Impact Measurement, a Credibility Builder for Sustainable Start-Ups!

September 10, 2019 | By Gary J. Schefsky

“If You are an entrepreneur building a sustainable venture and your intention is to generate social, community and/or environmental impact alongside financial returns, developing metrics is critical to validating your impact and improves your access to successive rounds of investment capital.” Gary J. Schefsky, Founder of New Luna Ventures.

When values-based entrepreneurs bring products and technology to market that improve and enrich our environment, food and water systems, human health and community they are making a positive impact for future generations. But what are the sustainable benefits and how do we measure them in order to validate the impact?

Sustainability management is the process of managing and measuring sustainability. This process may apply both internally, e.g. to management and human resources, and to external factors such as the impact the product has in the marketplace. In larger companies, the Chief Sustainability Officer is typically tasked with this function. For start-ups, the founding team, especially in a sustainable venture, should take on this task with equal importance as other core company-building functions.

The goal is to be able to report the positive business and sustainability results to stakeholders and investors who are both critical to sustaining the company.

I. Background

Return on investment is relatively easy to assess - an increasing valuation per round of investment, per share, and a multiple on investment at exit. Public stock investors look for yield, earnings per share, and share price growth over time. Time and liquidation are closely correlated for investors, x return over y time. However, these calculations do not work for measuring impact!

I recently attended a lecture on the linguistics of scent. We are all born with the innate skill to smell scents that starts in the womb, but we do not develop a language to describe it. There are trillions of scents, just as there are trillions of objects, but we lack a common language when it comes to our sense of smell. Scents can be broken down into their chemical composition, but then only trained chemists could talk to one another. Translators who can explain the abstract into a common language become experts or guides in this process, e.g. a sommelier explaining the aroma and taste of wine to a dinner guest.

Measuring impact is similarly abstract, a common language is lacking. The economics of money in over time compared to share price falls short. And, there is no calculator or formulaic method to measure impact. Fortunately, just like scents and wine, there are translators in the field of sustainability who are developing a common language for describing and measuring impact. They are advancing a process and a set of tools to apply to help measure impact. Let’s explore this process generally and some of the tools!

II. Measuring Impact

While there are many sustainable factors to measure, the three core pillars of impact: environmental, economic, and social are a great place to start: 

• Reduction of environmental impact
• Growth of jobs with diversity
• Improvement of community and social benefits

This division is a simplistic form of sustainability management, it enables you to construct a measurement tool and methodology around a core area of impact. Let’s take a hypothetical start-up to use for the application of the measurement approach.

Let’s assume our product is a software mobile app used to improve health diagnosis at the point of intake using big data analytics. The market is both developed and developing, the latter through license of the technology to NGOs. The first go-to-market sector is a rural Kenyan village, Africa. The village has one local nurse practitioner within 20 minutes access, and a hospital that is at least one hour transport away by an NGO-operated helicopter used only in the most immediate emergencies.  

1. Define and scope the problem

It is important to note that a prerequisite for the scoping process, and an all to common gap in start-ups, is a clear and concise product description. What problem is your product solving, what need is it filling? With such a description in place, a first step in the impact scoping process is to define the sector and problem being addressed by your venture and product, e.g. environmental, jobs, or community and social improvement. Our venture falls under the community and social benefits type of impact.

The problem being addressed is that the first point of health/emergency contact is typically with less skilled providers, before being seen by trained medical professionals. Missed emergency conditions can lead to catastrophic consequences. So, let’s say the thesis of our app and software is that in the hands of the first point of contact in a rural village, e.g. a nurse practitioner, it radically improves diagnosis of emergency conditions. A social problem being addressed is the differential in societal access to quality medical diagnosis and emergency response.

2. Application of tools

It is well beyond the scope of this article to address all the tools available that apply to measuring impact. In fact, the process of sustainability management, and the reason for a dedicated resource or retention of a consultant, is to find and apply the right tools. No matter which tool is applied the right tool is the one that allows for quantifiable results, is transparent, easily explained, and takes into consideration learning, adaptation, uncertainty and sensitivity analysis.

One tool is known as the Swiss Method of Impact Metrics. This model applies a metric of 0 - 3 in terms of impact to each causal relationship. In the area of sustainability, often the causal relationship is based on outcomes as compared to output. 

For example, an outcome of our hypothetical software application may be that after two years of use of the app by the nurse in the local village, the number of patients who died on the way to hospital dropped by 50% and this drop was directly attributed to improved diagnostics. This outcome might gain a success rating of 3. Other outcomes would be defined and measured as well, e.g. with less non-critical patients being sent to the regional hospital, the ratio of hospital staff to patient may increase resulting in overall improved outcomes in-hospital.

Identifying and measuring the outcomes will differentiate your start-up company from those that simply state that their venture is sustainable or is addressing a market need. You will have identified an actual outcome and applied a measurement.

3. Summarize & present

With the problem defined and scoped and the tools applied to measure outcomes, the next step is to explain the process and results - document your methodology. Sustainable impact can be thought of in terms of units of benefit vs. units of money. Just as a company documents its financial performance in a profit and loss statement, your company’s sustainability results can be described. Describing problems, outcomes and measurable results using real world examples helps investors understand the true sustainable impact of the product and impact of their investment. 

Tracking, rating and even weighting the outcomes and benefits becomes a clearly articulated metric. The total number or result of the measurement is less significant than the process of creating the methodology itself. The process validates that the product actually has an impact and it is this type of discipline that institutional investors look for in start-up ventures they fund.

4. Sustainability review

A final step in measuring impact is one of continuous processes improvement. This means to re-evaluate the process, problem(s), scope, and measurement tool for updates and improvement. Since there is no one measurement tool and new tools are being developed, adapting and improving your own measurement methodology is a likely course of action, until you find one that is a better fit or more advanced.

III. Conclusion 

A start-up company’s business plan should have defined the total addressable, available, and attainable market, go-to-market strategy, and projected profit and loss. Developing these elements is part of the business process planning that helps you test your thesis and explain it to investors. It becomes part of investor due diligence that proves your business case and is translatable into financial results and milestones. Yet, this process does not measure the impact a sustainable venture or product truly has.

Applying a sustainability measurement methodology to your venture makes the abstract concept of impact more clearly understood. You will have defined the product, defined and scoped the sector and problem, and applied a measurement tool to assess outcomes. This process establishes a methodology with continuous process improvement that enables your company to describe and measure sustainable outcomes. Doing so differentiates your venture from not only other start-ups, but even larger, public companies.

When applied correctly, the successful integration of sustainability measurement into your business will earn dramatic results for your company, stakeholders, and investors.

Author Gary J. Schefsky is the founder of New Luna Ventures, a venture investment firm that invests in and offers advisory support for values-based startups. He has 25 years of executive entrepreneurial experience and is a pioneer in impact venture capital and cross-border market-entry. Gary manages his investments with discipline and integrity, whilst actively teaching and publishing about entrepreneurship and investing with impact.