For VC fund 4impact much more is at stake than money

It seems simple: tech4good ventures offer digital solutions with a net positive impact on people and the planet. But investors in these businesses face double challenges, according to the co-founder of venture capital fund 4impact.

AI, like this robot at the the Global AI Technology Conference in Hangzhou, China, is one of the cornerstones of tech4good. Long Wei / ANP

In short

  • The Hague-based venture capital fund 4impact invests in businesses involved in environment, inclusion, health and well-being.
  • Even though impact comes first to the fund, co-founder Najafbagy says that the fund aims for double-digit returns.
  • The fund uses existing metrics to measure returns and experiences that impact is the hardest factor to put a number on.

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.”

Headquartered in The Hague, 4impact Venture Capital was founded in 2019 by former Goldman Sachs colleagues Ali Najafbagy and Pauline Wink. The fund is an early-stage investor in tech4good ventures. 4impact

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.

Magic Mon(ey)day

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.

Read more

Article: 4Impact co-founder Ali Najafbagy wants to make impact investing the norm

Article: AI can help impact investors

Report: Accenture 2018 report on tech4good [PDF]