Christian Nielsen discusses the issue of correlation between impact and financial performance with Machtelt Groothuis and Willemijn Verloop, co-founders of Rubio Impact Ventures.
As markets and the financial sector open up to impact investing opportunities, it takes more than well-meaning statements and shoehorned metrics to prove a fund’s impact claims, according to Rubio Impact Ventures co-founder Willemijn Verloop.
Rubio was one of the first in Europe to build impact into its “carried interest” – fully tying remuneration to aligned impact targets and financial returns. For its first fund in 2014 Rubio co-developed a novel social impact performance model together with the European Investment Fund (EIF). That model has since been benchmarked by funds around Europe.
Findings by Cambridge Associates confirm that impact VC funds in developed markets deliver 15% returns over a 20-year horizon, which is at least on par with mainstream funds. So the macro-evidence on impact investing is strengthening, Verloop says, but the sector still misses fine-grained evidence irrefutably linking scaled impact to scaled business growth – whether impact and commercial success truly align.
The beating heart of Rubio’s “return-scale-impact” model is evidence that entrepreneurs are delivering “systemic change” as they tackle societal challenges.
Verloop likens it to the left and right ventricles working in harmony – priming business to scale impact and impact to scale business. But the big assumption here is that there are no trade-offs between the two, which from Rubio’s experience proves to be true for part of the impact-driven business, but definitely not for all.
Avoiding impact drift is key, she adds, so it’s crucial that business and impact are intrinsically aligned…“companies creating a unit of impact for every unit they sell”.
To define the quality of the impact, she says, we need to understand the problem the business wants to solve and the quality of the proposed solution, and it all starts with a strong “theory of change leading to measurable, scalable impact”.
Rubio works with an external impact advisory board to quantify its impact targets (pre-deal) and then its limited partnership (LP) committee rakes both the impact targets and ongoing impact performance (post-deal) over the coals, linking it to the fund’s carry.
This post-deal follow-up is key, according to Rubio co-founder Machtelt Groothuis, “because it underscores where the true value is being created”. The process involves constant monitoring of performance targets and, as Rubio is learning, sometimes having to “re-evaluate when conditions really pivot”.
That is where it gets interesting. Although the ‘return-scale-impact’ targets are essentially wedded to the business and its growth over time, businesses are equally at the mercy of unpredictable markets, regulatory developments, and sometimes plain commercial whim.
So looking at the actual results of a fund after five or ten years is vital. Have impact and return really scaled in sync? With eight years of data from its first fund, Rubio has been able to do this analysis for the first time.
Groothuis says the findings are equal parts “enlightening” and “frustrating” for what they still don’t reveal. Their first fund far outstripped (152%) its impact targets and, despite early days, the second one is currently tracking well (11%). The combined portfolio of both funds with 31 companies showed over 56% average growth.
The firm’s investments are roughly split 50/50 across people and planet themes, several of which showed breakaway value-creation and impact. Groothuis says the fund’s total fair market value has grown in line with the impact target achievement over a seven-year period, “which really supports our fund hypothesis and proves impact and financial return tend to move together for the companies in it”.
Like any venture fund, a few in the portfolio faded, others made par, and some really soared. But overall, there is a strong correlation between impact and financial performance by company with positive and negative outliers. The traditional “VC power curve” can be seen across both impact and returns, confirms Groothuis.
On the high-flying side, take Olio – a platform allowing users to share unwanted or surplus food in the circular economy – which has grown four-fold in value while achieving almost 350% of its impact targets.
Meanwhile, in Rubio’s ‘people’ theme, Sama has propelled its AI and data training business into a job-creation beast in underserved parts of the world. Sama increased its value six-fold while achieving close to 400% of its impact targets. People trained and given the opportunity to work at Sama reported a 40% gain in real earnings. According to an MIT and Poverty Action Lab study that Sama took part in to better evaluate its impact, the company’s activities have benefited over 55,000 people worldwide.
In some cases, impact and returns are less closely aligned for different reasons. Rubio identified cases where the wrong metrics were chosen to represent the impact, or the underlying evidence changed. Sometimes early stage companies “completely pivot”, Groothuis reveals, or the alignment of business and impact or return is “driven by something other than volume growth”.
Take Sympower, which provides cost-effective and reliable peak balancing solutions for grid operators to introduce more renewables. The venture’s value has grown almost eight-fold across three funding rounds since Rubio invested, but impact is still at 33% of target. Part of Sympower’s business success has been driven by price developments, while Rubio measures its impact in terms of actual flexibility of grid balancing created.
In another example, Bomberbot – an ed-tech company empowering children through basic computational-thinking skills – switched from a focus on primary schools to after-school activities because of lagging legislation. That pivot seriously limited both the impact reach (fewer kids) and depth (fewer underserved kids). Bomberbot only hit 2% of its initial target.
Rubio’s attempts to learn more about the return-scale-impact nexus are part of a continual improvement strategy in the pursuit of greater alignment between impact and return. It’s an imperfect process in an imperfect and changing business environment, but the effort is paying off in unusual ways.
Verloop says future developments will introduce more granularity, to give the sector more confidence “that impact truly scales with growth and that growth scales as close as possible with impact”, in the knowledge that “not all societal and developmental problems can be solved 100% by business models, well-meaning or not”.