Venture capital and impact investing intersect in their objective to bring new capital to enterprises looking to solve meaningful problems. Why does it seem so difficult to get capital to startup enterprises, especially when the founders are women, black, Asian or minority ethnic? And why do the larger pools of capital, especially institutional investors, find it hard to focus on some of the most exciting, potentially world-changing enterprises out there?
Our Lead Expert Jamie Broderick discussed these questions and many more with our panellists Gary Stewart, CEO and Co-founder at The Nest, Chris Wiles, Senior Investment Manager at Foresight Group and Jean de Fougerolles, Managing Partner at Ascension Ventures.
Key messages from the discussion
- Impact investing, particularly venture impact, is growing. The next generation of entrepreneurs want to build scalable businesses and they want to do that with impact, to be part of a solution. Business ideas and their impact potential have grown exponentially. In addition to that, government and charity funding is increasingly looking for ways to solve problems related to environmental and social challenges via the private sector. That is why we see a greater move of finance towards impact investing.
- Investors continue to be risk averse, and COVID-19 has made things difficult. But, coming out of this pandemic, there seems to be a stronger focus on impact. Investors are not just investing in businesses, they are investing in entrepreneurs. It is common for investors to make investment decisions by spending time with business founders beforehand. The current reliance on digital meetings has made communications and deal conversion more difficult and time consuming. Companies also continue to expect pre-coronavirus valuations while investors are more risk averse and, in some cases, opportunistic. Overall however, there is a stronger focus on impact, indicating a surge of impact-focused start-ups in the aftermath of the pandemic, a trend that is expected to accelerate in the coming decade.
- Doing good and doing well do not have to be contradictions. The term impact is sometimes used as a proxy for charity, but impact can be seen in a spectrum: from avoiding harm to contributing to solutions to philanthropy. Creating positive impact is not synonymous with concessionary capital. On the contrary, businesses with strong commercial opportunities can simultaneously have fantastic impact opportunities, and commercial success is necessary for sustainability. Still, there is a gap in impact companies, whereby impact start-ups tend to focus primarily on impact and not on the business model and VCs find it difficult to put impact in numbers. Some ways to overcome these barriers have been: using a Theory of Change model to understand impact and incorporating this model in the investment process; and tying impact naturally into key performance indicators (KPIs) that determine a venture’s success or failure. Businesses that have both impact and financial success at their cores can do good while doing well.
- Venture fund investments lack diversity and therefore may be missing out on both financial and impact returns. Historically many companies have been actively solving the problems faced by minority communities, but these companies do not get financed. Targeting underserved populations gives access to a big market, enables the investment to decrease poverty premium, and helps society solve problems that the government has not focused on or successfully tackled. However, the lack of diversity in the VC sector means that many decisions are taken from a risk averse and comfort position. Additionally, there is no mandate on public disclosure on diversity perpetuating its lack. This leads to low number of people from minority backgrounds in decision-making positions. Also, the assumption that VCs can sense good investments in a risk-averse way can be challenged as most VCs don’t make their money back, so decision making from a comfort position may not work from both impact and financial return perspectives.