Tools for Systemic Venture Building: Theories of Change

Published in

Metabolic Ventures

14 min readOct 21, 2022

How to think about a theory of change and why impact-driven enterprises need one

This article is part of a broader series about tools for systemic venture building. You can read our introduction or scroll to the bottom of the article to find links to other tools in the series.

Introduction

If you don’t know where you’re going, any road will get you there.

A theory of change sits at the core of a mission-driven organization. However, our experience suggests that it’s still quite rarely used in the startup domain — even with impact-driven startups — and even when it is used it’s often misunderstood.

In this article, we wanted to explain why we see a theory of change at the core of a mission-driven organization and how to use it as a dynamic tool to help keep an impact-focus on track.

What is a Theory of Change

If you’re not familiar with the concept of a “theory of change”, it’s basically what it sounds like. It’s a theory you have, made explicit, for how to effectively achieve desired outcomes. While this piece will focus on utilizing a theory of change for early-stage ventures, it’s a useful tool that any organization or individual can make use of.

A typical theory of change diagram, which we’ll use as a basis, is separated into five main components: Inputs, Activities, Outputs, Outcomes, and Impacts.

Inputs of various kinds (e.g., labor, energy, materials, knowledge, expertise, partners, finance, etc.) feed a set of core activities, which lead to certain outputs. These three things are mainly within a venture’s control (although, as we’ve seen with supply chain disruptions and forced event cancellations, not always). These outputs in turn lead to expected outcomes, and, in the end, to the ultimate intended impacts.

A theory of change can get more complex and include:

Elements of time, such as short-term, mid-term, and long-term outcomes
More deeply embedding external factors and influences
Identifying key assumptions between each step
The challenge or problem being addressed, as well as the vision for when it’s achieved

But at the root, a theory of change is a hypothesis. Informed by a deep understanding of the problem and the dynamics of the system in question, it details how a venture’s actions are meant to ultimately affect deeper challenges in the system. It also forces us to unearth the key assumptions embedded in that hypothesis.

Relating a Theory of Change to Vision and Strategy

A theory of change can often be confused with a vision and strategy.

A vision is the destination you want to get to and what you want to achieve. It is effectively an end-point.

A theory of change is your best assumption of how to get there. In some ways, it’s like a map. More practically, a theory of change is a theory of how an organization’s actions will lead to the desired change it seeks. It includes, at least at a high level, how it plans to organize its resources, what it plans to produce (and why), and how the activities it can control will lead to the outcomes it can only partially influence.

A product/service strategy is about finding the right product(s), business models, partners, financial resources, and incentives for adoption that creatively help drive a theory of change while creating a thriving organization in the process, responding to practical facts and dynamics.

Theories of Change: Three Important Types

A theory of change can be a powerful tool, especially as we navigate the difficult task of changing complex systems. But when using a theory of change, it’s important to keep in mind that there are multiple types that are useful in particular contexts. In our view, it’s important to be aware of at least three types of theories of change, all of which play different but important roles.

#1: System-Level Theory of Change

Understanding the needs of the system, ideally before a venture or initiative is designed

A theory of change for a given system answers the question: What does this system or challenge need, and which pathways are most likely to create the change being sought?

While we all come with our own biases, this theory of change should be as objective as possible and precede a chosen solution, as if you were analyzing the system for someone else. A systems-level theory of change is essentially the condensed output of a lot of deep research and conversations with experts and key stakeholders.

A theory of change for how a system transitions is not static, and will likely be different at varying spatial and temporal scales. As a simple example, a theory of change regarding the electrification of the transportation sector would be different in 2022 than it was in 2002. It would also be different depending on whether we were focused on India or Denmark. Context is important and changes across space and time.

We’ll dedicate a future article for how to go about doing this research efficiently and effectively, but for now imagine it as something that takes dedicated time and focus. It’s also something that evolves; early-stage entrepreneurs would be wise to put in up-front work and come to initial conclusions before they settle on what kind of venture to build, but they’ll also inevitably continue to add key learnings to this macro understanding over time.

#2: Organization-Level Theory of Change

Understanding the role an organization plays and how it assumes its activities will lead to desired outcomes

For those familiar with the concept of a theory of change, an organization-level theory of change is often what they think of. Such a theory of change is about making explicit how an organization’s activities ultimately lead to the change it seeks to make, as well as what key assumptions exist in between. An organization’s activities are essentially “what it’s doing”, which could include business models, actions, programs, projects, events, etc. These activities require certain inputs like talent, finances, partners, materials, technology, etc., and lead to certain outputs, which are direct results of these activities.

