Impact is a double-edged sword. The pressure for solving the environmental challenges is at its peak and action is needed more than ever. But how can investors evaluate the effect of their investments? Which aspects should startups focus on to be considered impactful enough for an impact investor? 

There may be ideals and values guiding the business, but with limited resources and startup growth pains, very often the priorities turn into what is the most urgent issue to solve – paying bills, salaries, and investing in the development of the core business itself.

Change happens when guidelines become everyday practices 

Ideally, sustainable practices would become defaults early – as habits, practices, and guiding principles – not just exceptions that drain the enterprise among other mandatory duties to do with running a business. 

“The earlier more sustainable practices are established, the easier these will be to continue and at best, better practices of one single company can eventually become the standards of a whole industry.”

Here, the angel can also push the startup in the right direction, for example, by setting KPIs that are tied to social or environmental improvements that the startup has to achieve. 

For example, if the startup is hiring, the KPIs can include hiring-related criteria connected to equality, mapping and improving supply chains, or following the company’s net impact. 

For more concrete KPIs, if the company is directly working in sustainability, it makes sense to directly measure the ecological footprint development of the company. This goes the other way around too – startups can teach angels great impact practices as well that can be shared as learnings for their other portfolio companies.

From measuring impact to asking the hard, uncomfortable questions

I have personally witnessed the entrepreneurial passion for solving environmental and societal issues. Yet, there is the issue of using impact just as another trend businesses hop on, which benefits no one.

When it comes to assessing impact, the most important questions are often highly uncomfortable. As an investor, you can ask about supply chains, but also about motivational factors. Ask questions that reveal the private relationship to impact. Here are a few for inspiration.

  1. What made you come up with this idea? 
  2. Why is sustainability important to you as an entrepreneur? 
  3. How do you envision your company changing the industry in which you operate?

When we tap into what impact really means to the founder, it can reveal much about a person’s deep motivational factors.

“The tough questions must be asked and answered because it is one of the few ways to ensure that impact is not just a word, but is a word filled with values, goals, and intentions.”

For assessing impact and sustainability, FiBAN has gathered an ever-evolving impact toolbox, which maps out many of the aspects to consider with impact investing. Read more about the impact investing toolkit.

Even though no impact assessment tool is perfect, the startup ecosystem’s ever-growing interest in sustainability and equality reflects the true willingness of investors and the startup community to fix what is broken and to establish a more sustainable and equal business world. 

This being said, I’d like to invite you to an open discussion about investing in impact enterprises and encouraging more founders to tackle environmental and societal issues.

Have you found good practices for impact investing? What are the learnings that you could share with other investors? 

Contact Milja to discuss and further develop the Impact Investing Toolbox