Mainstream venture capital (VC) funds are beginning to look for a new kind of unicorn—companies that will not only provide huge financial returns, but also create huge social impact. Investors are directing increasing amounts of capital to these funds. TechCrunch reported last fall that "[t]ech solutions for such pressing issues as the climate crisis and social inequality have seen a 280 percent increase in global VC investment from 2015 to 2020,” with London and San Francisco as two of the leading hubs. Barry Eggers, a founding partner of Silicon Valley’s Lightspeed Venture Partners, characterizes where this shift is headed: “Social impact will become a new North Star for our industry.”
To be sure, a few VCs have invested exclusively for social impact for years. Think of veterans such as SJF Ventures (founded in 1999) and DBL Partners (launched in 2008), as well as firms such as Better Ventures, Rethink Education, and Impact Engine, all founded about a decade ago. But an impact mandate has been far from the norm until more recently. Now, limited partners are increasingly demanding to know how their investments in a VC fund’s portfolio companies are benefiting society. To respond, venture capitalists are seeking new ways of evaluating potential investments, adding value to early-stage companies, and measuring their impact.
Toward a Venture Capital Impact Framework
If the tools used by private equity impact investors are ill-suited for venture capital, then how can VCs manage and measure impact in ways that are both practical and credible? Fundamentally, we believe VC impact investors should be able to answer three questions that feel much like those they answer about any investment:
- What matters? For conventional VCs, the answer is usually finding companies that have potential for hockey stick revenue growth and attractive exits. Impact VCs will want to ask additional questions: What targeted, concrete impact in the world do you aspire to achieve from your investments, alongside financial return? What types of solutions will achieve that impact, and how can you spot them?
- Why you? When it comes to the social impact of an investment, why is your capital right for catalyzing real impact? How will your involvement help the company achieve its—and your—desired impact?
- Why this model and leadership? What about the specific company’s business model and team gives rise to a conviction that there is potential for a “unicorn for impact” and not just a financial unicorn?
Read the full article about venture capital and impact by Jordana Fremed and Michael Etzel at The Bridgespan Group.