This story is in partnership with SPRING ACTIVATOR.
Recent years have seen a dramatic rise of social impact companies hitting the mainstream globally, from Beyond Meat’s IPO at a US $1.5 billion valuation, to more than 4,000 companies becoming certified as ‘B Corps’ for a positive social and environmental performance.
With the climate crisis and other major issues in desperate need of solutions, technology investors spy opportunities to have a positive impact and have a financial return in the process. In doing so, they are coming into increasing contact with investors from a social impact background, who’ve been helping to build the social impact sector by investing in new social solutions or backing social enterprises in their local communities.
In the last few years, the economics have finally begun to make sense for new ventures like clean climate technologies, said Keith Ippel, the CEO and co-founder of Spring Activator, who has more than 25 years’ experience in technology and impact businesses and whose company trains early-stage impact investors through the Impact Investor Challenge program. “The ability to actually invest in technologies and companies and startups that can make the world a better place and create financial returns is there,” he said.
The old approach for entrepreneurs and investors is “capitalist by day, philanthropist by night,” Ippel added – where businesses maximize profit and see social value as separate – whereas impact investing “has shown there is actually a spectrum” of achieving various levels of impact and returns.
Now, impact investors from different backgrounds are navigating that spectrum together, and it could transform their work in the process. So what lessons are they each learning, and what effect will it have on the social finance and social impact sector in Canada?
Moving fast and slow
The transformation of the technology sector in the past few decades demonstrates that tech investors know a thing or two about creating high-value businesses. Gaining access to the right financing has been a vital tool in getting tech companies off the ground extremely quickly, and holds many lessons for impact investors and companies looking to grow.
“The beautiful part of tech is that they move. There’s a velocity in the tech sector,” said Ippel. “Where tech always helps impact, I think, is they’re far faster to implement and try and test ideas, and then help them achieve mainstream.”
One of the ways tech is teaching impact is the financial vehicles they use. Compared to more traditional grants and loans used in impact investing, Ippel said, the influence of tech is pushing more impact investors into equity investments and growth-oriented vehicles like revenue-based financing, where investors provide financing for a business in exchange for a share of future revenues
A financing issue that’s particularly challenging in the Canadian impact sector is finding investment during the ‘seed stage’. A 2017 survey of impact investors by the MaRS Centre for Impact Investing showed that social enterprises in the seed stage can struggle to secure capital, defined as those seeking anything from $50,000 to $1 million in funding.
This is a gap Mike Winterfield is trying to fill, an impact investor with a tech background who founded Active Impact Investments. The venture capital firm recently closed a $54 million climate tech fund and concentrates on early-stage climate tech companies with the potential for rapid growth.
“We’re sort of unapologetic about the fact that we’re trying to select [impact-focused] companies that can grow very quickly and perform very well financially,” he said. “The calibre of companies that are getting launched at the intersection of tech and impact have really flourished and improved.”
A select number of major climate funds like Climate Investment Funds (CIF) have made billions of dollars available for climate tech investments, Winterfield added, but this will not be available for early-stage companies. “Those funds can only invest in companies that are quite mature,” he said, while early-stage companies in the impact space have a harder time raising capital than in the traditional tech business. This is where programs like Spring Activator’s Impact Investor Challenge try to fill the gap by training impact investors to invest in early-stage startups and by facilitating the investment vehicle. Recently, the organization has partnered with Vancouver Economic Commission, Foresight Canada, Volition, and Innovate BC to run Angels for Climate Solutions and stimulate investment in early-stage, tech-enabled climate solutions.
But in achieving impact, being quick to scale isn’t everything. Ippel and Winterfield credit pioneering impact investors for investing in ventures to lay the groundwork for profitable solutions launching today, risking their own capital for longer term social value. This was particularly important in the clean energy sector where, after many years of work, solar energy has become cheaper than burning fossil fuels in much of the world.
“Thank goodness there were people who were willing to take bigger risks than me in the past. That built out a lot of the infrastructure,” said Winterfield. “If you look at cleantech, for instance, there were a lot of people who lost a lot of money 10 years ago.”
Ippel added that impact investors are often more patient than traditional tech investors. “With impact solutions, sometimes patient capital is critical to allow these ideas, concepts and companies to play out in a way that you might not normally see in a tech company where they’re expecting you to achieve certain milestones within the first 18 months,” he said. “Investing in solar and wind is just such an example. If it had been purely a tech approach it would never have happened.”
Measuring impact and profit
One of the most important areas where tech and impact investors are learning from each other is in measuring impact.
“This is the next phase of learning between tech investors and impact investors, because for tech investors, impact measurement in the classic sense was something they never did before, so they’re learning the fundamentals,” said Ippel, explaining that traditional tech investors will measure things like users and profit.
Now they are entering the impact space, however, he said tech investors are driving a quantitative movement within impact measurement – exploring ways to quantify social or environmental impact “that I think impact investors traditionally aspired to but couldn’t quite get there.”
