E562 | August Solliv ⁠(⁠Impact Supporters⁠) and ⁠Dougie Sloan⁠ (⁠Impact VC⁠ & ⁠Better Society Capital⁠), Impact Highlight Series: What We Learned from 10 Conversations on Impact VC

0:00What if everything you thought about impact investing was wrong? The most resilient companies that he was seeing are the ones that scale profit because they scale impact. But here's the problem every GP faces. It is just extremely hard to innovate the model. So does impact actually deliver returns? The data might surprise you. The impact appears to perform similarly, or at least as well as, non-impact companies in a venture context. But venture proof takes time. I think to definitively prove out returns in venture can take decades. Meanwhile, there's a massive opportunity hiding in plain sight.

0:3194 % of climate investment right now go into mitigation, climate mitigation, and therefore only around 6 % goes to adaptation. The best part? You don't need to be institutional capital to make a difference. Pretty much anyone can be the one bringing the capital into Impact VC funds. Join the final episode of Impact Highlight Series, where we prove impact isn't charity, it's strategy. Only on a UVC podcast.

0:57Here's a few words from our beloved sponsor. Impact VC is a global community of VCs accelerating impacts within venture. Their purpose is to cultivate a community and resources to unlock venture capital's ability to tackle the world's most pressing challenges. The community is made up of over 900 VCs, including both pioneers and newcomers, including generalist VCs and impact specialists. Visit impactvc.co to join the community and explore their resources, including the VC Impact Playbook, the Founder Impact Playbook, and the Impact Investing for VC's online training, which is designed to help VCs integrate impact practices into their investment strategies.

1:35That's a lot of information to get in 30 seconds.

1:41Tear down this wall. It's more than just an ally.

1:55This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Welcome to the Impact Highlight Series powered by EUVC, Impact VC and Impact Supporters. I'm one of your hosts, August Soule, and the founder of Impact Supporters. And I have Dougie here with me. I'm Dougie I'm one of the co-founders of Impact VC and also an Impact Investing LP at Better Society Capital in the UK And this is a special episode because it's the conclusion of the Impact Highlight Series we've been doing for the last month And so we've been doing 10 interviews with the top GPs, LPs, a couple of unicorn founders as well in the series And now we're trying to sort of wrap up and really call out all the good things we've heard and talk about the top tips we've gotten and top learnings we've gotten from each episode.

2:44Maybe, Doggy, do you want to take us through some of the first ones? And we've divided this up into four themes, so maybe we could start with the first one. Yeah, thanks, August. And the first theme we've pulled out is around impact driving returns and the interaction between focusing on impact and driving commercial outcomes. And one theme we heard quite a bit around here were the advantages of building an impact from the founder lens. As you say, we had several unicorn founders on the podcast in Nicholas Adelberth, Tony Jammus, Fabian Heilman, and they and others spoke especially about the talent lens, where you can recruit better talent, have more engaged employees and work better together in their experience by centering impact in how you work and are set up as a firm.

3:27which I think is a really interesting theme and speaks to some sort of quite fundamental questions around purpose and around business in different ways. And also sits quite interestingly alongside some work that we've been doing at BSC and Impact VC around focusing on impact or having impact to the harshest of business, driving commercial value in different ways. And that talent lens was one of the ones that we identified as being really powerful alongside acquiring and retaining customers in the right context, in the right markets, and navigating regulatory dynamics, unlocking capital in different ways.

4:03And some of those other levers actually were touched on in the episode with Emma Steele of Ascension and Emily Trunt of Wagestream, where I think maybe one piece to pull out from that episode was around how they've embedded impact in their sales cycle and their product economics. So they're designing models where the better they're solving for impact amongst the frontline workers whose financial inclusion they're seeking to improve, the better that they can work with and sell through employers. So their sales cycle has a positive reinforcing feedback loop with impact. And I think that's a really interesting piece.

4:36So Dougie, that actually reminds me a little bit of the lockstep model and how you go from having more impact to having more profit and how these two, they go together. and Emma and Emily also talked a lot about that. And that brings me to sort of the idea of shared value and of how impact and profits actually is sort of more of a co-linearity rather than a compromise between the two. And I think we both asked pretty much all our interviewees about this, whether they felt like there was a compromise between returns and impacts. And I think John had a really good point on this. He said, Jen Koga from eKventures, he said that the most resilient companies that he was seeing are the ones that scale profit because they scale impact.

5:17And we saw that in multiple of the interviews, actually, that sort of impact-native businesses, they benefit from tailwinds like policy support, regular sort of pushes, and consumer preferences. That means that they kind of have a lower downside risk and they can increase durability. