Editor’s Note

This article was adapted by EUVC from an original insight published by Better Society Capital.

Read the original article.

Purpose-led startups aim to make positive social or environmental outcomes part of how the business grows. For venture investors, the practical challenge is to understand which models can scale at conventional venture speed, which may follow shallower growth paths and how financial return expectations should reflect that difference.

The central argument is that impact and return do not sit at one fixed point. Different purpose-led businesses can pursue different combinations of scale, return and depth of impact.

Purpose-led entrepreneurs still need the familiar foundations of a strong startup: innovation, a scalable market opportunity and user-centred design. What distinguishes them is that these elements are intrinsically linked to delivering positive social or environmental outcomes.

Technology can be particularly useful where low marginal costs and capital-efficient models allow a company to reach many people quickly. Fast feedback cycles and rich engagement data can also help startups refine products, personalise services, develop predictive capabilities or support preventative action.

This approach may be relevant in areas such as health, education and financial inclusion. But it is not suitable for every problem or every person. Technology-led models can create their own challenges, and scaling too quickly can undermine the quality of delivery. The model is most powerful where startup methods genuinely fit the problem being solved.

Impact and purpose have sometimes been associated with lower returns or higher risk. In practice, there is a spectrum of financial returns, shaped by the nature of the business and the route it takes to scale.

We frame venture opportunities around two points on that spectrum: “unicorns” and “zebras”. These labels describe different scaling paths, not a judgement that one model is universally better.

In conventional venture language, a unicorn is a private startup valued at $1 billion or more. Here, the term refers more broadly to a purpose-led startup pursuing the kind of rapid scaling path that could lead to that status.

Purpose-led companies on this path may benefit from:

We believe purpose-led startups with these characteristics can deliver meaningful impact while growing at the pace required to target financial returns at or above the market rate for commercial venture investing.

Zebras offer an alternative to the unicorn model. They seek sustainable, profitable growth while maintaining a strong commitment to a community or cause. In this framework, they are businesses that aim to grow through better solutions but do not intend to become as large or scale as quickly as unicorns.

Some features of their business models may create shallower scaling paths: growth may take longer or reach a smaller market. Those same features may improve the quality of impact:

We believe businesses with these characteristics can deliver positive, though potentially lower, returns to investors while creating deeper impact than some faster-scaling models.

Venture capital has a role in supporting both scaling paths. The goal is not to force every purpose-led company into one return profile, but to develop financing approaches that fit the business model and its intended impact.

The strongest venture investors bring capital, strategic insight and operational support that can improve growth and profitability. Applied to purpose-led businesses, those capabilities can help founders pursue both strong returns and transformative impact.

That requires managers with scaling expertise, a strong track record, a good market reputation and a thoughtful approach to impact. Some may not describe themselves as impact investors even when they have backed companies whose products or services create positive outcomes.

High-impact, profitable ventures that grow more slowly or to a smaller scale may need different financing models. Conventional venture structures may not always match their time horizons, capital needs or likely return profiles.

Investors should therefore explore approaches that can support these companies without asking them to compromise the elements of their models that produce deeper impact.

For further practical guidance on embedding impact into sourcing, selection and portfolio support, see The VC Impact Playbook.

Douglas Sloan is Managing Director of Impact Venture at Better Society Capital. He leads its venture investment programme, which backs venture funds investing in impactful startups and works to advance impact practice in venture. He is also a co-founder of ImpactVC.

Learn more about Better Society Capital’s work supporting impact investment.

This article was adapted by EUVC from an original article published by Better Society Capital.

Read the original article.