June 29, 2021
Impact investments are investments made with the goal of generating positive, measurable social and environmental impact alongside a financial return. The impact investment market provides capital to startups in sectors such as sustainable agriculture, renewable energy, conservation, and microfinance, plus basic services including housing, healthcare, and education. In this article, we’ll look at several funding options for the category of impact-oriented startups that are organized as for-profit entities.
The good news is that impact investing is growing. The Global Impact Investing Network (GIIN) estimates the current size of the impact investing market at $715B. The majority of impact investors consider the industry to be ‘growing steadily‘—and 70% of those investors expect market-rate returns. But impact startups still face challenges in available capital, measurement, and understanding, despite expecting a market return.
Impact investments are also known as mission-related investments (MRIs). MRIs are investments that seek to have a positive impact and generate financial returns, as well as social or environmental impact. Program-related investments (PRIs) are below-market rate investments with a main purpose of greater social impact. They’re higher risk and are expected to deliver lower financial returns. PRIs tend to receive grant funding and patient capital from philanthropic organizations.
MRIs provide market-rate returns while focusing their mission on improving social or environmental well-being, often in support of the United Nations’ Sustainable Development Goals. The SDGs are an urgent call to align efforts toward “a shared blueprint for peace and prosperity for people and the planet” by 2030.
Another hallmark of MRIs is that they offer blended value—a model that combines a revenue-generating business with social value. MRIs have a double bottom line that measures performance in terms of positive social or environmental impact, along with traditional financial metrics.
What are impact investors focused on?
US SIF, the Forum for Sustainable and Responsible Investment, has seen a 42% increase in the consideration of environmental, social and governance (ESG) factors in investing since 2018. But while considering ESG factors is useful, and could be an onramp to impact investing, it’s not focused on making a positive impact. Negative screening used in socially responsible investing (SRI) is also not considered impact investing.
One of Toniic’s T100 reports, the Frontier of SDG Investing, examined data from 76 portfolios totaling $2.8B in committed capital. Each of the SDGs is addressed in the aggregated portfolios, but five of them account for more than 60% of the invested capital: SDG11, Sustainable Cities and Communities (29%), SDG7, Affordable and Clean Energy (17%), SDG3, Good Health and Well-Being (7%), SDG2, Zero Hunger (6%), and SDG12, Responsible Consumption & Production (5%). Climate change is the most important specific ESG issue considered by money managers.
Understanding where capital for impact startups comes from
A diverse impact investing landscape can move capital across asset classes and significantly influence the impact sector as a whole. The actions of these organizations can have a cascading effect on available capital and behavior. Over 1,340 organizations manage $502B in impact investing assets worldwide. These organizations include institutional investors, fund managers, banks, family offices, and venture capital firms.
Institutional investors such as BlackRock, KKR, Goldman Sachs, Bain Capital, and TPG have impact investing divisions or initiatives. They’re typically a later-stage funding option and can be ideal for impact companies that are looking for liquidity or an exit. As impact-driven arms of large PE and investment banking firms, these financial buyers can also help develop impact investing in ancillary ways, including co-developing measurement methodologies that impact investors can use. By reporting on their progress, institutional investors can help capital markets adopt a greater awareness of impact.
Banks and wealth managers surface investment opportunities to their individual and institutional clients who have an interest in social and environmental causes. Typically, these investment opportunities take the form of ESG-focused funds that are managed by institutional wealth managers. For example, Fidelity offers index funds that contain a curated portfolio of impact- or ESG-aligned public equities.
Family offices leverage their assets to advance their core social and environmental goals while growing their overall wealth base. Many family offices have a VC-investing arm to source and complete investments in companies that meet their impact and financial goals.
Fund managers, which include VCs and private equity firms, channel large volumes of capital from institutional investors to portfolio companies, which could include impact startups. The GIIN states that many more impact-oriented fund managers are needed.
Angels, VCs, accelerators, and crowdfunding for impact companies
Taken at face value, angel networks appear to provide the opportunity to reach many potential investors at once. But since bringing investors together often leads to a herd mentality, angel groups are arguably most useful when an impact startup has already secured meaningful funding commitments from several members of the group, and can then pitch the full group in order to secure additional commitments to fill out the rest of its funding round.
VC funding may be an option for early-stage startups who have a repeatable business model and an attractive CAC-to-LTV ratio.
In terms of impact, make sure that your mission aligns with the firm’s impact focus areas, and that you meet any other criteria they have. Depending on your stage and capital requirements, you may still have to supplement VC funding with venture debt or revenue-based financing.
