Limited Partners’ growing appetite for impact in venture investing

In February 2021, Big Society Capital and Mountside Ventures co-hosted a virtual ‘LPs in Venture — Impact Roundtable’, which brought together institutional investors from the UK, US and Europe to share insights and approaches to impact investing in venture.

Mountside Ventures, who are helping promote the flow of venture capital into the European ecosystem, kicked-off by sharing some findings from their 2020 report: ‘ The Capital Behind Venture ‘. Of 63 investors who contributed to the report, around one quarter were explicitly looking to invest in impact venture as a sector and four out of six surveyed said impact was preferred. Across all contributors, health tech and ed tech were amongst the most sought-after investments for LPs; perhaps reflecting an increased appetite to invest in more socially impactful businesses in the wake of COVID-19.

At Big Society Capital we’ve seen roughly a ten-fold increase in the number of venture funds raising investment with some level of impact intent in 2020 compared to 2018. Similarly, according to research from Dealroom investment into impact-targeting startups has almost doubled in recent years, representing between 15- 20% of all venture dealflow in Europe.

Whilst we are not all on the same journey towards greater impact intent, the vast majority of investors around the table are increasingly seeking to contribute to solutions to social and environmental problems.

Which led us to an insightful discussion: do you need to compromise financial returns to achieve impact? And, how can impact be a driver of returns?

At Big Society Capital, our focus is on investments that ‘contribute to solutions’. We don’t see a financial trade-off here, as there are certain business models where impact is a driver of value. Wagestream is a good example of an impact-led startup whose impact and financial returns have grown in lockstep. Wagestream has recently raised its Series B at a significant valuation, receiving backing from credentialled investors including Balderton Capital and Northzone.

Early-stage pan European fund investor Isomer Capital shared analysis of their own portfolio across 36 funds: which revealed that 40% of startups are actively seeking to tackle one of the United Nations Sustainable Development Goals. Isomer believes that you can be impactful at the same time as achieving market rate financial returns, which it sees playing out specifically in areas such as wellness, health, sustainability and products and services that are focussed on engaging with people on lower incomes and poorly served segments of society.

One emerging trend that Isomer have observed is that new fund managers in particular want to invest in companies that offer the opportunity to both create social impact and scale to build big businesses. This is a trend that’s built momentum in the past few years and the pandemic has amplified it through an increase in remote medicine and education more has happened in 12 months than in 25 years”.

Next, the question of ethics was raised: ‘can you ethically get rich in impact venture -aren’t outsized returns through definition extractive?’

Snowball, a multi-asset impact fund of funds which exists to prove that it is possible to invest for impact whilst achieving a sound financial return, argue that companies can scale ethically, and thinking about the accessibility and affordability of products and services is key. They also drew an important distinction between businesses producing discretionary and non-discretionary products. Where companies are improving the sustainability of essential goods and services, scale can still be to the benefit of society and planet.

How impact can be a driver of returns

Snowball explained that designing innovative solutions that tackle social and environmental needs can create significant market opportunity (e.g. clean tech, sustainable food and digital healthcare), but sourcing deals in these verticals doesn’t necessarily equate to impact. We need to go further to think about who products and services are reaching and measure the actual impact on individuals and planet, as well as assessing the mission and behaviours of the fund managers themselves to see if they are mission aligned with impact at their core.

In venture, this is best demonstrated by lockstep models where impact and profits are mutually reinforcing. For example, Ananda Impact Venture’s investment into Auticon, an IT consultant providing skilled jobs to individuals on the autism spectrum. Auticon achieves impact through the number of people it employs in good quality jobs leading to improved self-confidence, personal autonomy and personal wellbeing. Happy and fulfilled employees drive the financial success of the business, demonstrating that impact can be a driver of returns. Though, we should also acknowledge that there are also impact venture funds not targeting traditional venture style returns, instead targeting a shallower growth trajectory with lower volatility which can still produce attractive risk adjusted returns.

Reflections and next steps

We only really scratched the surface with our first roundtable discussion and it was clear as we closed proceedings that we could have continued talking for hours. We’ll be inviting everyone who joined, as well others who would like to join next time, to re-convene to dive deeper into some of these topics in the coming months.

It is part of our mission to support the collaboration amongst LPs committing to impact and we hope that by sharing our impact expertise and best practice alongside investment opportunities and impact stories, we can support others to navigate this growing segment of the venture ecosystem.

This collaboration could include working with others to share fund due diligence as well as co-developing new opportunities based on shared impact objectives.

We are really open to ways in which we can support a thriving impact in venture LP community so whether you’re interested in finding out more or are already actively investing and would like to collaborate, we’d love to hear from you.

Originally published at https://bigsocietycapital.com on 11/03/2021

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