Walking the Talk: The Higher Bar to Call Yourself an Impact Investor

You call yourself an impact investor. But, are you acting in ways that maximize your impact?

In my last post I wrote primarily to entrepreneurs demystifying what impact investors look for and why they so often pass on impactful ventures that “aren’t a fit.” Coincidentally that post turned out to be of interest to a number of impact investors defining or refining their investment strategies. Perhaps that’s a sign we’re on a path to a clearer, shared language between investors and entrepreneurs. (And by the way I’ve drafted the mock scorecard I promised, so ping me if you are interested in being an early reviewer!)

In this post, I’m shifting gears and writing primarily to investors about impact outside of the investment strategy.

Last year when I moved to the other side of the table — from an investor at Omidyar Network to an entrepreneur at Henry Health — I was taken aback. I was suddenly expected to respond to investor emails within hours as an entrepreneur, while I had at times responded within weeks as an investor. As an entrepreneur I spend countless hours guaranteeing that our pitch deck is the pithiest, standalone alone representation of our work, and updating it daily or weekly, while as an investor our website didn’t clearly communicate our investment thesis and I didn’t give it a second thought. I used to run five minutes late to meetings, and now aim to be a few minutes early. And even coming from a leading impact investor that I consider very intentional, I had not recognized or appreciated how the power balance between investors and entrepreneurs reflects itself in investors’ “modus operandi.”

Investors that are truly committed to impact should recognize the potential for change outside of their investment strategies, to set new norms in each of their actions and interactions with entrepreneurs.

For GPs, whether you are just entering the impact investing space or a trusted incumbent, step back and examine your processes and practices. From before you engage with an entrepreneur, through your pipeline and diligence process — how are you designing for impact? Is your pipeline process modeled after traditional VCs and thus largely built for “insider” entrepreneurs? Or have you intentionally improved upon that process to support the more diverse set of mission-driven entrepreneurs that your investment strategy is built for?

If you are an LP already taking the step to move your financial assets towards impact capital, do us all a favor and hold “impact capital” to a higher bar. Make sure your GPs focus on social impact not only in the way they deploy funds but in the way they structure their pipeline, investment, and portfolio management processes. My tolerance for “impact-washing” (using impact as a buzz word for fundraising) is low — and yours should be too.

Here is a quick list of the nine ways that investors can have impact and re-balance their relationship with entrepreneurs, beyond their investment thesis.

Before you even engage with an entrepreneur:

• Your team should look like the entrepreneurs you want to invest in. We know that most VCs source through personal networks and connections, and if there is anything we’ve learned from hiring data from the past decade, it’s that people in your network look like you. So, if you want to invest in diverse entrepreneurs, prioritize hiring diverse teammates. If you can’t find a dream GP, build a pipeline of diverse junior talent by partnering with programs like MLT. Ask for recommendations from excellent people of color already in the space or bring on venture partners and advisors who can source from diverse networks. But remember, once you attract diverse talent those individuals need to grow and stay. Create space for divergent thinking, clarify paths to promotion, and implement policies that diverse candidates themselves find most valuable.
• Get close to the problem you’re trying to solve. If you are a thesis-driven investor and interested in solutions that solve a specific social problem, learn deeply about the problem. Invite insiders into your decision process or engage in user-research alongside entrepreneurs. A deep understanding of the problem will not only help you invest in the right solutions, but can inspire innovators to focus on that unique problem — especially if you publish what you learn. The Imaginable Futures US team has done lots of this with their parent student advisors and 2019 Trends report.
• Your website should clearly state what you invest in (and what you don’t). This might sound obvious, but if your website doesn’t say that you only invest in Series A and beyond, or that you only invest in B2B SaaS — how do you expect entrepreneurs to know that? Entrepreneurs who come from “insider” communities (which in this case may be defined as predominantly white people, Ivy League school alumni, or people who worked in investment banking) may have the context they need to know your investment strategy, but the rest of us don’t. And going through your portfolio, company by company, to try to deduce the thesis is time-consuming guess work. So do everyone a favor and be clear — — Harlem Capital and Precursor Ventures provide great examples.
• Accept unsolicited proposals and/or host office hours. If you only look at the decks or take meetings that come with a warm intro — it can be pretty hard for outsiders to get in front of you. And I don’t say that to be mean or accusatory. Most VCs are flooded with proposals through every possible channel — LinkedIn, email, even WhatsApp — so its completely understandable that you don’t want to invite more proposals. But there is a middle ground here — investors should hire a few of the dozens of eager MBAs looking to get into impact investing and venture capital — to set up and administer a more structured process for reviewing unsolicited proposals and sending automated pass emails. Think office hours with automated scheduling (like Backstage Capital) or a simple form with screening questions related to the fund’s target stage, sector focus, and revenue thresholds (like Impact America). If all goes well, you’ll have less in your LinkedIn inbox and more hidden gems in your pipeline.