Accelerators and competitions
The fifth annual Cisco Global Problem Solver Challenge recognizes new business ideas that leverage technology for social impact from early-stage entrepreneurs around the world, with $1,000,000 split among 20 prizes.
The Founder Institute, the world’s largest pre-seed accelerator, defines a For Progress company as one that has an SDG-aligned mission, a product or offering that positively influences Key Performance Indicators towards the SDGs, and a public website that tracks progress of their KPIs on a regular basis. FI provides a free online tool that startups can use to identify their own impact KPIs and track them over time. FI also runs startup accelerator programs in 200+ cities worldwide.
The Los Angeles Cleantech Incubator is for cleantech startups focusing on clean energy, zero emissions mobility, or sustainable cities. Founders get hands-on support with market access, business services, and introductions to funders. Benefits include eligibility for the LACI Impact Fund and Debt Fund to finance growth.
Many Social Venture Partners (SVP) chapters across the US run an annual pitch competition for impact startups and nonprofits. For example, SVP Fast Pitch Seattle highlights and propels social innovation in the Greater Puget Sound region and beyond. SVP Seattle has an annual cohort of 20 locally based organizations across three tracks: established nonprofit, startup nonprofit, and for-profit social enterprise. In the past eight years, SVP Fast Pitch has helped more than 350 social impact organizations tackling poverty, homelessness, inequity in education, prisoner recidivism, climate change, and other pressing issues.
Village Capital runs accelerators for seed-stage, impact-driven startups. Programs range from one-day forums to 12-day accelerators spread out over three different workshops. At the end of each program, the two startups ranked highest by their peers receive grant funding or seed capital.
Crowdfunding is an evolving method of raising money via the Internet to fund a variety of projects. In 2020, the SEC raised the offering limit in Regulation Crowdfunding from $1.07M to $5M to facilitate capital formation for small and medium-sized businesses. The SEC chair recently said that for many small and medium-sized businesses, their exempt offering framework is the only viable channel for raising capital.
The GIIN lists crowdfunding platforms that are related to impact investing, for both equity and debt, including Kiva, Ours to Own, Start Some Good, and Lendahand.
Challenges of impact investing
If you’re talking to an investor who invests only in impact companies, they may be looking for more quantifiable metrics that you’re able to provide at your current stage of development. And if you’re talking to mainstream investors, you may have to dispel the assumption that impact companies are riskier investments with lower returns.
For those reasons, it’s more expedient for impact-oriented founders to seek funding from sources who make it clear that they understand the unique challenges and opportunities facing impact-driven investing.
According to the GIIN’s 2020 Annual Impact Investor Survey, business model execution and management is by far the most often cited contributor to risk. Other challenges include misperceptions about the nature of investment opportunities, fragmented approaches to measuring impact, and limited market infrastructure.
Moreover, very little data is available on impact investments in private companies, and getting more valid data is arguably crucial to the progress of the impact investing industry as a whole.
Funding and support options for impact companies
Acumen was founded by Jacqueline Novogratz to use the power of entrepreneurship to build a world where everyone can have the opportunity to live with dignity. They invest in early-stage companies whose products and services enable the poor to transform their lives.
Angels for Angels, based in Seattle, offers fiscal sponsorship to social entrepreneurs around the world. They look to support social entrepreneurs, organizations, and initiatives that are social purpose-driven, locally-led, and sustainable.
Astia was founded in 1999 as a nonprofit organization, and works globally to level the investment playing field for high-growth startups led by women. They have developed a process to eradicate sources of bias that perpetuate gender and race disparities in funding.
Better Ventures backs mission-driven founders leveraging science and technology to build a more sustainable and equitable economy. They invest in software, data science, and life sciences startups that will deliver profits and make measurable progress toward achieving the Sustainable Development Goals. They typically write $500K checks to pre-seed stage startups with strong technical teams working on solutions in sustainable economy, data-driven health, and adaptive workforce themes.
Catamount Ventures (possibly the only VC firm named after a big cat) focuses on healthy living, sustainability, education, and consumer technology. Catamount invests in teams with a defensible plan to grow a category-leading business driven by an authentic mission at its core.
Clean Energy Ventures is a climate tech venture capital firm that focuses specifically on shepherding early-stage climate tech companies from early R&D to a high rate of growth. A company’s technology, products, or services must have the potential to significantly mitigate climate change through the reduction of greenhouse gases.
Collaborative Fund supports new businesses pushing the world forward—particularly in the categories of Climate & Sustainability, Food, Health, Kids, and Money.
