Impact Investing and Venture Capital
Looking at the Startup Ecosystem Through an Impact Lens
Hi Everyone 👋 ,
The tech world has had a tough few months in the press. In the midst of bad headlines, it can be hard to remember the good that technology is doing.
And with the election coming up, our mindshare is consumed by society’s problems and inequalities. Tech is playing a part in solving those problems and reducing those inequalities: despite its flaws, technology has made life more convenient, more affordable, and higher quality.
This week’s piece focuses on the startup and venture ecosystem through a social impact lens. Let’s get to it!
Impact Investing in Venture Capital
When I worked at The Rise Fund, TPG’s $4 billion impact investing platform, I helped develop and refine a way to measure social impact. We called our framework the Impact Multiple of Money.
Rise was (and still is) the world’s largest impact fund, and the first to measure and track impact. You can think of the Impact Multiple of Money (IMM) for impact returns like you think of the Multiple of Money (MoM) for financial returns. Just as an investor may earn a 3x financial return on her investment (3x MoM), she may similarly earn a 3x impact return (3x IMM).
Let me give an example.
Our second investment out of The Rise Fund was in Dodla Dairy, India’s 3rd-largest producer of fresh dairy products. Initially, it might seem like Dodla’s impact comes from the nutritional benefits of more milk and dairy. But Dodla’s impact actually comes from income uplift to smallholder farmers.
Smallholder farmers are farmers who operate on a small scale—a smallholder farmer may own only a single cow, for instance. There are 120 million smallholder farmers in India and 60% live in poverty; the average earns $2 per day.
Many dairy farmers try to sell their milk in the open market each day, but can’t find a buyer. Their milk spoils and they go home emptyhanded. Working with Dodla, farmers enter long-term contracts that offer reliable daily purchases of milk. This leads to a doubling of annual income for Dodla’s 250,000 farmers.
Here’s how the IMM math might work (using directional numbers to prove the point):
In other words, for every $1 that Rise invests in Dodla Dairy, it expects to generate $5 of positive social impact.
Rise investments are required to clear a ~2.5x IMM hurdle and impact underwriting builds on the UN’s 17 Sustainable Development Goals: each deal’s social impact can be traced back to one or more of the SDGs.
In Dodla’s case, income uplift to smallholder farmers is rooted in SDG #1, “No Poverty”. More income trickles down to putting food on the table (SDG #2), access to better healthcare (SDG #3), providing education for a farmer’s kids (SDG #4), and so on.
Rise invests across six sectors:
Each sector typically draws from several SDGs. Here are examples of Rise investments in each sector and the “Impact Key Performance Indicator (KPI)” that Rise tracks:
Impact Venture Capital
Given my time at Rise and my interest in earlier-stage investing, I’ve often thought about whether impact investing can be applied to venture capital.
Applying Rise’s impact framework to startups is an interesting thought exercise. There are startups building innovative, impactful solutions across all six of Rise’s sectors:
Within each sector, I’ll give a high-level IMM for a company. These examples are illustrative, with made-up and overly-simplified numbers. They’re meant to show the different ways in which startups are impactful—through a later-stage impact investor’s framework—and to capture the scale of impact that startups can have.
In the last 25 years, we’ve gone from Nokias to iPhone 12s and from 10% of Americans on the Internet to 90%+. Yet the cost of education has increased 150% since 2000, 8x faster than the rate of inflation-adjusted wages.
A new generation of startups is using technology to make education more affordable, more convenient, and higher quality.
One example is Mos, which helps students find financial aid. Student debt in the U.S. has ballooned to $1.5 trillion—the largest component on non-housing debt in the country—and every year, more than a million students don’t apply for aid even though they’re qualified for it. Using Mos, the average student gets an extra $1,000 in aid.
Reaching 100,000 students—far fewer than Mos has its sights set on—would mean a 7.5x IMM for the Sequoia-led Series A round. In other words, for every $1 invested, students will avoid $7.5 in debt.
💰 Financial Inclusion
Much of the world’s financial system is broken, built to empower the wealthy and exploit the poor. There are 55 million underbanked or unbanked Americans—people who don’t have a bank account or people who have one, but still rely heavily on products like payday loans.
“Challenger banks” like Chime and Varo in the U.S., Revolut and Monzo in Europe, and Nubank in Latin America are disrupting incumbents and serving the underbanked with no-fee banking. Other startups cut across the system: Stripe’s stated mission is “to increase the GDP of the Internet”.