Generally speaking, rather than focusing on the input => activity => output part of the theory of change, which is often covered more in depth in a business model or an organization’s more typical plans, it’s much more fruitful to focus on the connection between activities or outputs and the desired outcomes being sought. It’s also recommended that, to maximize the exercise and the process around it, you track backwards all the way from desired impacts on the right hand side of the theory of change, challenging your assumptions along the way.

Creating an organizational theory of change can be a significant project, especially if it’s done with an open mind and not just as a communications exercise (more on this later). But equally, it’s an essential foundation of a mission-driven organization — and critical to put time into upfront. One way to speed up this process is to focus on the role the organization plays in transforming the system. Starting from a more objective understanding of ‘what the system needs’ from a systems-level theory of change, we can identify a more subjective theory regarding what role (or roles) an organization should play and how it achieves desired outcomes. Any organization — large or small, established or just getting started — has certain skillsets, capacities, passions, etc., that should be taken into account when thinking about the role it plays within a broader network of organizations that are working towards similar goals.

The key is finding a role where the circles overlap within the venn diagram, answering the question: What role do we intend to fulfill in the given system given what the system needs on the one hand and our passions and capabilities on the other?

We will dive deeper into role typologies in the next part of this series, but for now keep in mind that it’s an important component of an organizational theory of change. Alongside a clear vision and a leading if-then hypothesis, we can begin to build out a more comprehensive theory of change. To understand these components better, the below examples of existing organizations can help.

For building out a more comprehensive theory of change for an organization, we have included guiding questions and additional resources towards the end of this article.

(Footnote 1: Note that the “best” product according to Patagonia is related to its core values.)

#3: Product/Service-Level Theory of Change

Understanding the role a product or service can play in maximizing impact and achieving organizational goals

A product, service, or initiative-level theory of change sketches out the theory behind a particular product. If you’re Patagonia, the clothing line and the recently launched food store, Patagonia Provisions, likely have two very different theories of change. Even within clothing, the line of T-shirts might have a different theory of change than the more expensive line of jackets (respectively: branding and awareness vs. exemplifying a sustainable supply chain).

The goal is not to create endless numbers of theories of change. However, at least on the product/service level, it’s key to define a clear purpose and hypothesis for anything you put in the market. This is because, for a mission-driven enterprise, it’s critical that the product/service is in service of the larger intended outcomes and the mission of the organization. It’s typically not enough for a product/service to simply be financially successful. For example, if one of the core objectives of Patagonia Provisions was to ensure affordable access to healthy and organic food, they would be considered failing and would need to rethink how they achieve that goal given the high prices of many of the products on the platform. But if the objective was to provide farmers with good prices for their products, they might very well be succeeding.

A theory of change at the level of a product/service also helps avoid mission drift. Once we get into developing products and services people want to consume, we naturally end up tailoring them to the needs of active customers. If we’re aware of our theory of change for the product/service, we can adapt it to customer needs without the risk of completely diverging from the intended impact. If we don’t have a grounded theory regarding the outcomes we hope to achieve with the product/service, then we could easily find ourselves lost at sea.

Internal vs. External Uses

Internal: Monitoring and calibrating what you’re doing

These are larger impact goals we’re working towards, and thus this is what we should be doing.

A theory of change is most useful when the venture embraces it as a dynamic theory, updating it over time with new information, and uses it as a tool to ensure that it’s approaching its objectives in the most effective way possible.

Take a relatively simple scenario: Let’s say that your core goal was to increase educational outcomes and participation rates in rural communities in impoverished countries. Your research suggests that one of the bigger problems to address is rural electrification — providing access to electricity so children can read and do school work in the evenings. You thus go about building a company that focuses its efforts on installing household and community-level wind and solar. You innovate the business model and find creative ways to make a scalable operation feasible.

As your goal was educational outcomes, your work is far from over. What if lighting remains a problem, despite having access to renewable energy? What if deeper issues remain a barrier, such as families needing the income or labor provided by their children? What if the households willing to engage in an innovative business model for renewable energy are likely the same households to find ways for their children to acquire a decent education despite existing challenges? What if the intended outcomes decrease over time, with the second batch of deployments of renewable energy leading to a significant decrease in educational gains, and the third batch to an even further decrease?

For internal use, a theory of change helps us make our assumptions explicit, which can be updated over time and in different contexts as we learn from reality. In this way, a theory of change serves as both a map and a compass, and it should be updated on a regular basis as critical information becomes available or as the broader dynamics of the system changes.

External: Communicating with stakeholders

This is what we’re doing, and thus this is how it connects to larger impact objectives.

