Demystifying How Impact Investors Define Impact

A Guide for Entrepreneurs Pitching to Impact Investors

They’re an impact investor and your company is impactful. But are they going to invest in you? All entrepreneurs believe their products are going to have impact. So, pitching to impact investors and being rejected can be demoralizing. This post attempts to demystify what impact investors* are looking for and why they might be passing on your brilliant (and possibly impactful) idea.

You can’t have impact at scale if you can’t scale. Impact investors, whether they are impact first or returns first, need your business to have legs. That means they need many of the same building blocks to be in place that other (non impact) investors require — including a kick ass team, large TAM, promising unit economics. If you can’t attract and retain great talent, you can’t grow a business. And if you aren’t solving an urgent pain point for a large enough set of people, you can’t grow a business. Yes, you might feel like the impact investor is far too focused on your CAC, LTV, and ARR compared with your impact. But if your business can’t sustainably scale to reach thousands or millions of customers neither of you will reach the impact you want. Impact investors who are open to sub-commercial returns (what Omidyar Network would refer to as B investments) may tolerate smaller TAMs, lower margins, or slower growth, but they are still looking for an eventual (and realistic) path to sustainability.

There are many possible definitions of impact, and you need to understand the investor’s definition (ideally before you pitch to them). Impact investors have agreed upon a specific understanding of the impact they want to see in the world with their LPs or a board**. Whether you call it a thesis, strategy, focus, or priorities*** — their success is measured against that. And, just like you, they can’t do everything. So, for the most, impact investors are spending the majority of their dollars investing in very specific areas and in order for you to receive investment, you need to match their criteria.

Here are few of the common dimensions of impact that I see:

• Sector. Education, health, the environment, and financial services are among the most common “impact” sectors. For instance, some might argue that innovations in Education, a sector that builds the human capital of the country, are inherently impactful (I personally don’t buy this argument as there are a lot of gap widening education innovations but I won’t go there now). Sector specific funds like Learn Capital, Reach Capital, Rethink Education, and Owl Ventures do attract more impact-conscious LPs (including philanthropic endowments), but largely identify as Education investors rather than impact investors.
• Thesis. Within a specific sector, true impact investors are most likely to have specific theses. For instance, Lumina Foundation has a specific thesis on post secondary achievement and Imaginable Futures has theses for littlest learners, growing learners and adult learners. Otherwise of Education, Luminate has four impact areas and Accion Venture Labs lists five types of companies they are interested in on their website. While even narrower, and harder for entrepreneurs to retrofit into, typically these theses are built upon deep analyses of trends, bottlenecks, and points of friction in systems that are inequitable today. So, yes, it’s annoying if you’re doing something extremely important that doesn’t happen to fit the thesis, but the thesis wasn’t built with you in mind. It was built to focus on and support innovation at points critical for systemic change. (You can read more about the system’s thinking approach that Omidyar Network uses to craft investment theses here).
• Customer Segments. Another common frame on impact is the socioeconomic status of customers. Is your business mostly serving the top 20% of earners? Do you reach the middle class? How about lower middle class? If your business model is direct to consumer and your product is expensive, you may have an amazing product but that product probably isn’t reaching low income families — and that’s when an investor might start to worry about gap-widening innovations. However, if you are distributing through school districts or employers, payable with insurance plans, or paid by big businesses who want to each undeserved customer segments you may be more likely to reach more socioeconomically diverse families. Particularly outside of the US, we see impact funds like Mov Investimentos focused on exclusively on businesses that serve“base of the pyramid” (BoP) customers.
• Geography. I was once at a panel on Impact Investing hosted by EMPEA (the Emerging Markets Private Equity Association) where someone said “Investing outside of the US in emerging markets is impact investing.” I could imagine hearing a similar phrase from a US investor making an investment outside of SF and NYC. Certainly, entrepreneurs in Africa and Latin America as well as in Kansas City, Minneapolis, and El Paso have less access to venture capital. That said funds like Monashees (Brazil), Algebra Ventures (Egypt), and Revolution’s Rise of the Rest Fund (US, outside of Silicon Valley) expand access to capital in these geographies and do not identify as impact funds.
• Founders. And finally, I see a relatively newly emerging set of funds and accelerators focused on investing in minority entrepreneurs. VC funded start ups in the US are “still overwhelmingly white, male, Ivy League-educated and based in Silicon Valley” according to RateMyInvestor’s diversity report. Less than 1% of VC backed founders are black. Recent blogs from Mary Ann Azevedo and Kevin Payne provide great overviews of the funds trying to change this disturbing status quo.