Once you engage (or are engaged):

• Graciously pass clearly. Being unresponsive is rude — whether you’re ghosting after an unsuccessful date or not following up with an entrepreneur. As is being dismissive or curt. Yes, the volume may be overwhelming — but standard rules of engagement still apply. Letting an entrepreneur know that you aren’t going to invest is the least you can do to help them move on in their fundraising efforts. When you do pass remember that the entrepreneur is pouring their blood, sweat and tears (and in most cases their savings) into what they are building. So being told their company won’t succeed is kind of like telling a mother that the baby they spent 15 excruciating hours birthing is ugly. Make good pass templates (you can build them off this pretty exhaustive list of common reasons that VCs pass) and ensure they include genuine praise for what the entrepreneur is doing right or the criteria upon which you’d revisit the deal. If you are feeling particularly generous, offer a 15 minute feedback call or more detailed written feedback (Thanks to Kapor Capital and @RallyCryVC who have done this recently for Henry Health). The reason you aren’t passing may be the same reason other VCs are passing — and that may be fixable! Especially at the earliest stages, so much of the pitch is about framing and communicating the vision. Your feedback can have a significant impact on the fundraising outcome even when you don’t invest.
• Set fair terms. Many funds claim to be founder-friendly — but in the end some terms benefit founders and others benefit investors. If you are low-balling minority entrepreneurs — please stop. On a recent visit to the Bay Area, a black founder shared with us that many other black founders are raising $500K on $2–3M caps. Just because it is harder for minority entrepreneurs to raise capital doesn’t mean that they should be taken advantage of. Not having graduated from an Ivy League school or previously worked at McKinsey & Company doesn’t make the investment justifiably riskier. So, make sure you are offering terms aligned with the industry. Let’s be real — VC valuations are more art than science and the difference between a $3M and $5M cap for a pre-seed stage investor won’t materially impact the fund’s return. But, a $3M versus $5M cap may have a huge impact on the founder’s control of the company. If you begin your negotiations and get the sense the founder isn’t negotiating about the right terms — they probably don’t have access to the tools and resources they need to negotiate well. Send them a copy of Venture Deals and re-engage after they’ve had a fair chance to read it or offer to intro them to a more seasoned peer entrepreneur.

Once you invest:

• Stand for impact as a shareholder. This is a huge bucket that could probably be broken out into a ton of different sub-points — but for now I’ll just say that in all of the roles and supports that investors provide to entrepreneurs there is opportunity to reinforce the focus on impact. That could mean offering portfolio services focused on social impact measurement, DEI (diversity, equity, and inclusion), or founders’ mental health. It could mean hosting a board meeting in a school or community-based setting to make more other investors more proximate. However it looks, there are tons of ways to double down on impact once you are a shareholder in a company (many of which are not in conflict with fiduciary responsibility as a shareholder) — and I believe this is an area where investors could be significantly more transparent about what entrepreneurs (and LPs) can expect post-investment.
• Preserve impact at exit. I must admit that of all the stages of the investment process represented on this list, this is perhaps the one where I have the least experience. During my time at Omidyar Network we exited very few of our Education investments given that we were still in the first years of the investing cycle. But that disclaimer aside, it’s not hard to see how strategic investors can dilute or enrich the impact of a product or service. For instance, in education, if an edtech product is acquired by a chain of private schools with the intention for the product only to be deployed in owned schools (where the product was previously available to lower income students in public schools) this probably dilutes the impact, whereas acquisition by a publisher who is able to distribute the product to a huge segment of public school students may enrich impact. Obviously in exit negotiations there is much to be negotiated — price, alignment, control, pay out, lock ins, etc — I’m just arguing that social impact be kept as one of the considerations on the list.
• Reinvest your profits. And finally, is it so revolutionary to think that funds committed to social impact investors for the purpose of achieving social impact should be recycled to generate more social impact? Although many investors promise impact and financial profits, does that mean that once the social impact is delivered that the financial profits go back to traditional non-impact assets? I won’t claim to know the details of how LPs of social impact funds have used their dividends, but I’d love to see pledges for the recycling and re-investing of distributions. If we truly want to curb income and wealth inequality perhaps impact investors should be donating proceeds or pledging shares at exit to low-income customers or employees of venture-based businesses. Imagine a world in which an investor in Uber were donating proceeds to Uber drivers or an investor in Galvanize had pledged stocks to bootcamp graduates.

I speak from experience when I acknowledge that investors are under a lot of pressure. They respond to bottomless inbound deal flow, take dozens of pitch meetings, and make countless investment decisions with limited information all while being responsive and value-added to existing portfolio companies. And impact investors still have a lot to prove.

I’m just asking that as fund managers think about the impact they want to have in the world they consider not only the impact of their portfolio, but the impact of their interactions with entrepreneurs. Impact investors have the power to set a new “modus operandi” — one that is less of an exclusive boys’ club, and more welcoming to the diverse set of entrepreneurs that will solve the next generation of complex social issues. Spend just a little more time on how you will invest, to make sure its aligned with what/whom you want to invest in.

And yes, nine might seem like a lot. Believe me, I was trained at McKinsey — where we only have lists of three. But in all seriousness, figure out what you already do, then start with the “low-hanging” fruit, and then prioritize the medium-term objectives. Can you reach four of the nine by the end of 2020?

Thanks to Fábio Tran and Ashley Beckner 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 ➡️ impact investor ➡️ entrepreneur. I grew up in Pittsburgh — an often-overlooked tech hub — where I started my career at McKinsey & Company after graduating from Carnegie Mellon University. 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.