Impact-Driven Decision-Making at the Builders Fund

By Amelia Ahl & Katharine Hawthorne

As the impact investing industry has matured, so has the practice of impact measurement and management (IMM). From the SRI pioneers who led divestment campaigns, to ESG integration to manage risk, to impact as a driver of investment outperformance, the role of “non-financial” impact data has evolved with the impact investing industry.

The emergence of impact investing standards and measurement frameworks marks another sign of a maturing industry. At the Builders Fund, we’ve chosen to align our ESG and impact policies with B Labs Impact Assessments, Impact Management Project (IMP) frameworks, and the United Nations Sustainable Development Goals (UN SDGs). As a member of the Impact Capital Managers Network, we have also structured our practice to include ICM’s four Fundamentals of IMM: 1) Define impact objectives; 2) Establish an IMM process; 3) Establish fund manager’s contribution; and 4) Measure impact.

For us, impact goes beyond frameworks and metrics. As a certified B Corp, we hold ourselves to the same standards as our portfolio companies. We see impact as a driver of financial returns and IMM as a tool to support decision making throughout the investment lifecycle, from opportunity recognition, to value creation, and ultimately towards exit.

Opportunity Recognition

ICM’s first fundamental practice of IMM is to define clear objectives for the portfolio and its investments. On a portfolio level, Builders’ objective is to help solve environmental and social problems by building certified B Corps to advance a more sustainable and systemically responsible form of stakeholder capitalism. In order to achieve this objective, we have defined four key thematic focus areas that correspond to the major social and environmental challenges of our lifetimes, where emerging growth stage investment can meaningfully accelerate solutions:

Builders’ objective of creating systems-aware B Corps, combined with these thematic focus areas, drives our deal flow and sourcing and helps us to identify investment opportunities where impact is core to the business model. Prior to investment, Builders defines company-level impact objectives and key performance indicators (KPIs), which are reported quarterly. We use B Lab’s Impact Assessments as a tool in diligence and to measure ESG improvement from baseline at entry.

Value Creation

Post-investment Builders focuses on partnership, working closely with the management team to define, track and execute key value creation strategies. ICM’s second fundamental practice is to establish an internal IMM process, which Builders incorporates into a 100 Day Operating Blueprint for portfolio companies. In order to ensure that management teams and employees share in value creation, Builders establishes options or long term incentive programs, granting, on average, about 12% of each company to employees.

Builders partnership model is designed to co-create value with management teams post investment. In addition to financial capital, we bring human capital via our “Builders” operating partners. Approximately 50% of our investors are former C-Suite executives, founders, or operators who support our portfolio companies, often as board directors or advisors, to scale both their businesses and their impact. Our investment team also stays closely involved post-investment, collaborating on hiring initiatives, growth strategy, brand and marketing strategy, partnership development, B Corp certification, and pandemic response. Builders’ partnership model is central to how we operationalize impact and seek to establish our additionality as a fund manager (ICM’s third fundamental of impact).

To validate value creation, we measure impact (ICM fundamental #4) to hold the fund and its portfolio companies accountable. KPIs are measured annually, cumulatively and since investment. B Lab’s Impact assessments are refreshed every three years in order to maintain certification as B Corporations. We also actively work with our portfolio companies to improve ESG factors — as measured by the B Impact Assessment — because we see strong evidence that ESG drives better economic outcomes. (Builders itself has been a certified B Corp since 2015.) These metrics are then reported quarterly to LPs and disclosed publicly in our annual Impact Report.

Exit

We maintain flexible long-term exit horizons — up to 14 years — which supports a more holistic approach to value creation than is typical in private equity, while also allowing Builders and portfolio companies to jointly pursue values-aligned buyers and alternative liquidity methods to preserve impact at exit. Additionally, B Corp Certification ensures mission lock through a legal requirement in company governance documents to consider the impact of their decisions on all their stakeholders.

Continuous Improvement

At Builders, we have made an intentional commitment to embedding impact throughout our business model and accelerating the trajectory of growth stage companies building sustainable and systemically responsible businesses. We are also committed to continuous improvement and identifying opportunities for learning and development, including the three active focus areas below:

1. Leveraging Data: Builders and our operating partner network have developed expertise in our investment themes, but we recognize we cannot be not domain experts on the full scope of social and environmental impacts covered by our mandate. We are working to better leverage existing bodies of research such as randomized controlled trials, where available, to establish data-driven impact objectives and company-level theories of change. At the same time, we are looking for ways to better incorporate stakeholder considerations into diligence and portfolio company management to better understand potential community impacts through qualitative information.
2. JEDI (Justice, Equity, Diversity, & Inclusion): Builders is committed to racial and social justice and building a more inclusive financial system, starting with our firm. We initiated an internal learning and review process and are working to improve diversity in our deal pipeline, at all levels of our portfolio companies, and among our investor base. As this work develops, we are also educating ourselves about our own biases, and the systemic barriers that have prevented founders of color from reaching Builders’ target size and stage.
3. Exit Strategy: With Fund I fully deployed, we are early in that fund’s exit lifecycle and will be collecting more data points on how to help portfolio companies through the strategic decision-making process of balancing impact and fiduciary responsibility at exit.

By sharing our impact measurement and management practices, we hope to highlight some of our emerging best practices as well as our challenges, and thereby advance the impact investing industry. If you have questions or feedback on Builders approach, we welcome dialog and the opportunity to learn and evolve our practice.