Craft3 manages over $173M of capital raised from financial, corporate, philanthropic and religious institutions, government agencies and accredited individual investors that support their efforts to strengthen resilience in the Pacific Northwest. Craft3 has provided over $650M in financing to more than 8,500 people and businesses in Oregon and Washington through a variety of loan programs. Borrowers include entrepreneurs and small businesses and others without access to traditional financing.
E8 is an international, Seattle-based angel investor network whose mission is to accelerate the transition to a prosperous and cleaner world by investing in and fostering emerging cleantech enterprises. They provide early-stage funding along with strategic guidance, mentorship, and access to their greater network. Members typically expect an equity stake in return for their early-stage engagement, and they’re receptive to other investment vehicles.
Elevate Capital is Oregon’s first venture capital fund that specifically targets investments in underserved entrepreneurs—such as women and ethnic minorities, or those with limited access regionally to capital and opportunities.
Fifty Years is an entrepreneur-run, early-stage venture capital firm based in San Francisco. They back companies that can be profitable and make a serious dent in achieving one of the SDGs. “As entrepreneurs ourselves, we found it nearly impossible to find savvy investors that had the skills, knowledge, and experience to help us scale our business, and also fully supported our mission.”
Fledge is a global network of conscious company accelerators and investment funds that help entrepreneurs create impactful companies and cooperatives at scale. Each participating city runs up to one session each year for mission-driven, for-profit companies. The sessions have a 7-8 week curriculum that includes marketing and sales plans, funding options, pitching, and storytelling. They invest $20K in US-based companies. They also provide introductions to impact investors, and make follow-on investments.
Greenhouse is Genius Guild’s pre-seed venture fund that invests in market-based innovations that end racism. Their core investment areas are Restructuring the Flow of Capital in Black Communities, Healthy Environments, and Belonging and Connectivity. “The central mission of Genius Guild is to end racism and racism is hard-tied to no fewer than six Global Goals.”
Harlem Capital is a venture capital firm on a mission to change the face of entrepreneurship by investing in 1,000 diverse founders over the next 20 years. They invest in founders from all backgrounds, genders and walks of life, and are industry agnostic.
Lighter Capital is a provider of non-dilutive debt capital to startups. They offer up to $3M in revenue-based financing, a flexible model of financing based on monthly cash flow that doesn’t require giving up an ownership stake in the company. The implied interest rate can seem high, but this is a trade-off for not giving up any equity or collateral.
Lightship Capital invests in early-stage companies in the Midwest led by BIPOC founders, LBGTQ+ founders, female founders, and people with disabilities who operate in the CPG, E-Commerce, Sustainability, Artificial Intelligence, and Healthcare spaces.
Omidyar Network is a social change organization with a hybrid structure. This structure includes an arm that invests in for-profit startups tackling social challenges with an entrepreneurial spirit. They expect all commercial investments to achieve positive social impact and strong financial returns. To reduce the risk of mission drift, Omidyar targets companies that have social impact baked into their business model. Because this category of companies can earn or attract capital, they have a high capacity for growth and market impact.
PowerPlant Partners is a growth equity firm that invests in emerging consumer wellness companies. They believe financial results are inextricably linked to the impact a company makes in the world, and use their capital and expertise to empower disruptive, plant-centric, purpose-driven companies. PowerPlant helps companies understand their impact and measure progress like any other KPI.
Radicle Impact is an impact venture fund (and a Certified B Corporation) primarily funded by Kat Taylor and Tom Steyer. With an interest in social justice, environmental resilience and economic sustainability, they invest in early stage companies focused on Good Food, Good Money and Good Climate. Their goal is benchmark or better returns with measurable social and environmental impact.
Rethink Impact is a US-based impact venture capital firm with a gender lens that invests in mission-driven founders using technology to solve the world’s biggest problems. Their primary focus is on companies with female CEOs, or in some cases, women in C-level roles. They write $2M-$10M checks to lead or co-invest in Late Seed to Series C rounds, and look for companies with $500K-$15M in annual recurring revenue. They actively source investments that are making new digital health and education innovations, providing tools for individuals and families to move up the economic ladder, and speeding the transition to a more sustainable and resource-efficient economy.
Righteous Causes is a B Corporation that matches founders with angel investors and service providers in legal, marketing, fundraising, and finance (as well as life coaches). The co-founders started Righteous Causes because as entrepreneurs working in the social impact space, they lacked support. Founders pay a $150 application fee, and negotiate directly with investors to determine the amount of equity and any terms for any funding.
