Impact investment: the Startups guide
In the UK, impact investment is an investor trend that looks to bring about some social good. Read on to find out how to attract an ethical investor, and for some key examples of business ethics
A philanthropist and an investment banker walk into a bar… and leave the best of friends.
No, it’s not a joke! Philanthropy and investment really can go hand-in-hand, united through the medium of impact investment. This trend proves that not every investor is driven solely by financial gain – some are passionate about positive environmental and social change, too.
For an impact investor, investing is about more than the money – it’s about the meaning. In fact, according to the Global Impact Investment Network (GIIN), 65% of investors have a vested interest in making the world a better place.
But who are these investors turned social do-gooders? Where exactly is the moral high ground that they’re perched upon? And how does a startup business get there?
Read on to find out the whys and wherefores of impact investment, as we break down the startup need to knows.
In the following article, we’ll explore:
What is impact investment?
Impact investment refers to investments made with socioeconomic and environmental concerns in mind. The impact investor themselves (or, the investment itself) will have a dual focus, rooted in both financial and social purpose.
Impact investors want more than financial return – they want their money to be going somewhere positive, and doing something good. In order to invest ethically, they’re prepared to balance potential financial gain – or even uncertainty – with the complex measurability factors involved when tracking the positive, non-financial impact of an investment.
So, while still operating like a normal investment (insofar that the investor will still expect to see an ROI), the ‘impact’ part means that measurable benefits will be created for the environment, and/or society, as a result of the investment.
But what counts as impact?
Job creation, paying above the living wage, women's empowerment, the growth of the small business community through output, revenues and financing – are all examples of social impact factors. Alternatively, a negative carbon footprint, a conservationist scheme, or clean energy generation would all count as environmental impact factors.
So, an example of an impact investment could include investing in a non-profit organisation (thus benefiting the community), or in a clean energy company (which can produce measurable metrics to demonstrate its positive environmental impact) – basically, an investment in businesses that have a positive impact, and can prove it.
Is impact really measurable?
When it comes to impact investment, the metrics of measurability are slightly more complex. As social good can’t be weighed out in pounds and ounces, nor can all environmental conservation be documented in linear lines and rows, slightly more imaginative systems of documentation and proof need to be put in place.
What you measure and how you measure it will depend upon your industry, and the expectations of the investor. Although not all impact is quantifiable in a generic way, according to the New York Times, “this may be a golden age for measuring the financial and social returns on investments.”
So, with that in mind, we’ve brought together some tips and resources that’ll help when it comes to measuring proof of impact:
- Establish and state clear social and environmental objectives to relevant stakeholders – for example, to offset an agreed amount of carbon, or provide a certain number of jobs to an underrepresented demographic within a set time period.
- Set targets related to these objectives, using standardised metrics wherever possible, and keep records meticulously updated.
- Get creative in how you report on social and environmental performance. For example, creating a heat map that visually represents progress against pre-arranged goals can be a relatable, less ‘numbers centric’ way of plotting progress.
If you think some external help might be useful, the following sources specialise in measuring and reporting upon impact investment:
Operated by the Global Impact Investment Network, IRIS is a rating system that measures impact and closely aligns to the commonly accepted accounting principles, as used by the Securities and Exchange Commission.
The GIIN has also developed IRIS+, which aims to translate impact investing goals – such as gender equity, climate change, and affordable housing – into results.
Both IRIS and IRIS+ are designed with the investor in mind, but will show the metrics of measurability a business will be expected to produce in order to win the confidence of an interested impact investor(s).
- The Global Impact Investment Rating System (GIIRS)
- The Sustainability Accounting Standards Board
The Sustainability Accounting Standards Board is an organisation that analyses 77 different industries along a consistent range of environmental, social, and governance metrics. Looking at the metrics they use for your specific industry could be beneficial in formulating your own methods of reporting on, and proving, your impact status.
Created a decade ago, and originally intended to apply sustainability criteria to private investments made through venture capital and private equity funds, GIIRS was the brainchild of the B Lab (the non-profit organisation that administers B Corp certification).
As the GIIRS and B Lab use essentially the same assessment criteria, the metrics of measurability that your impact investor will want to see can also be provided by acquiring B Corp status.
Thanks to the B Lab’s 200 point scale, stringent requirements, and transparency of results, B Corps (or Pending B Corps) can send clear signals to investors and competitors alike as to the quality and breadth of their impact.
For more information on how to become a B Corp, read the Startups guide on how to become a UK B Corp.
Why is impact investment a good idea?
By supporting businesses who “do their bit for the world” as well as doing good business, impact investment provides capital that helps alleviate some of the most pressing social stumbling blocks facing the world today.Impact investment often operates within such sectors as sustainable agriculture, renewable energy and conservation, microfinance, and accessible, affordable housing, healthcare, and education.
Put simply, the concept of impact investment is a good idea – morally, socially and environmentally. From the perspective of the investor, impact investment shows that their portfolio is about more than just money. And from the perspective of the investee, the ability to attract and retain an impact investor shows credibility of business, and a recognised potential for social growth.
Stephen Acheson, a director at Standard Life Investments, hit the nail on the head: “One of the greatest obstacles facing entrepreneurs and small businesses anywhere in the world is access to funding.”
In light of this, impact investment could provide an answer to the problem, insofar that making your startup business appealing from an impact perspective could really improve your chances of gaining investment – especially if you have a sound method of proving your impact in place.
Who are impact investors?
