Measuring the Effectiveness of Food Labs & Co: Understanding Impact and the Methods to Quantify It
Holding Court on "Impact"
Today, the buzzword "Impact" in pitch decks is akin to the yesteryear's "Impact". But unlike its glitzy past, today it's about substance over style. Startups are emphasizing sustainable business models and goods, but how do they prove that "Impact" isn't just another buzzword? Can a startup's performance be determined by its "Impact"?
To cut through the fog, European VC investors like Etf Partners, Set Ventures, Astanor, Food Labs, and Sofinnova Partners have handcrafted a guide to impact investing. Let's take a look at the key takeaways.
So, what exactly is Impact?
Before we dive into measuring "Impact", it's essential to understand what it signifies. The term is so nebulous that there's hardly a German translation that perfectly fits the bill. In the handbook, "Impact" refers to the ripple effect a company creates for people and the planet through its products and services. It differs from the term ESG (Environmental, Social, Governance) that evaluates a company's internal sustainability. The desired positive change a company aims to bring about is called the "Theory of Change".
How do investors quantify Impact?
To validate the "Theory of Change", VC investors utilize a model called the Gamma model. This model ensures that before investing, there's a clear blueprint for how a startup plans to achieve "Impact" through its activities. Impact objectives are set, monitored, and reported to ensure that "Impact" is achieved alongside financial returns. For each portfolio company, investors define specific impact markers that measure the "Theory of Change".
These markers are categorized into three distinct dimensions: Innovation, Reach, and Scaling.
Innovation
Innovation measures the impact a startup makes by introducing new and sustainable solutions to socially relevant issues. For example, a startup could develop AI-driven software to optimize ship fuel consumption. An indicator could be proving the technical feasibility of the product before its market release.
Reach
Reach is about the extent to which a company can spread its solution and reach users. It's about market interaction and early adopters. For instance, an electric vehicle provider could measure the number of customers informed through the platform, even if not all lead to transactions.
Scaling
Scaling evaluates a company's ability to scale its solution far and wide to address significant social or ecological problems. For example, a company that develops alternative protein sources might measure its total contribution to reduced CO2 emissions by replacing traditional meat production.
Going Beyond Numbers
The three dimensions can build upon each other: Innovation lays the foundation for developing ideas or solutions. Reach considers the initial market penetration and acceptance. Scaling expands the solution to have the maximum social or ecological impact.
The results are expressed in scores:
- 1 or higher: Goal achieved or exceeded.
- 0.5: Goal achieved 50%.
- 0: Goal not achieved.
While Impact and financial success often go hand in hand, it's crucial to evaluate Impact independently. Especially in early-stage investments, validating the "Theory of Change" is paramount. In later-stage startups, impact markers align more closely with the company's financial performance.
Impact-linked Carry: A Cut Above the Ordinary
Many impact investors employ an impact-linked-carry. This means that part of their carried interest depends on whether impact goals are met. To calculate this, the impact scores of individual portfolio companies are weighted by capital (based on the investment amount) and combined into a "Fund Level Impact Multiple". If a previously set threshold isn't reached, the carried interest is proportionally reduced.
For instance, assuming a fund sets an impact goal for three portfolio companies:
- Company A: Reduce CO2 emissions by developing energy-efficient technology. Goal: Avoid 100,000 tons of CO2 within three years.
- Company B: Improve education access in developing countries. Goal: Reach one million students.
- Company C: Scale sustainable packaging. Goal: Replace 50,000 tons of plastic waste with alternatives.
If the companies only achieve these goals to varying degrees, the fund calculates the impact multiple and compares it to a predefined threshold. If the impact multiple falls short, the carried interest is proportionally reduced.
In a Nutshell
In the absence of a widely recognized Gamma model, the focus remains on standardization, collaborative data sharing, and systems-thinking frameworks to quantify various dimensions of "Impact", such as innovation and scaling. Investors increasingly emphasize contextual adaptability, tailoring metrics to local realities while preserving cross-portfolio comparability.
- The handbook for impact investing defines "Impact" as the ripple effect a company creates for people and the planet through its products and services.
- To validate the "Theory of Change", VC investors use a model called the Gamma model, ensuring a clear blueprint for how a startup plans to achieve "Impact" through its activities.
- In the three-dimensional framework, Innovation measures the impact of a startup's new and sustainable solutions to socially relevant issues, Reach considers the initial market penetration and acceptance, and Scaling evaluates the startup's ability to address significant social or ecological problems.
- Many impact investors employ an impact-linked-carry, where part of their carried interest depends on whether impact goals are met, and the impact scores of individual portfolio companies are weighted by capital for a "Fund Level Impact Multiple."
