An impact venture fund is a type of investment fund which aims to generate both financial returns and positive social or environmental impact. These funds are part of the broader trend towards impact investing, which incorporates environmental, social, and governance (ESG) factors into investment decisions.
Impact-focused venture funds have been gaining traction in recent years, with an increasing number of fund managers and investors recognizing the potential for startups to drive significant social and environmental change. This guide provides an overview of impact fund Thesis examples, methods to measure impact, pros and cons of starting an impact fund, and strategies for attracting and closing interested limited partners.
Key Sectors for Impact Funds
Impact-focused venture funds often align their investment strategies with sectors that contribute to the United Nations Sustainable Development Goals (SDGs), which address global societal and environmental challenges. Here are some of the main sectors that are commonly targeted by impact funds:
- 1. Renewable Energy & Environment: Investments are targeted towards innovative solutions in sustainable energy, waste management, and water conservation, aligning with SDGs like Affordable and Clean Energy and Responsible Consumption and Production.
- 2. Healthcare: Impact funds back ventures aiming to enhance health outcomes, especially for underprivileged communities, contributing to the SDG of Good Health and Well-being.
- 3. Education: Funds support entities that strive to improve access to quality education, backing both traditional institutions and EdTech startups, which support the SDG of Quality Education.
- 4. Financial Inclusion: Impact investors foster financial accessibility for underserved populations by supporting microfinance institutions, digital banking, and financial literacy initiatives, contributing to the SDG of Reduced Inequalities.
- 5. Sustainable Agriculture: Impact funds promote improved farming practices, waste reduction in food production, and development of sustainable food products, aligning with the SDGs of Zero Hunger and Responsible Consumption and Production.
- 6. Infrastructure & Housing: Funds invest in ventures that provide affordable housing solutions and enhance infrastructure in underserved communities, contributing to the SDG of Sustainable Cities and Communities.
- 7. Digital Inclusion: Impact funds back initiatives aimed at enhancing access to digital technologies and the internet for marginalized communities, contributing to the SDG of Reduced Inequalities.
While the sectors targeted by impact funds can vary based on their specific goals and expertise, they all share a common objective—to generate a positive, measurable societal or environmental impact alongside a financial return, thereby contributing to the achievement of the UN SDGs.
Measuring Impact with the Fund
Impact measurement is crucial to ensure that the fund is achieving its social and environmental goals. However, to conduct such measurements, funds first have to select a framework such as the Impact Reporting and Investment Standards (IRIS), the Global Impact Investing Network’s (GIIN) framework for measuring social and environmental impact.
Among these, the For Progress approach, especially suited for startups, offers a compelling way to align business performance with the United Nations Sustainable Development Goals (UN SDGs).
In the For Progress approach, startups select a series of impact Key Performance Indicators (iKPIs), which are specialized metrics derived from the UN SDGs and their 169 sub-goals. These are translated into startup-relevant measures. By identifying and tracking these iKPIs, startups not only monitor their business performance but also their contribution to these global goals.
When many startups in a venture portfolio adopt the For Progress methodology, funds can operationalize and track the aggregate iKPIs of its portfolio. This provides a holistic view of both financial returns and societal impact. This aggregate tracking can present a persuasive narrative to stakeholders, demonstrating that the fund’s investments are driving positive change alongside financial growth.
However, it’s important to note that the For Progress approach is one of many strategies a fund can use for performance measurement. Other traditional metrics used to assess the track record of a fund manager and their portfolio companies include total exit value, investment performance (such as IRR or MOIC), total capital raised, measurable sales increases, number of companies helped, size of professional network, and years of experience.
Sample Impact Funds & Investments
Navigating the impact investing space necessitates clear goals and a strategy to measure progress. Key Performance Indicators, or iKPIs in this context, play a pivotal role in evaluating a startup’s contribution to Sustainable Development Goals (SDGs). We’ll explore examples of impact funds and their investments in different sectors and the corresponding iKPIs that help track their advancement. Through these instances, we’ll see how startups, under their impact funds’ guidance, can aid in achieving the SDGs and effecting global change.
Example 1:
Thesis:
“AgriGrowth Fund is a $2.5 million Angel fund in Nairobi to back African agritech startups working towards sustainable farming practices, using the partners’ experience in closing 30 deals over a five-year period with a total deal value exceeding $250 million.”
Investments:
- Agritech Solutions: This startup uses AI and IoT technologies to optimize agricultural supply chains, reducing waste and increasing market access for rural farmers. iKPI 2.1.1 is tracked by measuring the increased efficiency of these supply chains and the number of farmers reached.
- NutriChild: This startup focuses on nutritional supplements and educational programs to fight child malnutrition and stunting. iKPIs 2.2.1 and 2.2.2 are measured by tracking the number of children exiting the stunting and malnutrition classifications after receiving NutriChild’s products and services.