Many types of investors are entering the growing impact investment market. Here are a few common types of investor, and their motivations:
|Type of impact investor:||Area of impact investment they specialise in:|
||Provide client investment opportunities to both individuals and institutions with an interest in general or specific socioeconomic or environmental causes.|
||Leverage greater assets to advance their core socioeconomic or environmental goals, whilst maintaining or growing their overall endowment.|
||Provide proof of financial viability for private sector investors while targeting specific social and environmental goals.|
In the real world, the nonprofit organisation Root Capital places impact investment into the agricultural industries of both Latin America and Africa. This is to boost agricultural economic worth, as well as encourage employment (particularly that of women). It also seeks to improve the livelihoods of rural people by investing in companies that have the potential to grow, employ more people, and maintain the land, but struggle to compete within the European market as they encounter problems with cashflow.
Root Capital alleviates this cashflow problem, and has recently invested $230,000 in The Savannah Fruits Company: a once-upon-a-time startup business that, since its first round of impact investment in 2008, has transitioned into becoming a fully fledged company.
Root Capital’s most recent investment has the impact objective of increasing employment and wages for rural women in Africa, whilst strengthening a small business into a flourishing enterprise.
This is of course an example that sits within the international business arena. But the principles remain the same on the micro level as much as they do on the macro: impact investors shake up the business world for the sake of social, environmental, and economic purposes.
What can my startup do to appeal to an impact investor?
According to the Global Impact Investor Network (GIIN): “Although very few investors report significant risk events in their impact investing portfolios, business model execution and management is by far the most often cited contributor to risk.” This sentiment was very much echoed by business facilitator Vivienne O’Keeffe, CEO of V Vortex Holdings Ltd, when we caught up with her to ask all about what businesses can do to appeal to the right impact investor. Here’s what she had to say:
What are the hallmarks of a credible impact investor?
“Impact investing is a rapidly growing industry, fuelled by investors who are determined to generate a financial return and social and environmental impact. The impact investors themselves have notable characteristics of social and environmental governance. The ultimate hallmark of a credible impact investor is the implementation of their mission and vision.
“Impact investors tend to track progress over a longer period that ‘normal’ investments. They are not basing it on reward depth, nor the obvious ROI.
Imagine a world where investors actually cared… Impact investors are a new breed. I firmly believe that investors can evaluate the companies they support based on how well that company creates meaning for the people they serve and by evaluating the services they provide.”
Could you share your top three tips for startup businesses looking to find and attract the right impact investor for their business?
“Far too often, there is a disconnect between what a business plan says and what investors want to see. The right mindset is crucial, as it shows the right attitude and precedes the business plan in terms of importance.”
- The business plan:
“Business plans composed by external institutional sources, rather than the entrepreneur, are easily spotted and not conducive to investment.
“If the soul of the project and the entrepreneur’s vision are not present in the business plan, the investor quickly loses interest. This is even more likely in the impact funding arena, where there is deeper connectivity to the opportunity – not just the usual ROI and exit.”
- Sales and marketing:
“Have a robust strategic sales strategy in place, and show thorough market research to back up your methods.
“It’s all well and good having an amazing product or service, but what good or benefit is it if the investor sees there is no attempt at sales or market research?
“Make sure you’ve got a plan to get your business out there, and a strong sales strategy in place to show any investor (impact or otherwise) that you’re a business that’s going places. Put yourself in the investor’s shoes: you’d want to know you were backing something credible, and so do they.”
What are the pros and cons of impact investment?
By now, you should have an understanding of what impact investment means, and what it could do for your business.
But is impact investment really right for you?
We’ve drawn up a list of pros and cons to help you decide.
|✅Provides a sense of moral and social good:
Appealing to impact investors, and the steps you’d have to take to get there, show that you’re a business with strong social values, and are giving back to society or the environment in some shape or form.
✅Credibility of business:
Being the investee in an impact investment scenario shows that your business is credible, and trusted to deliver on its promises of social good. This represents you in a good light, and will stand your startup in good stead for future investment opportunities.
✅Strong investor/investee relationship:
Due to the nature of an impact investment, the relationship you forge with the person/company that invests in you will be stronger, and founded in a greater sense of shared values – perhaps a healthier way to approach the investor/investee dynamic.
|❌Vague and hard to pinpoint:
Impact investment is still a relatively new concept, and many people aren’t quite sure what it means or entails. This means that there is little guidance around what you can expect from an impact investment, or what you’ll be expected to do.
Since an impact investment has a dual focus, this will require more effort from you. You’ll have to provide the metrics of impact, as well as deliver the financial goods. This is a potentially time consuming and laborious task, especially if you’re new to the startup scene.
❌Difficult to appeal to the right impact investor:
With little industry knowledge on the topic, and a sea of potential investors out there, it can be hard to select the right investor with completely genuine motives.
❌It takes patience
Measuring meaningful impact takes time, so if you’re not prepared to put in the hours, it might not be the path for you.
More than paying lip service to Corporate Social Responsibility (CSR), impact investment demands both positive and measurable results from any investment made – an objective intended to sit alongside any financial motivations.
From something that started as a way of avoiding risk caused by the actions of companies, impact investment has evolved as a more comprehensive and wholesome assessment of positive business performance.
With the current scope of the impact investment market estimated at a respectable $502 billion, it’s clearly a big deal, and worth more than just a passing thought – especially if your business has its roots in doing a little bit of good, as well as turning a respectable profit.
Where to next?
If you’re looking for other ways to get your startup off the ground, take a look at our page on 6 ways to fund your startup that will walk you through easy ways to finance your business today.