One innovative model is Nova Credit’s. When people cross borders and set up lives in new countries, they typically leave behind their financial histories, starting from scratch. They’re unable to get credit, cell phone plans, leases, or anything else requiring credit histories. Nova built a “Credit Passport” that allows credit histories to cross borders.
It’s hard to quantify Nova’s impact, but one estimate is that a Nova customer is able to add ~$10,000 to the economy by being able to access credit—whether through consumer spending or new business creation.
If Nova reaches 50,000 customers (a conservative target), that’s $500 million in positive economic impact.
🌱 Food & Agriculture
All of the world’s buildings, roads, and paved surfaces make up less than 1% of Earth’s land surface, while more than 45% of the land surface of Earth is used for grazing or growing feed crops for livestock. Those livestock—particularly beef cattle—are responsible for 40% of global methane emissions.
Pat Brown, a former Stanford biochemistry professor, founded Impossible Foods to eliminate our planet’s reliance on animal husbandry. He’s fond of saying, “Other entrepreneurs have their sites set on Mars; I’m doubling down on Planet Earth.”
One kilogram of beef produces 220 kilograms of CO2 emissions. If Impossible replaces 1% of beef consumption, that would drive a 33.5x IMM for the Series G round.
And that’s less than 1% of what Impossible hopes to accomplish. Impossible’s stated goal is to replace 100% of all meat consumption, not just beef.
There are startups emerging in the mold of Impossible and Beyond. Kuleana aims to be “the Impossible Foods of seafood” and is making a plant-based raw tuna replacement. Perfect Day is “Impossible Foods for dairy”. And Climax Foods is a data science company powering the broader food engineering process.
☀️ Energy & Sustainability
The climate crisis will be our generation’s defining crisis. It’s easy to overlook that fact at this moment (we’re experiencing a unique confluence of a health crisis, a political crisis, and an economic crisis), but climate change will be the most enduring and the most severe of these crises. Joe Biden is even considering adding a Cabinet-level post for a “Secretary of the Climate” of sorts.
The company that’s most captured the public’s imagination around climate change is Tesla. Just a few years past expectations of bankruptcy, Tesla is the world’s most valuable automaker: its stock is up a staggering 500% this year. Toyota produces about 25x as many vehicles as Tesla, but is valued $175 billion less. (Though Tesla is really a software and battery company disguised as a car company.)
There are less visible startups working on other climate-related challenges. Concrete produces about 2.5 billion tons of CO2 each year—about 10% of global carbon emissions. CarbonCure is a startup that reduces the carbon footprint of concrete.
Healthcare is a sector in which nearly every company is impactful. The most interesting are digital health companies, which use technology to scalably lower costs and broaden access in a massive, low-NPS industry.
Telehealth adoption has surged during the Covid-19 pandemic. Livongo, a company that helps people manage chronic diseases like diabetes, has seen its stock rise 550% this year. Because Livongo is public, it’s possible to estimate its impact this year.
Livongo reports 175,000 members in its diabetes program. A Lilly-funded study found that Livongo customers experience a 22% decrease in diabetes medical spending.
This IMM math only takes into account one year; a true IMM would factor in impact over an investor’s entire hold period. This analysis is also limited to Livongo’s flagship diabetes product, while Livongo has recently expanded into hypertension, weight management, and behavioral health. Livongo’s impact is likely multiples higher, which will accelerate when it finalizes its $18.5 billion merger with Teladoc this fall.
“Technology” is less of a sector and more of a horizontal enabler: each of the companies above is a technology company. But in the Rise framework, it can serve as a catch-all for startups that don’t fit cleanly into an industry-specific bucket.
Shopify enables small business creation; Faire helps those small businesses thrive. Hopin lets people connect in a global, distributed world; Deel helps people find work in a global, distributed world. Aurora and Scale are impactful by pushing forward frontiers of innovation.
One timely company is Catch. Prop 22 is on the ballot in California for whether gig economy companies like Uber and DoorDash should provide benefits to workers. We’re living through a massive reinvention of work, as work disaggregates:
Catch is a pick and shovel for this new economy. In the U.S., work is an integral part of the social safety net. Contract workers don’t have access to traditional employment benefits, and that’s where Catch steps in to offer health insurance, retirement benefits, and so on.
Founder / CEO Kristen Anderson recently tweeted that Catch is processing $1M of income each week (~$50M run-rate). Benefits are typically 30% of income, meaning Catch currently provides ~$15M in societal value each year.
