Editor’s Note

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

Read the original article.

For venture funds, impact practice becomes useful when it shapes real investment decisions rather than sitting alongside them as a reporting exercise. That means applying an impact lens to fund strategy, due diligence, investment committee decisions, portfolio management and learning.

Better Society Capital uses Ascension’s Fair by Design Fund as a practical example. The fund’s work suggests that strong impact practice rests on a clear goal, an evidence-based investment strategy, explicit decision criteria, proportionate measurement and a willingness to test assumptions.

Impact practice is the application of an impact lens to established systems, processes and decisions. Its purpose is to help managers optimise for impact alongside long-term financial value.

This is still an emerging discipline. There is no single model that every venture fund should copy. The relevant question is whether a fund’s practices are proportionate to its strategy and capable of influencing investment decisions.

For a broader practical framework, see the related resource The VC Impact Playbook.

Fair by Design was created to tackle the UK poverty premium: the additional cost people on low incomes can face for essential goods and services. A University of Bristol study estimated the average cost at £490 per low-income household per year in 2016, with the most highly exposed group incurring an average of £750.

The fund set a clear goal: to eradicate the poverty premium by 2028. Its investment strategy then focused on early-stage technology companies addressing structural causes of that premium, including information gaps in credit scoring and barriers to accessing lower-cost services.

Two principles made the strategy coherent:

Not every fund needs such a narrow mandate. A generalist fund can still set impact goals for distinct focus areas and assess each investment by the contribution it could make.

An evidence-based thesis helps a fund define what to look for when assessing both impact return and impact risk.

Fair by Design examined whether a company’s business model could extend impact to the people who stood to benefit. One example was a business-to-business-to-consumer, or B2B2C, model: a company sells through another organisation that reaches the end user. Separating the paying customer from the beneficiary can make a service more accessible to people on lower incomes.

The wider lesson is that impact potential depends not only on the product, but also on who pays, who benefits and whether the model can reach the intended population at scale.

Fair by Design included detailed sections in each investment memo covering the company’s impact thesis, its expected contribution to reducing the poverty premium and the KPIs that would track progress.

This gave the investment committee a structured basis for considering impact. It also made it easier to shape an investment or portfolio plan in ways that supported the fund-level goal.

The fund also worked with Toynbee Hall to establish a lived experience panel. Before a prospective investment reached the investment committee, people with direct experience of poverty reviewed the product and provided feedback. That feedback formed part of the committee papers.

This added a form of evidence that conventional diligence can miss: whether the proposed solution meaningfully addresses the problem from the perspective of intended users. The ventures also received early feedback on their products.

Fair by Design established impact KPIs for each portfolio company, with data reported to the fund every six months. The measures included how many people were reached, who was reached and the savings created.

Portfolio data was not treated as sufficient on its own. The fund also worked with Better Society Capital and 60 Decibels on external evaluations of selected companies to test assumptions and challenge the conclusions drawn from internal reporting.

The value of measurement lies in what it changes. Evidence should help a company and its investors refine the business model, improve how impact is delivered and identify where initial assumptions do not hold.

A related article on measuring impact in climate and environment explores how other venture funds apply this principle across the investment lifecycle.

Fair by Design shared quarterly impact updates with investors and refreshed company-level KPIs every six months. Its annual impact report translated portfolio metrics into estimated reductions in the poverty premium.

That reporting connected company activity back to the overall fund goal. It also created a basis for adjusting the strategy when evidence showed that an assumption was incomplete or a portfolio approach needed to change.

Impact reporting is most useful when it closes the loop between strategy, decisions and learning. The objective is not to produce more metrics. It is to create enough reliable information to decide whether the fund is achieving what it set out to do.

Fair by Design’s approach shows how impact can be integrated into the traditional venture investment cycle: define the intended outcome, use evidence to shape the thesis, make impact explicit in governance, involve affected users, track portfolio progress and learn from the results.

Because impact practice in venture is still developing, what counts as good practice will continue to evolve. The durable principle is to make impact part of the investment system itself, with enough evidence and feedback to improve decisions over time.

Nicholas Andreou is Head of AI at Better Society Capital. When the original article was published in 2020, he was Associate Venture Impact Partner at Big Society Capital, the organisation’s former name.

Better Society Capital is a UK social impact investor focused on increasing investment in solutions to social issues and inequalities. Learn more about Better Society Capital’s work connecting capital with organisations seeking social outcomes and financial returns.

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

Read the original article.