Lots of words but what do they really mean? How can we be confident that technology is having a positive impact on society or the environment and what is the role of an investor in this process?
Katapult believes that technology has an important role to play in tackling the pressing social and environmental challenges that the world is facing. There is a place for technological solutions and managing for positive impact can reinforce and enhance commercial performance, as well as be a driver of value for investors and stakeholders. However, it is not a simple process of: take a problem -> add technology -> generate impact and investor returns. We believe that the intention of the founders, the context of the technology, the business models used, and the role of the investor are crucial components to consider when operating in the field of impact tech. The majority of this piece will focus on the role of the investor, sharing some of our lessons learned at Katapult. We’re still learning and are keen to hear from other impact tech investors about their approaches as well.
The market is maturing
More entrepreneurs want to be impact entrepreneurs. Atomico data suggests between 15-20% of European startups are impact focussed, a 33% increase over the last five years. And investors are increasingly investing in impact companies. Atomico data also shows consistent growth of capital invested minted into purpose-driven European tech companies over the past five years – for a total value of $34B cumulatively. According to PitchBook’s Climate Tech Report*, which pulls on data from PWC, capital deployed into the climate tech sector specifically increased 5 times the VC capital growth rate between 2013 and 2019, despite its infancy in VC markets (6% of total VC capital deployed in 2019).
This is combined with regulators paying more attention to sustainable/impact fund vehicles. Incoming legislation including the EU’s Sustainable Finance Disclosure Regulations (SFDR) and the UK’s Sustainable Disclosure Regulations are seeking to standardise reporting with a goal of making sustainable finance more transparent.
Investors having impact
This week, Katapult VC launched its latest climate and ocean accelerator programmes, investing in 23 high-impact companies from New Zealand to Mexico City, via Tallinn and Oslo. The companies receive an investment and join a 3-month accelerator program covering investor readiness, growth readiness and impact readiness.
The Impact Management Project (IMP) brought the language of Investor Contribution to the world of Impact Investing. Investor Contribution is differentiated from Enterprise Contribution, which considers the work of the enterprise in generating impact. Investor Contribution refers to the role of the investor. It offers a framing for differentiating how we as impact investors can show up and add value to and deepen the impact of the companies and funds that we invest in. The IMP framework suggests 4 dimensions for how investors can contribute to overall impact of the investment:
1. Signal: signally that impact is important – for example, by including a request for impact KPIs in term sheets.
2. Engage: actively working with investments to help them further their impact, sitting on the Board, offering advice, etc.
3. Grow markets: developing a field or area of impact. This could be seeding a new vehicle in a geography or impact area that is underserved; e.g. a new gender lens fund in Colombia
4. Provide flexible capital: using the terms of investment to support greater impact – for example, taking a more patient approach to return on capital.
The Katapult approach
At Katapult VC we work mostly with 1) signalling and 2) engagement. On Signalling, impact has always been front and centre for Katapult. In the early days we faced criticism and questions about whether we should downplay the impact language for fear of investors not taking the companies, and our investment processes, seriously. Today the landscape has changed. The investment team sees companies prioritising an investment from Katapult to give impact credibility to their cap tables and our LP investors are pushing us on our impact reporting processes. Impact is about positive outcomes for people and/or the planet. We can only know if impact is occurring if we seek to measure those outcomes; e.g. we have improved X number of peoples lives in Y way; we have reduced x tonnes of ocean bound plastic reaching the oceans. We ensure that all of our investments are reporting on their impact KPIs. We agree meaningful data points for collection with the founders. Gathering data to help them and us learn, adapt and iterate to maximise our impact.
When it comes to Engagement, the Katapult VC model is to invest capital and to offer all investees an accelerator programme to help them scale their businesses. This programme covers 3 areas: growth, investment and impact. 33% of the programme is focused on impact. This structure gives my team and I the pleasure of working with the companies intensively over a number of weeks on their impact opportunities and risks. Each company will develop a Theory of Change, deep dive on their impact using the IMP 5 Dimensions of Impact, put together an impact pitch deck for scrutiny by impact investors, develop an impact management and measurement plan, as well as a risk assessment covering impact and ethics associated with their business and technology development plans. The programme is rich and calls on team members from the Katapult Foundation and the Katapult VC, bringing in external experts and the Katapult alumni.
Reflections for impact tech startups
We have now taken 137 startups through the programme. Each company has its own specific questions and areas of impact to be addressed, but common areas of feedback have emerged. I am sharing here and hoping they might be helpful to other impact startups and investors.
- Not all impacts are equal
Know your contribution. Assess with rigour where you are having the most meaningful impact and start there. Optimise your processes for that, and measure so you can improve and align with investors and partners that add to this. Secondary and tertiary impacts can be added and monitored as you scale.
- Integrate impact into business processes
Intentional founders are often intuitively making business decisions that optimise for impact as well as commercial success; for example, which suppliers to work with, which customers/sectors they won’t supply, which staff to hire, etc. We often find, however, that this is not normalised within the company, leading to a risk of mission drift as the company scales. Integrating impact formally into business processes and materials can ensure that as the company grows, everyone is aligned to maximise impact.
- Understand the risks
What is the worst that could happen? Work backwards, look at any historical potential risk events and consider risk mitigation strategies, both for today and as you scale. Assess the impact of your technological footprint on societal issues such as bias and fairness and environmental ecosystems.
- Align yourselves with a community of like-minded travellers
Find follow up investors that are excited by your impact trajectory, build a support network of other founders that you can call on, get mentors (we have a pool of about 200 mentors in Katapult that bring an enormous amount of value to the startups), etc.
- Fix your deck
Many impact investors will be familiar with the “rainbow-washing” deck. The pre-revenue startup that is solving every SDG. Be clear in how you articulate the problem you are solving, how you are doing it, and how you are going to measure the difference you are making. Keep it simple, be clear on what you are, and are not, doing. Be honest about what you are focussing on and demonstrate that you are aware of risks as well as upsides.
As an impact professional, I recognise that technological solutions will only be part of the answer to addressing social and environmental challenges. However, where technology is to be part of the solution, I believe that investors need to take seriously their role in stewarding the impact, and mitigating against the risks, of these technology-based businesses.
Katapult is thrilled to be part of a growing community of impact VCs that are coming together in the UK and Europe to increase our knowledge and effectiveness. This is an exciting time for impact tech investors, and we are looking forward to learning from others that are intentional about the impact they are working towards. Please get in touch with us at Katapult Foundation and Katapult VC.
*PitchBook Q1 2022 Climate Tech Report, June 13, 2021, pitchbook.com