What is an impact startup?

A very common question we get asked is ‘what counts as an impact startup?' In this blog we unpack how we think about this question, while recognising that each investor and startup will likely have their own view aligned with their values. For example, we focus on social impact in the UK which influences our definition. Below we articulate a ‘bullseye’ case for us. We recognise that impact is a spectrum, and some startups may develop over time or some may never meet all these criteria but still contribute meaningful impact.

Here is our definition of an impact startup:

“A startup whose purpose is to contribute to solutions that create positive change – and over time enables and evidences strong impact performance through proportionate impact practice”

Within this definition, there are three areas that we consider:

1. Founder motivation and intent around creating impact
2. Desired/achieved impact performance
3. Impact practice

Founder motivation and intent

Over their lifetime, startups will have to make thousands of difficult choices, pivot several times and redefine their purpose. If one of the core reasons for starting the business is not impact, it is possible that impact will be forgotten in the rollercoaster ride that is building a business.

This same drive can also lead to better execution: being purpose-led can correlate with resilience in the face of adversity. In addition, clarity of intent enables clarity of execution as entrepreneurs can better focus on what matters to their mission.

A conversation with founders can go a long way to providing clarity on their intent. Impact is usually something impact-driven founders want to talk about very early on. In absence of the ability to speak directly to founders these are some other things that we look for:

1. Public commitment to impact in the form of an impact thesis (e.g. see Oyster’s Social Impact Thesis)
2. Communicating about impact on a regular basis to stakeholders (e.g. see Ophelos’ blog on product design for vulnerable customers)
3. Establishing impact governance mechanisms (e.g. see Togetherall’s Guardian Council)
4. Aligning with recognised impact frameworks and certifications (e.g. Circa5000 is a certified B-Corps)
5. Investment taken from recognised impact investors (e.g. Wagestream’s funding partners)
6. Whether the founders have lived experience of the problem they’re trying to solve (e.g. Headspace’s Richard Pierson was struggling with anxiety before launching the app)

In our experience, this is probably the most important of the three areas to look for. Without impact intent driving the startup from the top down, it’s unlikely that impact will be created in the long run.

Desired/achieved impact performance

What impact is the startup looking to create or ideally has created to date? We are looking for startups that have the potential to deliver meaningful impact for large groups of people by transforming social issues. This is often achieved by creating new categories of product or service, or by meeting the needs of a structurally underserved group. We use the Impact Management Project’s five dimensions of impact to break this down.

What outcomes are being achieved?

The startup is targeting important positive outcomes, meaningful to those experiencing the issue and focused on widely accepted basic human needs (e.g. essential rather than discretionary services, based on assessment of level of need).

For example, Second Nature’s habit change programme is tackling chronic health conditions by helping people lose weight and live healthier lives.

Who is benefiting from these outcome changes?

The startup is targeting individuals who have higher needs or are underserved. Higher need to us is operationalised as a spectrum, e.g. in mental health, someone experiencing schizophrenia is likely to have more immediate and acute needs than someone experiencing depression. Underserved to us means one of four dimensions:

1. There are currently no alternatives
2. There are currently only inferior alternatives (i.e. building a meaningfully better solution)
3. Alternatives are unaffordable
4. Alternatives are inaccessible (due to non-financial barriers)

For example, Wagestream (financial wellbeing platform) is able to systematically reach users on low incomes through their B2B2C model as demonstrated by their impact monitoring data.

How much are they benefiting?

We think about this across the dimensions of scale and depth. We expect to see startups that can scale to the point of having a transformative impact on the problem they are tackling. In particular, startups that are more scalable than existing solutions. Depth is harder to quantify and is thematic area specific. Here are some examples:

1. In a mental health context, we’re looking for statistically significant reductions in the mental health issues/symptoms
2. In a physical health context, we’re looking for statistically significant reductions in ikelihood of developing an illness or reduction of existing symptoms or improvement in life expectancy
3. In an affordability play, we’re looking for reductions of at least 10% of the poverty premium: £50 per year per user

For example, Togetherall (mental wellbeing platform) tracks data on impact effectiveness and has published peer-reviewed academic articles on the effectiveness of the platform.

Are there material and risks that the startup is not mitigating?

There are three areas of risk that are important:

1. Mitigating the likelihood that the desired impact is not achieved (execution risk, external risk, alignment risk)
2. Mitigating known negative impacts associated with the business model
3. Mitigating potential unintended negative consequences

If the startup can clear these hurdles, then the risk-adjusted impact return expectations are in line with what we are looking for when considering impact startups.

Impact practice

Finally, we look at how embedded impact is into the day to day running of the organisation. If impact practice is lacking, then it’s likely that impact may be diluted as the company grows. We have written about what good impact practice at venture level looks like in this GitBook. In short, we look for the following core practices as a minimum:

1. Articulate a clear and well-evidenced impact thesis (what problem are you trying to solve, why and how)
2. Embed impact into product design, business model design and go-to-market strategy
3. Measure impact in a proportionate way across the venture lifecycle
4. Report impact to key stakeholders

This definition is far from perfect, we recognise that there are areas of ambiguity and conceptual fuzziness, but it has helped us think about the question of ‘what counts’ more deeply. We are iterating our thinking over time and would love to hear any thoughts you have or how you define an impact startup.