2017 was the first year I ever taught and designed a course at the university level. On the side to managing a venture capital firm, I taught Innovation and Disruption Management in the MBA program at a university in Austin, Texas. The objective of the course was to equip these MBAs with the vocabulary to create progress and change, whether that was within or outside of an organization. The hope was that the students would develop the language that would allow them to participate in a discussion to navigate the unknowns.
We often found ourselves talking about invasive species, the American Revolution, Schoenberg twelve-tone atonality, and how these examples had disruptive properties to incumbent systems (whether it was biology, a political, or artistic revolution). In many ways, I feel like I gave a class on biology, art, anthropology, and a little bit about business. One of the key subjects discussed in our course that was essential to developing this language and vocabulary was to define “Innovation” and “Disruption”.
Through discussion, it was understood that there are many definitions to “Innovation” but the concluded understanding about innovation was that it was the process of taking an invention into the market where it can be used and bring value; in essence innovation is the conversion of knowledge into value. Once this was understood, I asked the class what they thought the definition of “Disruption” was. As commonly misunderstood, a lot of the responses from the class described “Disruption” as something that was solely “New”, “Novel”, or “Different”. Using our examples of invasive species in incumbent ecosystems, or a political revolution, or even a new artistic movement, it was illustrated that Disruption wasn’t something simply new, novel, or different, but it was something that was significantly asymmetrical that it redefined the value exchanged in an incumbent system.
What was defined in that discussion with our class was that Innovation and Disruption are one of the same, but what differentiates Disruption is the degree in which that innovation occurs. All new technologies that bring value to a market are innovative in some respect but not all of them are disruptive. Some companies choose to exploit certain opportunities in markets with different solutions, and based on the impact of those solutions to an incumbent system, that is what defines its disruptive properties.
Innovation and Disruption are not mutually exclusive, but rather they are one of the same thing, but at different degrees. One can only understand disruption in the context and in relationship to the process of innovation. Much of this is true based on the discussion between Venture and Impact.
VENTURE AND IMPACT
Historically, Venture and Impact have been two separate discussions. We have considered companies that have been designed to make profit to be different in standards to enterprises that designed to make a social or environmental impact. Because of such a separation in discussion and definition, this common stigma paints the picture that one must give up profit and economic return to do good for society and/or the environment. Very often those from the venture space look at people in the Impact space and feel a little bit sorry for them. And those in the Impact space look at those in the Venture space as greedy or irresponsible.
Very similar to the discussion I had with my class about how Innovation and Disruption are related (but different), the same goes for the discussion many of us are engaged in with respect to how Impact fits in with Venture. Venture and Impact may be different, but they are related. To silo them into two different discussions creates the assumption that a “non-social enterprise” does not make an impact on society or environment. Every enterprise creates an impact on society and the environment. All ventures impact our society by recognizing opportunities for improvement and progress in markets and industry, which ultimately effects how we work and live. All ventures impact our environment whether it is based on the solutions we provide to our consumers, how we manufacture, or what footprint we leave. Very similar to the discussion between Innovation and Disruption, the real question is about the degree of our Impact (whether positive or negative).
Every enterprise creates an impact on society and the environment. All ventures impact our society by recognizing opportunities for improvement and progress in markets and industry, which ultimately effects how we work and live…the real question is about the degree of our Impact.
Technologies and venture can bring about change, but it is up to those innovators to determine what kind of change that is. With the growing discussion around Impact and social good, we have been seeing the rise of Impact Investing, the rise of Benefit Corporations, and Corporate Social Responsibility. With the rise of younger generations that are more altruistic, and with an imminent shift in global wealth, more resources and dollars are being shifted toward Impact. With this shift in discussion, there are still questions about how to properly use these resources to make meaningful change. It is still debated why there is still a lack of resources being allocated toward Impact enterprises and there is still debate whether or not new measurements of success should accept returns that perform below public market equivalents.
There are many reports that show that Impact Investing is competitive, or outperforming public market equivalents. These reports are technically correct, but its truth is debatable. These Impact Funds are typically based on ESG (Environmental, Social, Governance), which assesses a company based on their environmental and social impact, and corporate governance. An ESG fund manager determines if a company is impactful based on whether or not the company has adopted best-practices that mitigate their environmental footprint, if they are social responsible with all the internal and external stakeholders, and if they practice sound corporate governance. From the perspective of any good fund manager, ESG measurement is another qualifier that mitigates risk in another game that has no absolutes, that is ultimately a game of risk and probability. It should be no surprise that ESG funds would be competitive, because funds that stack their deck to mitigate risk (and increase probability) naturally correlate to better performance.