Leah Nguyen, Investment Director for the TELUS Pollinator Fund for Good, who has a background in tech consulting, says careful evaluation of social impact companies is vital for tech investors in charting a course beyond traditional profit-focused business.
“There’s a bit of discipline in ensuring that when you’re evaluating these opportunities, you look beyond just: ‘OK, here’s the market growth number,’ but is this actually addressing the issue that the company is supposed to address?” she said. “Otherwise you run the risk of being seen as impact washing or greenwashing.”
Nguyen said some impact investors are shifting their approach, too. “On the flipside, for impact investors, sometimes there’s this distinction that: Oh, because I’m an impact investor I must be ok with accepting concessionary returns. I think that narrative is starting to shift,” she said. “If you’re solving a real problem, then there’s going to be a big market opportunity.”
She pointed out that one thing both impact and tech investors need to focus on is measuring and increasing diversity – both in investor firms and companies they support. “To really drive impact, you want to work outside of the system,” she said. “If you want to look at it from a purely economic perspective, investing in diverse founders makes a lot of sense because they’re going to find market opportunities that are untapped.”
Another common challenge which may benefit from both impact and tech investor input is working out how to uniformly measure impacts which are harder to pin down.
“The tension starts to exist when we start talking about impact metrics that are more qualitative, and that might take decades to really materialise versus something that’s more discreet,” said Sarah Applebaum, a partner at venture capital firm Pangaea Ventures who invests in cleantech and has a background in the non-profit sector.
For example, one of their companies, Carboncure – which manufactures a technology for the concrete industry that introduces recycled carbon dioxide into fresh concrete – has a very clear quantitative impact measurement of tonnes of carbon dioxide sequestered, she explained. Whereas social impacts such as helping people find meaningful employment or support for people with addictions are more difficult to measure accurately for investors.
“Not always chasing unicorns”
These harder-to-measure externalities point to more lessons that tech investors can teach more traditional impact investors and companies: how to articulate the business case.
“The bigger challenge for impact, especially social impact companies that are looking to raise money, is articulating the value proposition for investors,” Applebaum said.
She pointed out that impact investors with a philanthropic approach can adopt a hybrid model with more concessionary returns — where less profit is accepted in return for greater social benefits — than more profit-focused investors, but it is vital that impact investors and organisations are as clear as possible about their mandate.
In articulating visions and business cases, the impact of tech investors on the sector has been valuable, said Andreas Hagen, an impact investor on Quadra Island, British Columbia, who previously founded a software company. A place-based investor working with small local businesses, Hagen’s approach is very different to venture capital firms seeking the next big social impact tech venture.
He says tech investors are encouraging social entrepreneurs to speak the right financial language with funders and communicate their vision more effectively, as well as use approaches from the tech world like pitch decks and more effective workflow management.
“With a lot of these companies, technology is being brought into the mix to make it possible for those businesses to grow and evolve,” Hagen said. “It’s really exciting to see smaller businesses have access to the tools.”
On the other side of the spectrum, however, Hagen argues that place-based impact investors may be more in touch with the social and community aspects of achieving impact on the ground. He said instead of pushing lucrative opportunities through a pipeline, as can be the case for tech investors, traditional impact investors have a different lens with more patience to slowly build businesses with a more holistic, deep and local impact.
“Those kinds of businesses become real anchors within the community,” Hagen said. “I think sometimes we chase those unicorns, but really when you think about place, the most impactful thing you can do is have meaningful jobs in an area people are really proud of.”
Whether from a more traditional tech or traditional social impact background, tech and impact investors offer each other a rich mix of experience, tools and expertise to push forward solutions to important issues. But how can this exchange be harnessed effectively?
For Sarah Applebaum, it’s all about making sure that investors are speaking the same language and creating common standards across different sectors. “We see the UN Sustainable Development Goals pretty much everywhere with any fund that’s talking about impact, but those are really difficult to standardize when you’re talking about specific impact outcomes,” she said.
Organizations are convening sectors to work on this standardization in how different organizations measure what impact means, she said, such as Impact Capital Managers, who Pangea works with. “It might help encourage new entrants into the impact investment space because it’ll have the vocabulary to talk about it and the toolkit to measure what it is they’re actually doing and speaking to results,” Applebaum said.
Meaningful exchange may be about closing the cultural gap too. “One of the big challenges in social impact circles, and in philanthropy as well, is this notion that because we’re doing good, we can’t do well financially,” she said, recalling her background in non-profit organizations. “Capitalism is a dirty word, making money is a dirty word. I think that mindset is somewhat pervasive.”
Mike Winterfield says he has experienced those different cultures, too. At conferences, he would hear from impact investors who’ve found it difficult to achieve profits in their projects, as well as tech investors hungry for more impact through their businesses. Eroding those barriers and working together more effectively could reap some rewards.
“How do you marry those two people? How do you get the people who really understand impact, and pair them up with people who really understand business?” he said. “I think that’s where the magic happens.”