Venture capital’s increasing interest in impact investing

Big Society Capital engaged with more than 10 times as many venture firms with an impact lens seeking funding in 2020 relative to 2018

Purpose-led start-ups are tackling hard problems and improving lives. Wagestream is making payday lending redundant by enabling employees to get instant access to their earned wages. Open Bionics is on a mission to ‘turn disabilities into superpowers’ by building and developing the next generation of bionic limbs for limb-different children. Ieso Digital Health delivers online therapy for people with common mental health issues across the UK, at a time and place that suits them.

These companies all have impact intent at their core and have designed accessible products and services that are addressing areas of essential human need.

Venture capital firms are becoming increasingly interested in investing in companies like these. Big Society Capital engaged with more than 10 times as many venture firms with an impact lens seeking funding in 2020 relative to 2018. And analysis suggests investment into impact-targeting start-ups has almost doubled in recent years, representing between 15-20% of all venture dealflow in Europe.

See also: – Engaging on sustainability in start-ups paves way for green transition

So why are venture firms now more interested in impact than in previous years?

1. It reflects a shift in the broader investment market

The major constituents of venture firms are investors and founders – and both of those groups increasingly care about impact. Data from the 2016 Mission-led Business Review shows that one in five young founders say having a positive social impact is their primary motivation for starting a business. We are increasingly seeing experienced operators and serial founders launching impact-focused startups.

Similarly, limited partners are showing an increased interest in impact. Of 63 investors who contributed to the The Capital Behind Venture report by Mountside Ventures, around one quarter were explicitly looking to invest in impact venture as a sector and two thirds said impact was preferred. Groups such as Pension for Purpose and the Responsible Investment Network of Universities have emerged to help institutional investors come together to learn about impact.

2. Purpose-led companies can attract talent and customers

For start-ups to succeed they need to attract customers and high calibre talent. The evidence suggests people increasingly care who they work for. For example, a 2016 study by LinkedIn found 74% of candidates want a job where they feel their work matters. Purpose-led companies have an advantage in presenting a clear mission that resonates with potential hires – and ultimately working on that mission provides a level of meaning that can keep the best talent over time.

The evidence also suggests consumers increasingly care who they buy from – with a 2018 Edelman Earned Brand survey showing that 64% of consumers are belief-driven buyers who would choose a brand based on its position on social issues. There is growing demand to help solve the many pressing issues facing society – and brands that can authentically articulate their positive social contribution are positioned to succeed.

3. Social impact can drive returns

Impact can be a source of value – and therefore a driver of returns. Although having a clear purpose is beneficial, actively solving for impact over time can drive deeper value. Delivering strong impact performance can help attract and retain customers, employees, and investors – as well as positioning companies ahead of regulatory risks.

For example, Wagestream seeks to deliver better outcomes for employees’ financial wellbeing. It does this by providing access to earned income as a benefit through employers. For example, an employee on the platform may be able to avoid missing their rent payment thanks to being able to access some of their wages two weeks earlier. As Wagestream improves and builds evidence of the value of this service, it will deliver both stronger impact and a stronger basis to attract employers as customers.

Where next for impact in venture?

Tech-enabled business models can have a transformative impact in the right context, with the right intent, and with an aligned business model. The Covid-19 pandemic has further highlighted the need for innovative solutions to social problems, and we have seen many impact start-ups step up and adapt in response to the crisis in areas such as health, education and financial inclusion.

Impact start-ups are part of a movement that is gathering momentum and with many pressing issues facing society, they have an even greater role to play in the recovery phase of this crisis and beyond, providing opportunities for investment.


Natasha Turner

Natasha is global editor at ESG Clarity, part of Mark Allen Financial, and has been a financial journalist for seven years. She has been shortlisted for Story of the Year and Investment Journalist of the...