Exploring the challenges investors face when assessing venture managers for impact

Last week, we held our second roundtable with Limited Partners who have a focus in venture investing to discuss best practice when assessing managers for impact. Investors increasingly want to have more intentional impact through their venture investments, but assessing managers in this category is a challenge; something we came together to unpick.

This roundtable included a diverse group of investors including fund of funds, family offices and trusts and foundations. Roughly half of the attendees are already actively investing in impact venture and half have not yet invested.

In this blog, we share some of the key challenges investors face when assessing managers for impact and how we can work together to address them.

Challenge 1: how do you define impact venture?

It might sound obvious, but a great starting point is to think about what you mean by impact venture and the impact you are trying to achieve.

Impact means different things to different people and there is no one size fits all definition. However, some felt there was a need for investors to reach a level of commonality or threshold to define an impact investment for it to become credible.

At Big Society Capital, we broadly define ‘impact venture’ as investing in early-stage businesses that intentionally seek to have an impact by contributing to solutions to significant social problems in the UK. These are purpose-led businesses whose products or services are targeting positive outcomes that are meaningful to people experiencing the issue. Examples of social issues that we think venture investing has a role to play include health, education and financial inclusion. We are particularly interested in products and services that can be made accessible and affordable to as many people as possible — prioritising people who are not currently well served.

For more about how we think about this, check out our blog: Bringing impact intent to venture investing

Challenge 2: impact washing, credibility, and authenticity

There are growing concerns amongst investors around impact[green]washing, an additional risk that impact investors need to assess.

Investors are switched-on to the reality that managers are likely to tell a different impact story depending on a given investors impact lens. Unfortunately, there are no short cuts, so you should be prepared to spend a lot of time with managers, getting to know them and assessing alignment.

We shared how we break down our assessment of managers into four categories, which we assess throughout different stages of due diligence:

Values & motivations. What is the driving force behind the manager’s investment thesis and does this resonate with our values? For example, are they purposeful, rigorous, respectful? This is something that we assess throughout the due diligence process, through 1–2–1 meetings, referencing and observations.

Impact intent: Does the manager have a clear (and articulated) intent to create impact? Do they have impact goals and a thesis for how these will be achieved? We’ve created an impact canvas tool to help us assess this at early stages of due diligence.

Impact practice: Does the manager have/are they working towards rigorous and value-add impact practice for thinking about impact? This is something that we test as we progress through the due diligence process.

Impact performance: Does the manager have a track record of delivering impact or is likely to deliver impact in the future? This is something that we assess relatively early in our due diligence process through detailed assessment of a managers’ portfolio and/or pipeline against our definition of an impact startup.

We share what we think ‘good looks like’ in this blog: Impact best practice in venture from the Fair by Design Fund.

Challenge 3: lack of track record

Impact investing is still nascent therefore there is still a limited amount of track record for investors to assess evidence of financial and impact return targets.

What makes impact venture hard is that managers are required to have early-stage investing skills and impact management skills. Investors find that managers usually have one but rarely have both. Some investors shared that they may be willing to make a trade-off between financial track record for the right depth of impact. This would mostly apply where they felt they can be catalytic and help build the track record of emerging impact managers. Others, however, would much rather place investments with managers that have an established financial track record and are starting to look at things differently.

We take a two-pronged approach in building our impact venture funds portfolio at Big Society Capital. We work with established venture managers, not explicitly categorising themselves as impact managers but who are values aligned and thoughtful about the subject and help bring deep expertise in venture investing to impact. We also see ourselves as catalytic investors and have backed new impact venture managers early in their journey, such as Bethnal Green Ventures, to help build a track record in this space.

Challenge 4: need for standardised impact framework

Without a consistent framework for assessing managers on impact, it becomes very difficult for investors to draw comparisons.

It is widely acknowledged amongst this group of investors, and the wider venture community, that some of the commonly used frameworks for assessing impact need to be adapted to better apply to earlier stage investment. Investors are still reliant on qualitatively assessing the alignment of managers rather than applying a common assessment framework. We, alongside others, have found collaboration helpful. As one of the participants put it, ‘having friends in the market to test views and support referencing is a key part to decision making — it takes time but really important.’

A common framework for impact management in venture is something that the team at Big Society Capital would like to work with others to help build. We’re already working with some venture managers to test what’s possible and what adds value.

Summary and next steps

As a group, we surfaced a number of common and overlapping challenges that investors face assessing impact venture managers. We want to make it easier for other investors to confidently make impact venture investments that align with their financial and impact objectives. We have committed a lot of dedicated resource to this area over a number of years in an attempt to address some of the challenges surfaced here but there is more to be done. By working together, we believe investors can support the growth of a thriving impact venture ecosystem.

If you are a Limited Partner and would like to join future roundtable discussions or find out more about our work in impact venture, please contact Katie Fulford-Smith.

Originally published at https://bigsocietycapital.com on 20/05/2021.

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