Five venture capital funds have worked together to develop a handbook for implementing the European Investment Fund’s approach for linking impact to carried interest.
The gamma model framework was designed to help investment managers articulate and validate their theory of change for each investment | Yozayo on iStock
Five venture capital funds have unveiled a handbook for implementing the European Investment Fund’s (EIF’s) approach for linking impact to carried interest during Impact Europe’s annual conference taking place in Bilbao, Spain this week.
The handbook, titled Impact Accountability in Venture Capital: A Ready-Reference for Practitioners, has been developed by the UK’s ETF Partners, the Netherlands’ SET Ventures, France’s Sofinnova Partners, Belgium’s Astanor and Germany’s FoodLabs to provide practical guidance for VCs seeking to integrate impact into their carried interest models.
Theory of change
The funds explained that the gamma model framework – which was developed by IESE University of Navarra and the Family Office Circle Foundation and adopted by the EIF – was designed to help investment managers articulate and validate their theory of change for each investment.
However, they said that despite providing a straightforward approach to evaluating impact, measuring it, and distinguishing the success of an investment’s theory of change from other factors, the framework suffered from being highly open to interpretation, especially when viewed across funds of different sizes.
Speaking to Impact Investor, Patrick Sheehan, managing partner for ETF Partners, said: “We observed that funds were applying the framework in different ways because they operated in different contexts. For example, early-stage investors focusing on demonstrating new technologies might approach the framework differently from late-stage investors working to show scalability.”
Target audience
The handbook is targeted at any VC firm that the authors said was intentional about impact, including those who want to link carried interest to impact achievements. This includes both Article 9 and mainstream funds.
“We aim to promote clarity and consistency in how we discuss impact and link it to carried interest, rather than maintaining multiple approaches,” said Sheehan. “While impact funds are naturally considering these issues first, I believe more mainstream funds will increasingly think about the impact of their investment strategies.”
Sheehan expressed hope that clearer communication around impact measurement would encourage broader participation within impact investing as well as encourage more traditional venture investors to enter the sector.
“If we can explain how to approach impact in a simple and practical way, then it will encourage others to do it. We’d like to see this becoming more mainstream.”
An iterative process
As well as providing an introduction to impact-linked carry and using the gamma model from EIF as a conceptual framework for validating impact, the handbook also details the funds’ shared experiences and approaches to selecting impact indicators, implementing impact-linked carried interest and governance. It also offers real-world case studies and actionable recommendations.
It is viewed by its authors as a living document that will need to be updated to reflect emerging best practices and approaches as the industry continues to evolve.
“It is not intended to be definitive. Impact accountability is an evolving area,” said Sheehan. “What it is meant to show is a group of people doing it seriously and their experiences of putting impact accountability in place in order to help the investment community.”