Many grants expect or even require a theory of change (and might ask you to describe how your initiative fits within their own theory of change). Growing numbers of impact investors want one, too. Beyond the interests of financiers, some enterprises seek to make their efforts explicit on their website — explaining their overall objectives and how their activities will hopefully create the right cause-and-effect toward achieving them.

It’s important to outline how an external theory of change may be different from an internal one. An internal theory of change has two important forms:

One is probably a bit messy and quite complex, with a lot of information (Example). It’s probably good to update this theory of change about once per year, perhaps during an annual strategy cycle.
The other is a clear and crisp if-then hypothesis that is used on a daily or weekly basis to ground decision-making

An externally facing theory of change is somewhere in the middle. An if-then hypothesis is too simplistic and probably not visual enough, but you want to keep things simple enough that it’s clearly understandable for an external party. B-Lab’s theory of change serves as a good example here.

Additional Resources

General Process

Below is a roughly laid out process for creating an organization-level theory of change.

Challenge and Need
In this step, you are essentially building upon research you’ve already done in order to define the problem as objectively as possible.

How do you identify and understand the problem that you intend to solve?
What does the system need?

Vision
In this step, you are defining where the system should go and what it looks like for the organization you’re building to have played a key role in achieving that vision.

Vision of the system:

The ‘What’ Vision: How the system should be different and what it looks like when change is achieved
The ‘How’ Vision: How the system can be different and what it will take to bring about that change

Vision for the organization

What role does the organization play, especially in relation to other roles that other organizations play?
Longer-term, what has the organization enabled, at a high level?

Outcomes
In this step, you are getting clear about the outcomes you want to drive towards, giving them as much detail as possible.

What is the organization’s most critical objective?
What are the other key outcomes that guide the organization’s direction?
How can you get more detailed about them in quantitative terms? How does it look like if you reach them?
How do you understand the relationship between outcomes and impacts? What are your assumptions for how these outcomes, if achieved, will lead to the desired impacts?

[Hypo]Thesis
In this step, you want to be clear about your if-then hypothesis of achieving the key outcomes you’re driving towards. “If” typically defines the performance criteria for the output (or thing you’re putting into the world), whereas “then” typically defines the resulting effects on the outcome you’re driving towards.

What is your current hypothesis about the types of capabilities, assets, or other resources that, if in place, would enable your desired outcomes to be achieved?
If there are multiple hypotheses, how do you prioritize them? How do they link together?

Backcasting
In this step, the goal is to map out what is needed to fulfill the desired outcomes through tracking backward from the endpoint, one major step at a time.

What is needed directly before the desired outcomes that, in turn, will lead to those outcomes? And before that? And before that?
As you backcast from the final outcome and identify key steps, infrastructure, resources, attitudes, and other things that must be in place, how do you view the likely effects on beneficiaries, partners, and the capabilities of the organization?

Outputs
In this step, you’re working to define the outputs you want to put into the world (or at least their performance criteria), as well as how they connect to activities and outcomes.

What are the outputs you seek to produce? (If you’re not yet sure, what defines success of those outputs?)
How do you assume these outputs lead to the desired outcomes you seek? What are the key underlying assumptions?

Inputs & Activities
In this step, you’re describing, at a high level, what the organization will be doing (activities) to create the intended outputs, as well as the resources (inputs) you need to fuel the activities. To avoid business planning, think about:

What are the key activities you need to be doing as an organization to achieve the outputs you intend?
What are the critical inputs, especially the non-obvious ones, that you will need to enable those activities?
Are there any critically important assumptions (e.g. access to inputs, or the skills necessary to execute the activities) that are important to surface?

Defining Success and Timeframes
In this step, you’re using the element of time to be more practical about what you want to achieve over what timelines, and how these different milestones are reflected in your theory of change.

How do you separate between short-term, intermediate, and long-term outcomes?
In order to be on track with what we want to achieve, what are the objectives we have for the next 5 years?
In order to be on track with what we want to achieve, what are the objectives we have for the next 2 years?
What could you do tomorrow to bring you one step closer to your goal?

Selecting Indicators
In this step, the goal is to identify specific KPIs and metrics that are relevant for understanding whether your theory of change is accurate or needs to be rethought.

What indicators or metrics could help you keep track of whether outputs are leading to desired outcomes?
What indicators or metrics could help you keep track of whether outcomes are leading to desired impacts?

Other Resources

Along the way, we’ve found some additional resources we think can be valuable:

The Impact Path, a well-regarded resource on theories of change
A basic introduction by Innovation for Social Change
A guide to creating a workshop series to arrive at a Theory of Change
A guide by Civicus