No matter how you frame it, venture capital investors know (or should know) they are entering an inherently risky space. Eye-watering upsides are tempered by hair-pulling fiascos. Tech startups, which rely on innovation and growth in sometimes untested markets, are particularly prone.
The rule of thumb bandied around is that only 30-40% of startups completely fail. Another 30% or so return the original investment, and the rest produce substantial returns.
These figures are loaded with semantics on what constitutes a fiasco. Research by Shikhar Ghosh of Harvard Business School (see this Wall Street Journal article) suggests the failure rate could be more like 75%.
Mandate in the middle
For the growing class of business-for-good investors, debating risk in purely financial terms misses the point. For the 4impact co-founders Pauline Wink and Ali Najafbagy, much more is at stake than money.
On the question of how to reconcile financial and impactful returns, 4impact’s Najafbagy is unequivocal. Investing in the future means leaving this world in better shape than when we entered it: “That was our credo from day one, and still is,” he said.
Tech4good investing is all about backing future-proof digital technologies, business models and entrepreneurs with “impact baked into their DNA,” he explained, stressing that 4impact focuses on the environment, inclusion, health and well-being.
“Our mandate is to be in the middle where impact and financial return are equally important and reinforce each other.”
Output, outcome and impact
To assess these bilateral returns, 4impact uses the European Venture Philanthropy Association’s (EVPA) framework, which looks at inputs and activities to create output, outcome and impact.
“Output is easily measurable, outcome takes a bit more time, and impact typically a lot more time,” Najafbagy noted.
One of 4impact’s portfolio companies, Envision, has an AI-driven app for blind and visually impaired people which works on smartphones and smart glasses. In that case output is the number of users, outcome is when they become more independent (read more, travel more, interact more), and impact is when users are ultimately better integrated in society.
Impact and tech first
On the financial side, Najafbagy said his company is competitive with the broader venture capital market, and aims for double-digit returns annually. “Financial returns are as important as impact returns, but it needs to be solid impact and tech first before we engage with a venture.”
4impact is upfront that it is early days both for the company and in the impact space more generally. Its longer-term outlook reflects that: “We publish an annual impact report and integrate our portfolio’s outputs and reportable outcomes on our way to impact over the years to come.”
Clear vision, deep due diligence
The 4impact fund chooses its companies according to a scoring grid based on the team, impact, tech, financial return and other metrics as a result of detailed due diligence.
“We invest in young companies and have to buy into the founders’ vision,” he said. That can sometimes require a leap of faith from both sides.
Although 4impact attends venture-capital pitching events both on- and off-line, Najafbagy and Wink, a former Goldman Sachs colleague, do their own desk research on prospects and filter the results through the company’s impact-tech-financial lens.
Together with the rest of the 4impact team, they wade through hundreds of tech4good claimants a week and select the potential winners. They also ask half a dozen prospects into their offices in The Hague or online to pitch at 4impact’s regular ‘Magic Mon(ey)day’ gatherings.
“We met the incredible founders of our latest investment, The Fabricant, during one of these sessions,” said Najafbagy. The company saves on textile waste by digitising seasonal collections for resale/wholesale clients, saving travel, time, and energy while avoiding pollution and emissions.
The Fabricant’s mantra, Najafbagy threw in with a hint of pride, is "always digital, never physical… we waste nothing but data and exploit nothing but our imagination".
“If that’s not balancing the planetary ledger, then what is,” he concluded.
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