SheEO is a global entrepreneur marketplace and community supporting women and non-binary people. They finance female founders by bringing together female “activators” (also a Toniic term) who each contribute to a pool of funds loaned out at low interest to women-led ventures. Activators select to fund ventures that create significant positive impact across all sectors, including wellness, AI, education, food sustainability, waste reduction, energy efficiency, inclusion, and biotech. SheEO funds entrepreneurs with a 0% interest loan. As the founder pays back the loan, the money is paid forward to new social impact ventures.
Sixty8 Capital is an Indianapolis-based VC firm that invests in undercapitalized founders in the flyover states. They’re a seed-stage fund for Black, Brown, women, and LGBTQ+-led startups. And they’re industry agnostic, investing in tech, tech-enabled, and Direct-To-Consumer startups.
Social Venture Circle is for early-stage, for-profit ventures that are solving social or environmental issues, have gone to market, and are raising between $200K to $3M.
Spero is a VC firm primarily funded by eBay founder Pierre Omidyar. Spero invests in founders building mission-driven technology companies in wellbeing, sustainability, plus learning, work, and play. They prefer to lead or co-lead a $3-$10M round (late seed or Series A). Their typical check is $2-$4M, and they reserve capital for follow-on.
Toniic is a global community of asset owners seeking deeper positive net impact across the spectrum of capital. Their members consist of more than 400 high-net-worth individuals, family office leaders, and foundation asset owners. Toniic curates co-investment opportunities across asset classes and impact themes.
Unovis is an investment firm that, through their funds, provides seed to growth funding to entrepreneurs who are developing plant, fungi, fermented, and cultivated replacements to animal products. They believe that fixing the broken food system poses the most vital economic and ethical imperative of our time.
The Urban Innovation Fund provides early stage capital and regulatory support for startups that have the potential to transform the lives of millions of city dwellers. Their verticals include transportation, energy and water, and health and public safety.
Urban US funds seed-stage startups that upgrade cities for climate change, including optimized buildings, food resilience, climate insurance, fun EVs, and water demand shaping. They’re focused on specific types of impact outcomes, such as reduced GHG emissions or increased resilience, and reducing the negative consequences of higher-density living like traffic congestion or public health problems.
Village Capital supports impact-driven, seed-stage startups. They have collaborated with more than 120 industry-leading corporations, innovative foundations, impactful development groups, and sector-specific investment firms. They’re focused on three thematic areas: Sustainability, Financial Health, and the Future of Work.
Women’s Capital Collaborative is a philanthropic initiative that partners with women entrepreneurs. The Collaborative uses an integrated capital approach to fund women-led social enterprises that are supporting and empowering women and girls. They target companies in need of early-stage growth capital, and more than 50% of their funding supports women of color.
ZEAL Capital Partners target investments in companies that are bridging America’s wealth and skills gap by creating meaningful impact for under-resourced communities. They partner with entrepreneurs who are seeking Pre-Seed, Series Seed, or Series A investments with $200K or more in annual revenue, anywhere in the US. And they proactively source, invest, and scale companies that directly impact nine of the 17 SDGs.
Making more capital available for impact startups
Given the urgent societal and environmental challenges the world is facing, it’s a critical time to shift more capital away from companies that cause societal and environmental harm, and towards companies that develop solutions for these challenges.
The increasing number of impact investors and greater awareness of the SDGs is heartening, but most investors still focus on the single bottom line of financial return, rather than risk a double bottom line of financial returns plus social or environmental impact—even for startups that expect to deliver venture-scale returns.
A founder leading a mission-driven startup should seek funding from investors who specifically mention that they provide impact investment capital. As it is, an impact founder will probably have to do more work on reporting to each investor because impact measurement methodologies are not yet standardized. It may also be helpful to look for funds that are not self-described as an impact fund, but have many portfolio companies that are impact-oriented.
If you’re targeting impact-focused investors, be prepared to explain and document why your company is an impact company. This may take the form of identifying how your company contributes to one or more UN SDGs, or shows alignment with other ESG metrics.
GIIN believes that by the year 2030, impact investing will have made essential contributions to the achievement of the SDG targets. Working toward the UN’s 17 SDGs and 169 targets over the next ten years will require a tapestry of organizations and funds committing to mission-related investing by making more capital available.
We hope that this list of funding sources makes it easier to secure the financing you need to grow your impact startup, and that your success helps pave the way for other impact startups who follow in your footsteps.
Author: Nina Post