Example 2:
Thesis:
“EduFund is launching a $7 million Seed fund in Bangalore to back Indian edtech startups, leveraging the partner’s experience in leading investments that have achieved exits totaling $500 million.”
Investments:
- EdEqual: This startup offers a digital platform providing access to quality primary and secondary education content for children from low-income families. iKPI 4.1.1 and 4.1.2 are measured by tracking usage data and academic improvement of children using the platform.
- LearnAbilities: This startup provides adaptive learning resources and training for teachers to effectively educate children with disabilities. iKPI 4.5.1 is tracked by the number of schools adopting their curriculum and resources, and the number of students reached.
Example 3:
Thesis:
“GreenTech Ventures is launching a $5 MM Pre Seed fund in San Francisco to back North American renewable energy startups, leveraging the partner’s track record of overseeing $200 MM in successful exits and an average IRR of 25% from past investments.”
Investments:
- SolBright: A startup that manufactures affordable, high-efficiency solar panels for low-income households in developing countries. iKPIs 7.1.1 and 7.2.1 are tracked by measuring the number of households switching to solar energy and the total increase in renewable energy consumption.
- EnergySave: This startup offers a platform to commercial buildings and factories to identify and implement energy-saving measures. iKPI 7.3.1 is measured by tracking the energy savings achieved by the clients of EnergySave.
In each case, the impact fund tracks the relevant iKPIs as a measure of how well each startup is contributing to their fund’s thesis and the broader SDGs. At a higher level, these iKPIs will roll up into VCs’ measurement of the fund’s overall impact and financial performance.
Pros and Cons of Starting an Impact Fund
Impact Funds can be a powerful tool to bring about social or environmental change, while also providing potential for profitable returns. These funds, while attractive to investors seeking to align investments with their values, bring about a unique set of advantages and challenges.
This section delves into the pros and cons of starting an impact fund, ranging from their capacity for market differentiation and high returns, to challenges surrounding the perception of returns, measuring impact, and their relatively new presence in the investment landscape.
Pros:
- Market differentiation: Impact funds can differentiate themselves in the crowded venture capital market by focusing on social or environmental outcomes.
- Alignment with investor values: Many investors are increasingly interested in aligning their investments with their personal values, making impact funds attractive.
- Long-term sustainable growth: Businesses addressing social and environmental issues often present sustainable growth opportunities due to the ongoing nature of these challenges.
Cons:
- Measurement challenges: Measuring social and environmental impact can be complex and time-consuming.
- Perception of lower returns: Some investors still perceive impact investing as offering lower returns, although this perception is changing.
- Limited track record: The impact investing sector is relatively new, and many impact funds have a limited track record.
Closing Impact Limited Partners
A growing wave of socially conscious investing, backed by a cohort of limited partners keen on making a tangible impact, has created a fertile landscape for impact funds. This surge in interest has opened up numerous opportunities to connect with LPs who are not just financially motivated but also driven by a desire to foster meaningful change. The following strategies, from leveraging professional networks to maintaining active engagement, provide a roadmap to capitalizing on this promising climate and securing LPs for your impact fund.
- 1. Leverage professional networks: Utilizing existing relationships and expanding your network can be a valuable strategy to source potential LPs. Referrals and introductions often carry significant weight.
- 2. Target impact-centric LPs: Foundations, family offices, and specific institutional investors often harbor a keen interest in impact investing. Directly engaging with such LPs can greatly improve your chances of success.
- 3. Articulate a compelling Impact Thesis: A clear and powerful impact thesis can articulate your fund’s social or environmental goals, the strategies to achieve them, and how they integrate with financial returns, offering LPs a comprehensive vision of your fund’s potential.
- 4. Exhibit subject matter expertise: Highlighting your team’s knowledge and skills in identifying and supporting impactful startups can enhance the confidence that LPs place in your fund management’s abilities.
- 5. Implement robust impact measurement and reporting: Providing empirical evidence through systematic measurement and reporting reassures LPs of your commitment to realizing the fund’s stated social or environmental objectives.
- 6. Demonstrate credibility through certifications: Acquiring relevant certifications can underscore your commitment to impact investing, enhancing trust among potential LPs.
- 7. Collaborate with premier vendors: Working with high-quality vendors can reinforce your fund’s professionalism and enhance its appeal to potential LPs.
- 8. Maintain active engagement: Regular follow-ups with LPs can keep them engaged and informed, emphasizing your ongoing dedication to your impact goals.
Conclusion
Impact-focused venture funds offer a unique opportunity to drive social and environmental change while achieving financial returns. For fund managers and investors, understanding the unique challenges and opportunities of these funds is key. By adopting best practices, leveraging networks, and maintaining open communication with LPs, fund managers can successfully navigate the complexities of impact-focused venture investing, maximize returns, and foster long-term growth for their venture capital funds.