Impact investing is all about facilitating measurable advances for social and environmental causes. In the VC landscape, that means backing companies that are trying to change the world for the better. What sets it apart from other socially responsible investing strategies is that it doesn’t just withhold capital – it puts it forward in order to develop new solutions to today’s most pressing social and environmental challenges.

Amidst a climate of geopolitical uncertainty, technological disruption and the twin spectres of environmental catastrophe and demographic change, we need those solutions now more than ever. Everyone knows the clock is ticking – which is precisely why over the course of the past decade impact VCs have sprung up across the globe. What’s more, it has become clear that ‘doing good’ is no longer just a matter of ethics – it's also good business.

When my co-founder Florian and I founded Ananda Impact Ventures back in 2010, the impact space was an immature market with little agreed-upon terminology. According to dealroom, it now accounts for over 18% of VC investment in Europe and 8% in the US, with the combined value of impact companies today worth over $2.3 trillion. While Ananda and other leading impact VCs have demonstrated you can make money in the sector, the impact movement still has its critics. Their concerns usually coalesce around a simple question: how, exactly, do you measure impact? 

It’s a valid one. Ananda is a pioneer not just because of our business track record – it’s because we’ve come up with a means of addressing that question head-on. We maintain that there is no trade-off between impact and profitability because impact has to be built into a company’s DNA to be worthy of the name and scale with turnover in lock-step. This means defining what impact means for a particular startup in a particular sector from the outset, which is just one of the reasons why we focus our energies towards early-stage startups. By getting in early, we ensure founders get the right kind of infrastructure in place so they don’t drift off course. Transparency is not an impediment to growth; harnessed correctly, it can be one of its principal drivers. 

Let me show you what I mean. 

A little history

For a long time, investment attempting to engineer a better world focused on the promotion of charitable causes or withholding funds towards questionable areas of commerce, whether it was abolitionists in the 19th-century transatlantic world, or anti-war protestors in the 1960s and 1970s. People usually referred to this kind of activity as ‘Socially Responsible Investing,’ but it was not until the new millennium that impact as we know it today started making waves.

First, 2004 saw the foundation of the European Venture Philanthropy Association, which was founded with the express purpose of gathering institutional bodies committed to impact under one roof. The term began to surface in earnest when the UN released its Principles for Responsible Investment later in 2006, with its signatories controlling some $6.5 trillion in assets worldwide. Then in 2009, the Global Impact Investing Network (GIIN) was founded.

When Ananda first started out in the same year, we found ourselves at the forefront of an emerging space with a lot of excitement in the air, but one nonetheless predicated on some fairly abstract notions. What’s more, while there were plenty of investment strategies geared towards empowering disadvantaged groups, there were very few specifically focusing on the environment. It may seem like a no-brainer today, but everyone was still reeling from the financial crisis and no one thought you could make money and save the planet simultaneously.

We knew this was the wrong approach. I had just sold my asset management company, a pioneer in ESG investing and a close partner with the WWF, and had an idea of the scope of our problems. My hot take? All sectors are interconnected – educational outcomes impact environmental ones; how you handle biodiversity has a bearing on how much carbon you emit; carbon emissions affect healthcare; health and well-being correlate with education. Impact investing should be about creating a portfolio that can cross-pollinate, allowing one company to have knock-on effects on another. For it to work, you need to put your money where your mouth is, so that other players in the space are compelled to do the same. That’s why a couple of years after getting our first fund off the ground, we decided to team up with the European Investment Fund (EIF) to create the ‘Impact Carry Model’ (ICM). 

The Impact Carry Model

The ICM directly links a VC’s carried interest in a company not just to their attainment of financial goals, but to their attainment of quantifiable impact KPIs and targets. What does that mean in practice? Ananda only begins to see its carry if at least 60% of the impact target values across our portfolio are reached. Above 60% the carry scales in line with the percentage of the target values reached. Above 80%, we potentially see 100% of the carry, but only if the financial return is also right. These clauses are legally binding and the KPIs and target values are agreed upon with the largest investors in our funds. Because at the end of the day, real impact is about mission alignment – and that should be more than just a slogan. You should be able to see it in numbers that refer to tangible metrics and outcomes.

When it came to our Fund II, even we were surprised by the results. The first of its kind in Europe to use the ICM, we overachieved on our impact targets by more than 40%. Over the past decade, it has helped VCs around the world leverage the power of capital for the better. Our model has been adopted by over 80 other funds in Europe and beyond, ensuring that the financial incentives of hundreds of VCs directly align with impact-related priorities.

As sustainability has become a more widespread concern amongst both investors and the general public, the whole startup landscape has caught on to a crucial fact. In today’s day and age, you don’t have to choose between making money and changing the world – because you can make money by changing the world.

A paradigm shift

Paradigm shifts have a habit of inspiring criticism, and impact investing is no exception. In many ways, these criticisms are similar to those directed at ESG investing. This is especially the case in the US, where financiers object to what they perceive to be state overreach and a muddling of fiduciary obligations towards shareholders, ultimately resulting in poorer returns. But coming to this conclusion takes a relatively selective reading of the figures. According to a Bloomberg article, there are now some $41 trillion in assets held in ESG-related funds. That statistic wouldn’t be so large unless shareholders were turning a profit. While some of its more hard-nosed detractors might hold the line that their returns would be higher outside of the ESG tent, few would now claim that ESG isn’t capable of making money. 

The consensus is a little different when it comes to impact startups. VC has always played a longer game than its contemporaries in the world of financial services. They bet big so they can win big, but that means staying the course with your founders through different funding rounds and periods of market volatility. Critics may be tempted to dismiss impact VCs for what they see as fanciful thinking. But as the space gets older, the numbers are becoming more and more unequivocal.

Take our first fund, in which we recently completed a full funding circle following the merger of our portfolio company Auticon with Unicus to form the largest autistic majority company in the world. Over the course of the cycle, we made two times the money-on-invested-capital for our LPs. Overall, an impressive 80% of our investments gained positive financial returns with the remaining 20% still creating measurable, non-profit impact. And this happened at a time when the level of ambition of impact founders (and consequently Ananda) was nowhere near to where it is today.

Patience is a virtue – and more and more institutional investors are getting the memo. Even BlackRock’s CEO Larry Fink has gone so far as to predict the next 1,000 unicorns will be in climate tech. Today, Blackrock manages over $586 billion across its sustainable investing platform. Slowly but surely, the dial is shifting. 

The time is now

Our track record is clear – we’ve helped over 19 million patients receive better healthcare, created over 4,500 jobs, improved over half a million school pupils’ learning outcomes, saved over 7,000 tonnes of CO2 emissions and protected 180 million hectares of global forest area with optimised wildfire detection. We’ve also addressed 15 out of the 17 UN Sustainable Development Goals and seven of the nine Planetary Boundaries.

Whether it's OroraTech and its satellite-based global wildfire charting technology, NatureMetrics and its biodiversity monitoring, Closed Loop Medicine and its personalised medicine and precision dosing technology, or IESO Digital Health making online psychotherapy available to millions online, we’ve been betting on impact startups for almost a decade and a half. And the reason why those bets have paid off is that our companies can address investors and the general public alike in saying “Here is what we’re doing, here’s why it's important – and here are the numbers to prove it.”

Those numbers are not about virtue signalling. They are about making a business case. They are about stating plainly that the VC landscape has the potential to change the world. But most importantly, they are about recognising that there is no time left to waste.