing to pay for the impact outcomes being created. Olio is a good example of this. The free-to-use platform enables users to share unwanted food within their community, helping to prevent waste and fight hunger. While the outcomes here are important, it’s difficult to spot a willing and able payer in these dynamics.
However, Olio soon realised that food businesses were already paying for waste management services to dispose of surplus food and that Olio’s model could service that need regardless of whether the businesses cared about what Olio did with that food. By looking for customers based on the activities they provide rather than the outcomes they create, Olio has unlocked a hugely viable business model. They are now working with over 3,000 businesses to help them manage their food waste and food items listed on Olio’s platform have gone from 300,000 to over 1.6 million in less than a year.
Another example here is Oyster. They are applying a proven revenue model (companies buying HR services to hire people remotely) to tackle global inequalities. They do this by nudging companies to consider talent all around the world, particularly those underserved by the current labour markets (e.g. those in emerging markets). The aspiration is to provide opportunities to those who currently don’t have them, bringing a host of benefits to service users, including increased incomes and reduced pressure to leave homes and families for work. Oyster’s approach has enabled them to scale their business and impact quickly, hitting a valuation of $475 million only a couple years after launching.
There are many excellent models capable of creating impact. The challenge, in the current venture context, is linking those impact models with viable revenue models. Doing this can unlock high-growth pathways, which is a critical step for success in VC-backed models. Spurred on by a desire to create impact, founders are increasingly experimenting with innovative third-party payer dynamics to unlock new types of revenue models, which have the potential to create impact at huge scale.