Impact Due Diligence: The Questions We Ask
By Elizabeth Coston
Impact Engine’s Partner Tasha Seitz recently wrote about the evolution of term sheets and the growing trend of investors requiring alignment of values or commitment to specific impacts. We ask entrepreneurs to sign a mutual commitment to impact, which comes towards the end of the investment process, but we also integrate an impact “deep dive” earlier in our due diligence process. In addition to alignment with our core areas of focus, we evaluate specific criteria to make sure each company we invest in is making a sustainable, lasting impact in its designated impact area. We’ve outlined a few of the questions we ask of ourselves and of prospective companies below.
+ How aligned is the impact with our core areas of focus where we believe we can make the best judgments and provide the most support? Our focus is in education, health, resource efficiency and economic empowerment. When selecting our portfolio companies, we want to make sure we have the experience, resources and connections to provide valuable, effective support for the entrepreneurs we invest in, so alignment is key.
+ How “baked into” the business model is the impact? We make sure that impact is an integral part of each company’s product or service offering, so that impact grows hand in hand with revenue. We want the impact to be very difficult to decouple from the business, and highly likely to survive a corporate acquisition. This means that we do not invest in “buy one give one” models, where revenue generation is separate from impact creation.
+ How deeply does the entrepreneur and leadership team care about and understand the problem they are solving? We want each company’s team to understand the social or environmental problem on a larger scale, while knowing exactly how their product or service can be a lever for impacting that problem. We look for founders who deeply understand the problem they are trying to solve and are committed to creating impact through their business. If we have better answers on impact than the entrepreneur, that’s a warning sign.
+ What are the scenarios in which this company can lose its impact focus? We’ve seen many startups that have had to adjust their path based on their early experiences bringing product to market. We fund companies that are committed to impact, but we also think through ways in which a company’s business might be disconnected from impact. Having impact directly tied to the business model helps mitigate this risk.
+ How much does the impact “matter”? This can often be subjective, but we make sure each of our portfolio companies is making an impact for those that will most benefit from it. For example, does the product improve education for populations most in need? Or is it so expensive that it is only accessible to high-income families or schools? We also think through the breadth and depth of the impact, and whether the company has the opportunity influence overall ecosystems for the better.
+ What evidence is there that the company’s product or service will lead to specific outcomes that matter? For each company we invest in, we develop a hypothesis around how the company creates impact, we identify key performance indicators (KPIs) that measure that impact, and we look for a connection between those KPIs and longer term outcomes. Evidence of outcomes can come from the company’s own examples or credible third-party research, but companies must be able to demonstrate the potential to achieve significant social or environmental outcomes. For example, our portfolio company ReUp Education helps students who have dropped out of college re-enroll and complete their degree. They are able to point to research that shows that students who graduate from college have lifetime earnings of $700,000 to $1,000,000 more than their peers who do not. Thus, ReUp’s KPIs include the number of students they have re-enrolled and supported through graduation, which will lead to improved economic outcomes for those individuals.
+ How will the company be able to measure impact — immediately and over time? We select for companies where the product or service they provide aligns with positive impact, and we give a great deal of thought to what companies can measure now and in the future to capture the impact they are making. We discuss the the entrepreneurs what metrics they can collect, striving to balance pragmatism with rigor. Because we have a focus on products that create impact, the metrics that our portfolio companies are collecting should not just demonstrate their impact, but also be valuable in the sales process to demonstrate value to customers, whether it be improved education or health outcomes, economic savings to un- or underbanked customers, or improvements in sustainability.
Along with our portfolio companies, we are constantly striving to get better at evaluating, measuring and reporting on impact. What other impact evaluation criteria have you seen? Please share!
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