Think of this list as a scorecard — the more dimensions that apply to you the more impactful you are the eyes of an investor and the more likely to receive impact investment. Be ready to talk to all of these dimensions of impact.

Another day I’ll actually put together the mock scorecard based on these dimensions, but first I’ll curious to see if this list resonates with impact investors or entrepreneurs who have pitched or raised from impact investors. What am I missing?

Last but not least, investors need to have conviction in order to make an investment, so help them understand. Bloomboard’s CEO, Sanford Kenyon said this well when speaking about edtech businesses — if investors don’t deeply understand the education space, the salient problems for students, parents, teachers, and administrators, the sales cycles, the distribution models that work — they aren’t going to invest in you. Unfortunately, this can trip up a lot of businesses solving problems that aren’t lived by white, male investors. Think about Bevel, Tristan Walker was solving a real problem for men of color by creating a single-blade razor that didn’t cause razor burn, but white VCs just didn’t get it. Don’t get me wrong — this sucks. We should have more GPs who have diverse lived experience and are willing to step outside of their boxes to fund solutions to problems they didn’t have to experience. But, in the meantime, as an entrepreneur you can do a few things to make this a bit less painful: make it easy for your investor to learn quickly about the problem. Assemble a folder of new articles, research, podcasts, and industry data about the problem, then make it real by inviting them to focus groups or arranging for them to talk with a customer. And if you do that and an investor still doesn’t get it — move on quickly, they may not contribute much to your business anyway if they don’t understand the problem.

Personally, I have faith that the VC industry is changing for the better. Already, junior investment team members are more diverse than senior investment team members. The next generation of philanthropists (and LPs) are thinking differently (and dare I say more deeply) about impact than prior generations.

In the meantime, if you are an entrepreneur trying to raise capital for in an overlooked geography, for an impact sector, serving low and middle income consumers, and/or are a minority yourself — stick with it. Let’s make the white male VCs who invest only in B2B enterprise SaaS businesses in Silicon Valley realize the mistake they are making.

*There is another blog to be written about the different types of impact investors — but suffice to say that between philanthropies, (multi)family offices, funds, and corporate investment groups its a pretty heterogenous group.

** While investors should have this, the reality is that some aren’t clear on the impact they want to have on the world — perhaps because they just got started in impact investing, are a couple years in a revisiting their thesis, or because they realize what they’d ideally like to invest in doesn’t exist. Don’t get caught up in their internal strategy conversation, recognize the lack of clarity and commit to checking back in with them in 3 to 6 months.

*** Investors could do us all a favor by using more specific language but I’ll save that rant for another day

In 2019 I made the commitment to write more (both journaling and blogging) and basically failed miserably. So, I’m recommitting to that goal in 2020. If you have questions or reactions — please comment or DM me. And if you like this blog — please share it. The more feedback I get the more it will encourage me to keep writing.

The majority of the content of this blog was written in Nov 2019 after “Investing in The Future: Reimagining learning while leveraging technology” — a closed door event co-hosted by CommonLit Inc and Nasir C. Qadree in Washington DC. Thanks to Fabio Tran and Fernanda Aidar for their thoughtful review and feedback on earlier drafts of this post.

And in case you don’t know me — hi! I’m a management consultant gone impact investor gone entrepreneur. I grew up in Pittsburgh — an often-overlooked tech hub — where I studied International Relations and Politics and Policy & Management and started my career at McKinsey & Company. Afterwards, I joined Omidyar Network (the philanthropic investment firm of Pierre Omidyar, founder of eBay and his wife Pam) where I had the privilege of investing over $25M in education entrepreneurs primarily in Latin America who were innovating to serve low- and middle-income students and families. Last year I joined Henry Health as COO based in Washington DC. Henry Health is a telehealth start-up that provides culturally sensitive self-care support and mental health services to ensure black men can show up whole, operate with joy and live with power.