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Bringing impact investing to venture capital is challenging for two key reasons:
It requires broadening the lens of what’s impactful, and
The most transformative startups are horizontal, cutting across sectors.
1) Broadening the Lens
So much of venture is already about creating impact at scale: the industry, at its core, is about providing the capital and support for world-changing companies. Not all companies end up changing the world, but the ones that do are often transformative.
In the Rise framework, “Technology” is a sector; in the venture world, “Technology” is the throughline across sectors. “Impact venture” means understanding how technology changes lives, requiring a broader definition of impact—a definition not easily rooted in Sustainable Development Goals.
Take one industry that technology has reinvented: dating. Many people would scoff at calling dating companies “impact” companies, but one could plausibly argue that there’s nothing more impactful on someone’s life than finding their life partner. The ~40% of people who meet their companion online (which includes me!) would certainly say that these tech companies are impactful.
This trend is even more pronounced for same-sex couples, who have a much harder time finding a partner without the Internet.
I like the example of same-sex dating because it embodies how technology changes lives. Because of the Internet, people were able to connect in new ways; distribution, information-sharing, and communication were each completely transformed.
This past summer, a Chinese gay dating app called Blued went public. Its founder, Baoli Ma, was unusually personal in the company’s SEC filing:
I was laden with agonizing loneliness, helplessness, and fear of the future during my adolescence. I used to think that I was the only person in the world attracted to people of the same gender and that I was sick and needed treatment. That was why, when I found out on the Internet that there were other people like me, and that homosexuality was not an illness or disorder, I felt a tremendous sense of relief and excitement. After all, I’m not alone in this world. After all, we are not sick. After all, love is gender blind.
To me, herein lies the power of the Internet—it empowers us to elevate ourselves, and to bring warmth to others across all corners of the world living in loneliness, helplessness and fear because of their sexual orientation.
If Ma’s words can’t capture the impact of technology (or remind someone of why this industry is special), I’m not sure what can. His words resonated with me because they captured my early experiences of the Internet—as a closeted gay teenager, finding belonging and community online.
Technology broadly—and social media specifically—have been highlighted lately for their negatives. There are serious problems that stem from social media (problems that need to be addressed), but I’m convinced that the Internet and social media platforms have been a net positive for society. When it comes to internet and software companies, “impact” needs to be reframed.
2) Horizontal Impact
The most valuable venture-backed startups tend to be horizontal, cutting across sectors. Big Tech companies, for example, have unlocked enormous value:
Microsoft has dramatically increased the world’s productivity—how can that impact be measured?
What is the social impact of Apple’s iPhone? How much did the iPhone increase world GDP?
Google made all of the world’s information available to anyone; how can that be quantified?
Because these companies are horizontal and because internet and software platforms reach massive scale, it’s difficult to quantify their value creation.
During this pandemic alone, Zoom has facilitated telehealth, online learning, collaborative work, and more. For highly-scalable internet and software companies, how do you measure the breadth or depth of their impact?
A younger generation of impactful startups is emerging—startups that are primarily horizontal, cutting across Rise’s cleanly-delineated sectors. They may not qualify for a traditional IMM analysis, but their impact resonates broadly and deeply.
Bono, one of the founders of The Rise Fund, likes to say that capitalism isn’t moral or immoral; it’s amoral, and the job of capital allocators is to channel it in productive, impactful ways. I admire how Rise has pushed for accountable investing, but I’m also an advocate for a broader scope of impact.
Not all startups are impactful, but impact is imbued in Silicon Valley ethos. It’s the reason that entrepreneurs and investors spout mission statements about changing the world (admittedly, sometimes hyperbolically) and it’s the reason that workers leave stable jobs for risky ones.
There are, of course, other forms of impact in the startup and venture world: job creation; venture returns generated for endowments and pension funds; wealth creation for employees, which enable a variety of philanthropic organizations (the Gates Foundation, for instance). Stakeholder capitalism is taking the place of shareholder capitalism.
This piece isn’t meant to gloss over tech’s (many) ills. The tech industry—and especially Big Tech—has many problems to sort through this decade. Rather, this piece is meant to offer a rough framework for how tech has made life better.
Impact has always been in the startup ecosystem’s DNA. It’s helpful and inspiring—in the midst of negative headlines, and at a time when the world’s problems are center stage—to remember the positive impact that technology is having.
Sources & Additional Reading
Check these out for further reading on this subject:
Online Dating Is Taking Over the World | The Atlantic
The Mission That Motivates Us | Pat Brown
Our World In Data, CBInsights, Pitchbook
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