Impact Investing: How do Impact Investors measure impact?
A look at how Impact-focused funds gauge and execute impact measurement.
Measuring impact
Venture Capital funds measure impact in a variety of ways. Here’s two:
Logic Models
Funds use logic models to outline the process for social impact. Models map the links between input, activities, output, outcomes, and impact. Logic models assess impact risk. In this context, impact risks are the factors that could interfere with the expected social impact of an intervention. Impact risk is the likelihood that the impact will be different than expected. This is crucial when analyzing how new companies can jeopardize existing infrastructure and communities. Acumen and LGT Venture Philanthropy use this model to outline the process for social impact. For example, Acumen uses this model to assess “Would X output really translate into Y outcome?”
Scorecards
Funds implement scorecards to measure impact in a tailored way. They monitor and manage key performance metrics on operational performance, organizational effectiveness, finances, and social value. Scorecards can also evaluate a fund's mission, goals, and metrics over time. For example, Bridges Ventures created its own Impact Scorecard that is used today. Additionally, scorecards are a useful benchmark to track impact over time and in comparison to other funds.
Executing Measurement Efforts
Measuring impact is separate from execution. Execution is vital to ensure social impact. Various funds execute measurement in different ways. Here’s two:
Incentive Structures
Funds can implement and design structures to incentivize investors. An example of this incentive in practice is through a Social Impact Carry. A Social Impact Carry rewards portfolio managers based on the measured social impact of investments under their management. For example, Core Innovation Capital ties a general partner’s financial compensation to an impact score.
Measurement Integration
Funds can integrate impact measurement with investment management.
This integration keeps investors connected to their portfolio companies and aligned with their impact targets. For example, LGT Venture Philanthropy investment managers are responsible for impact measurement. This measurement includes building the theory of change, conducting site visits, and working with funded projects to collect impact data.
Measuring impact and executing measurement is vital for Impact-focused funds. Ideal measurement models consider societal and financial factors. Models should help investors analyze and tailor their strategy to craft an ideal outcome for all involved (company, community, investor, etc.)
In the future, a potential impact model could be used by both the startup and investor to create transparency and align objectives throughout the fundraising process.
As the space matures, I look forward to seeing the innovative ideas, tools, operators, and investors that arise.
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If you want to read more about this topic, check out this article from the Stanford Social Innovation Review.
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