How can venture capitalists align their impact goals with their financial goals?

1 Define your impact thesis

The first step is to define your impact thesis, which is a statement of the problem you want to solve, the change you want to create, and the criteria you use to measure your impact. Your impact thesis should be aligned with your mission, values, and expertise, and reflect the needs and preferences of your stakeholders, such as LPs, founders, and beneficiaries. Your impact thesis should also be clear, specific, and realistic, and guide your sourcing, screening, and due diligence of potential deals.

2 Assess your impact potential

The next step is to assess the impact potential of the startups you are considering investing in, which means evaluating how their products, services, or business models can contribute to positive social or environmental outcomes. You can use frameworks such as the Impact Management Project (IMP), which defines five dimensions of impact: what, who, how much, contribution, and risk. You can also use tools such as the B Impact Assessment, which measures the performance of companies across various aspects of impact, such as governance, workers, community, environment, and customers.

3 Align your impact terms

The third step is to align your impact terms with the startups you are investing in, which means setting expectations and incentives for achieving both financial and impact goals. You can use mechanisms such as impact-linked returns, which adjust the financial returns based on the impact performance of the startups, or impact covenants, which require the startups to comply with certain impact standards or practices. You can also use clauses such as impact lock, which prevent the startups from changing their mission or values after an exit or a change of control.

4 Monitor and report your impact

The fourth step is to monitor and report your impact, which means collecting and analyzing data on the impact performance of your portfolio companies, and communicating your results and learnings to your stakeholders. You can use metrics and indicators that are relevant, consistent, and verifiable, and align with industry standards such as the IRIS+ catalog or the SDG indicators. You can also use platforms such as Impact Cloud, which enable you to track and visualize your impact data and compare it with benchmarks and peers.

5 Improve your impact practice

The final step is to improve your impact practice, which means seeking feedback and insights from your stakeholders, and identifying opportunities and challenges for enhancing your impact performance and management. You can use frameworks such as the Impact Due Diligence Innovation (IDDI) initiative, which provides best practices and recommendations for improving your impact due diligence process and outcomes. You can also use networks and communities such as the Global Impact Investing Network (GIIN), which offer resources, events, and connections for advancing your impact knowledge and skills.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?