On 10 July 2024, we had the pleasure of hosting a breakfast roundtable event on the topic of The Lifecycle of an Impact Investment: Cross-sector Perspectives and Experiences.
We had a diverse range of impact investing specialists from innovative charities, VC investors accelerating impact within venture, impact-aligned angel investors, and other members of the impact community in attendance.
The aim of our discussion was to share and reflect on the perspectives and experiences of impact investors from across sectors on:
- Intentionality in impact investment;
- Tools and approaches to embedding intentionality into the impact investment process; and
- Preparing portfolio companies for further impact investment and navigating impact exits
Below is a summary of some of the key insights and takeaways from our discussion:
- Investor accountability. The roundtable discussed the range of approaches taken by impact investors when crafting an impact thesis and defining their "intentionality". The discussion also highlighted the increase in "impact washing", as well as the tendency of most impact investors to focus exclusively on the intentionality and impact of the organisations that they fund. The participants called for (i) more focus from impact investors on defining their own intentionality as investors (as distinct from that of their investees) and (ii) bolder commitments from impact investors to deliver on and measure themselves against such "investor intentionality", in the same way that they expect their investees to deliver on and measure themselves against their "investee intentionality".
- Role of legal mechanisms in embedding intentionality. Although some investors relied primarily on pre-investment due diligence to check for impact alignment, legal mechanisms were also widely used to embed intentionality. Some investors viewed legal mechanisms as "backstops" or measures of last resort, whether in governing documents (eg purpose clauses) and in the investment documentation (eg put option rights allowing the investor to exit in the event of impact-drift). That said, the roundtable also highlighted the value of these legal mechanisms for demonstrating a clear and public commitment to impact from the beginning, which set expectations, aligned incentives, and acted as a compass in the decision-making process. Impact reporting was also discussed as a key guardrail (to keep the venture on track, protecting against impact-drift), though investors noted the pitfalls around inflexible impact metrics, particularly for early stage ventures. Participants also acknowledged the difficulty of agreeing impact metrics when not in a lead investor role, and of finding suitable portfolio-wide impact metrics to track, instead of sector- or deal-specific impact metrics only.
- Trade-offs between impact and financial returns. The roundtable called for more honest conversations in the impact investment space about the trade-offs between impact and financial returns. It was acknowledged that while there are investment opportunities where impact and financial returns do work in full lockstep, these opportunities represent a small sliver of the universe of impact-driven organisations. Yet, there appears to be a false consensus within the impact investment space that truly promising impact-driven organisations should have impact and financial returns to the same degree. This excluded a multitude of organisations which worked to solve complex systemic issues and required patient and flexible capital to achieve deep levels of impact.
- Financing tools. Linked to the previous point, there was debate over the role of different financing tools to cater for the full spectrum of financial and impact return expectations. The roundtable recognised the availability of a wide variety of impact-aligned financing products (eg convertible and revenue-based debt, redeemable equity) and mechanisms (eg impact milestone-based finance, impact-linked finance and structured/capped exits), in addition to traditional venture capital, but some investors expressed concerns that while these tools and mechanisms are available, they are not attracting sufficient investor appetite and, as a result, are currently not widely deployed.
- Role of financial advisers. The roundtable also discussed the key role which financial advisers could play in solving some of the challenges identified above, given they are the often the ones who bridge the gap between investors and investees. On that basis, the roundtable noted the need for increased engagement by and with financial advisors, to raise financial advisers' awareness of the wide spectrum of impact investment opportunities which their clients may be open to considering, to deal with some of the myths that still persisted around impact investing, and to help advisers' to distinguish genuine, intentional impact investment from impact-washing.
The roundtable concluded with a final call for increased cross-sector collaboration (eg through joint events or initiatives) to leverage the strengths of different sectors in supporting investees and investors to achieve greater impact.
We are grateful to our attendees for their engagement and valuable contributions to this important discussion, and look forward to continuing the conversation at our next roundtable event in the Autumn.
If you have any questions or would like to get involved in our next roundtable event, please reach out to one of the team.