The problem with these reports is that it paints the Impact space with a broad brush, assuming all that one has to do is invest consciously in companies that have their heart in the right place to make an impact with profits. ESG only represent a small segment in a diverse and complex space, and more often than not, it is a method to determine which companies not to invest in, not how to recognize emerging opportunity that will create profitable and impactful change. Ask LPs (Limited Partners), Institutions, Endowments, about their perception of on impact funds that focus on early stage venture. I am sure they will have a different sentiment and risk-appetite toward it.
Going back to our discussion about, Venture and Impact. Similar to the discussion with my class about the relationship between Innovation and Disruption, Venture and Impact are not mutually exclusive, but varying in degrees of impact (Positive to Negative); more of a hierarchy based on degrees. Very similar to how Abraham Maslow determined in his theory of psychology that human motivation was based on the fulfillment of different needs states, Venture and Impact have a relationship that is based on the fulfillment of basic venture requirements. Just as an individual can only self-actualize if they have fulfilled all social (Esteem, love and belonging) and physical (shelter, safety) needs states, one can only make the environmental and social impact they want if they are able to first generate a competitive business based on sustainability, profitability, and scalability. Profit is a result of a competitive business that takes advantage of opportunities and needs in a market. Profit is like oxygen to a business, and without profit a business cannot be sustainable or scalable. Without sustainability or scalability you cannot make a meaningful impact or create systemic social and environmental change.
…one can only make the environmental and social impact they want if they are able to first generate a competitive business based on sustainability, profitability, and scalability.
If we assess the disruptive properties of companies based on the degree of innovation, then we must assess the opportunities of ventures based on the varying degree of their impact. Ventures may have properties of Impact that might meet standards such as corporate social responsibility, or they may be significant in their impact where their core technology might systemically solve a global challenge, or they might be a company that has negative impact and because they do not have best practices in how they manufacture, or even it might be a company that provides a nominal solution to the market but does no harm. Every venture has an impact on society and the environment — The real question is what kind of impact do we want to make and to what degree.
Venture and Impact have historically been two separate conversations, but it is essential for the discussion to be one. We can no longer segregate venture and technologies based on their title as a “Social Enterprise” or not. It prevents enterprises that are making impact from being accountable to profitability and scalability, and it limits the permission for profitable ventures to make a meaningful impact. One would not call Tesla a “Social Enterprise” but many would argue that within its business, it is creating one of the largest environmental impacts and shifts toward renewables. Singularity over in NASA Ames has produced ventures that have used Autonomous Drone Networks to provide last mile logistic systems that benefit both larger logistic enterprises as well as serve resource-scarce nations in Africa; does one call this a “Social Enterprise”? When I am not teaching biology, art, and anthropology in the business school here in Austin (i.e. Innovation and Disruption Management), I manage a venture capital fund that focuses on technologies that are solving global challenges. Our investment thesis is based on the premise that our biggest global challenges are also our biggest commercial opportunities. Many of the projects we work on are providing systemic solutions to systemic challenges related to things environmental, resource sustainability, global connectivity, renewable energy, health and wellness, etc . The best solutions for these systemic challenges are ventures that are naturally disrupting incumbent systems — new category creators. Within those new categories we find immense commercial opportunities. Many of our co-investing partners in our projects are well-known firms that have also invested in non-social enterprises like Google, Facebook, FitBit, Twitter, but still find an opportunity in our impactful venture projects. Not just because they are “Social Enterprises” but also because they are compelling enterprises that have large commercial opportunity solving challenges on a global scale.
Venture and Impact have historically been two separate conversations, but it is essential for the discussion to be one.
One would assume that our fund’s investors must be motivated by Impact. Some are, but in reality a lot of our early investors have come from real estate and oil & gas. We have created a unique approach to venture capital that allows us to create compelling value in the venture space, and we happen to be making a big impact at the same time. We have been able to invite a broader audience of people that have been previously segregated by the “Venture vs. Impact” conversation into our work, not by trying to convince them of the titles of Impact, but by bringing about true venture opportunity where the economic levers and value can speak for themselves.
Similar to how Innovation and Disruption are related but different, Venture and Impact have a relationship. All ventures make an impact on society and the environment. Every venture must remain competitive, profitable, and scalable to provide that impact. What kind of impact and to what degree of impact is up to the Innovator. The way we truly make profitable and scalable impact is to take conversations that have historically been separated and make them one.
Plus…two conversations is one too many.