Impact-driven startups distinguish themselves from the rest by communicating an environmental or social benefit they intend to accomplish. It’s no surprise that new-era entrepreneurs address the most urgent challenges, with some of them taking the impact aspect very seriously.
When startups depend on external funding, however, they should be conscious that bare impact metrics and statements are insufficient for venture capital. Even if the impact is glorious and laudable, capitalists will always find ways to measure and account for it accurately.
Impact measurement is difficult for a variety of reasons. Many social and environmental changes are hard to quantify. Even if it appears to be possible, impact metrics must be reliable, accurate, and reflect the investment outcome. There is also an issue with the accessibility of data. Especially when it applies to social impact, the data meant to quantify it may be subjective since how people view social change depends heavily on who we ask.
Two challenges in impact measurement and tracking matter most:
• Lack of track record – the impact can only be anticipated by applying some theoretical modeling.
• Indirect impact – Calculating the environmental impact if a startup invents CO2 emitters is simple. But in the case of most tech startups, they indirectly affect particular processes that trigger a chain reaction that leads to an impacting outcome.
3 types of metrics that investors will care about
Three main groups of metrics may be used to quantify the impact.
Output metrics assess the number of products or services generated by an investment. They help measure investment performance and how well it meets objectives; however, they are not directly related to social or environmental impacts.
Outcome metrics go a step further: they demonstrate the effects of investment but capturing certain aspects of the impact. For example, a renewable energy business may be assessed based on the quantity of greenhouse gas emissions reduced. Outcome metrics are far more useful for demonstrating social and environmental change, even if they only reveal contextual and isolated value.
The third group is called “impact metrics,” which are far more effective for presenting a significant influence. Here are some examples of common indicators used across different investment domains:
• The social value provided by investment is measured by the Social Return on Investment (SROI), which considers both the financial returns and the social results and represents the ratio between these two as a percentage.
• The Environmental Impact Quotient (EIQ) weighs the environmental impact by considering energy use, waste generated, and pollution levels.
• The Carbon Footprint of an investment quantifies the amount of greenhouse gas emissions created.
• The Human Development Index (HDI) measures a country’s or region’s social and economic development. It considers parameters such as life expectancy, education, and income.
Searching for a common impact language
“Most impact investors usually use a mix of different metrics and create models that allow them to evaluate their projects on multiple levels simultaneously. But, as we invest at a very early stage, we consider more the potential of the impact rather than the impact itself. The more advanced a startup is, the more useful metrics are”, says Kasia Zalewska, an impact angel investor at Ragnarson Invest.
So, at the point where the impact business community is still relatively fresh, investors are looking for a common language to clarify and compare the social, environmental, and economic performance of their investments.
IRIS+, developed by the Global Impact Investing Network, is one of the common standards. It is the most commonly applied free-to-use impact accounting system, and leading impact investors use it to measure, manage, and maximize their effect on society or the environment.
IRIS+ delivers a set of verified indicators for each impact area that investors may adopt and implement as a standard already in use and designed based on best practices. IRIS+ is also an evidence-based approach that connects common investment goals to specific outcomes and corresponds with the UN Sustainable Development Goals. As a result, it becomes a valuable tool for investors to gain a more comprehensive view of how they impact across all of their portfolios.
Both impact investors and startups should be able to transform their initial goals into real impact results. Such a result is only possible if data is used to accelerate the flow of funds to the most impactful initiatives. Demonstrating impactful outcomes by selecting appropriate metrics is of interest to both startups and venture funders. The more impact a startup has, the more money impact investors stand to gain, and the higher the profit the startup can make. And this is how the looping motion works with a benefit for the financial market, the environment, and society.