The springtime of impact entrepreneurship

There has never been a more favorable moment to create a mission-driven company than right now.

The pandemic has disrupted many of our existing systems, creating the opportunity to look with fresh eyes at some of the most critical problems we face, such as the climate crisis, economic inequality, gender disparity, racial injustice, among others.

In the last decade, impact-oriented venture capital has reached greater maturity and is ready to get behind startups that want to take positive impact as seriously as commercial success.

The pandemic has also caused a “values shift” that is driving broad behavioral changes from what people buy, to who they want to work for.

The shift to remote work has democratized access to both talent and capital for startups.

Mission-driven companies are poised to thrive in this new environment, given their increased access to talent, capital, and a consumer market ready to support their vision for a better world in the form of dollars and cents. Perhaps yours will be one of them.

Perfecting a model for talent + capital = impact

The different models historically available for bringing together talented people and capital to pursue positive impact in the world all have their challenges. You could simplify those models down to three basic types:

1. Nonprofits—raise money from donors to hire staff, recruit volunteers and develop programs through which positive impact is pursued.‍

2. For-profit corporations—may divert resources from the primary commercial business model to fund programs through which positive impact is pursued. ‍

3. Benefit corporations*—take pains to align business model and positive impact, strive for commercial success to fund greater impact, can raise money from traditional as well as impact investors.

*We’re not using this term here in the strictest sense, necessarily, of a certified B Corp. But rather to describe a company that has formalized its commitment to positive impact in a meaningful way To merely declare one is impact-driven is not enough.

To consider the merits and challenges of each of the above three models, it’s useful to apply two lenses. The first lens is that of a talented person who desires to apply their talent to positive impact. The second lens is that of the custodian of capital who desires both a return on investment and a positive impact.

I wouldn’t venture to comment on the failures and merits of these models without having direct experience with each of them. I have tremendous respect for the work non-profits do, in particular. I spent six years on the board of SFCASA. And before that I was a pro bono marketing advisor to multiple nonprofits, under the auspices of the laudable Taproot Foundation.

Nonprofits would seem to offer the “purest” model through which to pursue positive impact. But to look at nonprofits through the lens of a talented, impact-minded individual means to accept that soliciting money from donors (or “development” as it’s euphemistically called) is going to be a continuous and all-consuming activity. In the majority of cases, the demands of continuous fundraising are accompanied and complicated by the pervasive spectre of insolvency. Most nonprofits also struggle to create and sustain programs through which they deliver impact, at even a modest scale.

For custodians of capital seeking a return on investment, or even a high probability of meaningful positive impact at scale, nonprofits are invisible. There are forces (we don’t need to discuss them here) that seem to keep nonprofits inefficient and small. Nevermind the operating constraints on just delivering their programs consistently, most nonprofits struggle to demonstrate and measure their impact. This is naturally challenging for impact-minded investors, who might be ready to forego ROI (to some degree) for clear evidence of impact effectiveness. This is surely one of the reasons why donations to nonprofits still come mostly from individuals.

For-profit corporations (FPCs) offer an attractive compromise. Because they place value creation for investors at the highest priority, FPCs readily attract capital. And because they offer the majority of jobs at generally higher rates of pay than NPOs, they also attract the majority of the talent.

Impact-minded job seekers, who are also pragmatists, may gravitate to for-profit companies whose business models align, to some degree, with a positive impact. It has become an aspect of the storytelling of most (employer) brands to connect whatever they do as a business, somehow, to a “mission” of the highest order. This is a grey and subjective area. Caveat emptor. But the important distinction is that for-profit companies don’t have any formal commitment to delivering a positive impact. We, of course, applaud the many for-profit companies that do great things in the world by giving to NPOs and to other good causes.

Of these three simplified models, benefit corporations would seem to offer the ideal approach, by combining the purity of intention of nonprofits and the potential for scale and value creation of for-profits. But this magical combination is extremely hard to come by. The ideal is to combine a high potential for positive impact with a high potential for commercial growth. The desire to identify and fund such opportunities (that intersect high impact potential and high growth potential) is not new and has been called “impact investing.”

The rise of impact investing

For a long time, a part of the prevailing theory of impact investing was that bringing impact and commercial success together was a hard, intrinsic problem (a bit like combining oil and water), such that one would expect to have to necessarily compromise on one or both dimensions.

But in the last decade, that has changed in a big way.

For starters, we now have a growing number of companies that would seem to be both scaling their positive impact and increasing their commercial success. (See subjectively curated list below). These examples do more than provide profound encouragement, they provide data that can be used to understand this promising model better.

Secondly, the “science” of impact investing is also maturing and a framework for evaluating and better understanding benefit corporations is emerging. As a result, more capital is flowing into the space. And not just from the traditional impact investors anymore.

“While some may be tempted to view these players entering the impact investing space with skepticism, we see traditional asset managers as bringing to the table something the traditional impact investing community has thus far lacked: scale.”
‍—Saadia Madsbjerg, Former Managing Director at Rockefeller Foundation

The arrival of investors from more traditional asset classes has indeed brought scale. The impact investing market was recently estimated at $715B (source GIIN), and is expected to continue to grow briskly (CAGR was 17% since 2016, also GIIN).

Not like oil and water after all

From the growing number of examples of successful benefit corporations, new data is emerging that contradicts the notion that positive impact and commercial success are like oil and water. Rather than counteract each other, positive impact and commercial success, it seems, might actually reinforce each other.

“We believe it is possible to generate meaningful impact and strong financial returns together. This assumption is driven by the belief that impact can be a source of value.”
—Nicholas Andreou, Big Society Capital

A source of value! It’s a part of some moral belief systems to expect that doing good leads to doing well. But when it comes to corporations, I don’t think we expect that to be true. We haven’t had many examples in the past. Nor have we had an alternative narrative that describes how positive impact and commercial success might actually reinforce each other.

Thanks to Nicholas Andreou, and others like him that are focused on understanding the mechanics of successful benefit corporations, a growing body of knowledge is being developed for the benefit of future impact-minded founders and investors. This tells a different story. I recommend reading “Four ways impact acts as a source of value for startups and investors” and “How impact can increase customer retention” to see what I mean.

A new narrative is being written that is going to accelerate the allocation of capital to impact investments. As a result, the number of startups that decide to design themselves as benefit corporations is also going to increase. In five years, the discussion of “impact metrics” best practices among founders and VCs is going to be as popular as “saas metrics” discussions were five years ago.

The pandemic as a catalyst

Before the pandemic, we were already at a tipping point favorable to impact entrepreneurship. The pandemic has also dramatically raised the urgency of many of the problems we already faced.

Climate crisis, economic inequality, gender disparity, racial injustice, and other crises were already posing deep challenges to governments around the world at the start of this decade. There was already a $2.5T gap in the funds needed to deliver the Sustainable Development Goals by 2030 (Source WEF). The pandemic has made it even harder for governments to achieve these goals as they are forced to shift resources and take on new levels of debt to survive the multiple threats of the disease.

In light of this, we must urge private impact investment capital to step up and help fund these SDGs and play a bigger role in finding solutions to problems conventionally seen as the domain of the public sector. Impact-minded entrepreneurs will have their part to play by creating the startups that will pursue systems change in a number of critical areas.

A values shift

One of the most macro effects of the global pandemic is we have experienced what my wife called elegantly a “values shift.” The stresses and disruptions of the past year and a half have made us all reflect on what really matters to us. And this has many implications to consumerism, and also to the world of work and to entrepreneurship.

Talent acquisition is a totally new game for companies that depend on knowledge workers to create value through innovation. Employees everywhere have new expectations of work/life balance, and of what they get for what they give. Gone are the days when just raising a seed round and advertising some jobs on your website means you should expect qualified candidates to come knocking on your door. This applies to the largest, most established knowledge work companies as well.

In a more values-driven world, employers of all sizes must now do more than merely offer work. They must offer meaning. Benefit corporations will enjoy the ability to attract talent disproportionately. Read more about how mission-driven companies should think about recruiting and culture.

Location independence

Another macro effect of the pandemic, the accelerated adoption of remote working, is also extremely favorable to companies that are strongly mission-driven. Removing the constraints of location means that your company’s mission (like a beacon) can freely attract the talented individuals for whom it resonates, no matter where they happen to live. On this point and on the benefits of hiring for mission alignment without geographic limitations, we have some direct experience and a remarkable case study to share at Oyster. The combination of a shared passion for the mission and the diversity we have created on the team is absolutely one of our superpowers, and a large part of the reason we were able to do what we have done.

Investors are also thinking outside the historical geographic boxes when looking for companies to fund. And in the same way that talent is gravitating more freely to mission-driven benefit corporations, so too is impact-minded capital.

Indeed, because of their ability to widely attract both talent and capital, mission-driven, fully-distributed companies are going to achieve incredible results—both in terms of positive impact and commercial success. This is the model we need now to pursue systems change via entrepreneurship.

How to become an ‘impact unicorn’

Inspired as we are by all of the above, we at Oyster want to do everything we can to encourage mission-driven entrepreneurs. As part of Ascent (our first virtual conference about the Future of Work) we organized a panel discussion of impact investors. We wanted to hear directly from them how they think about impact investing and how they evaluate impact-driven founders and startups. The panel includes Aobo Guo of Generation Investment Management, Dougie Sloan of Big Society Capital, and Cameron McLain of Giant Ventures, moderated by Tony.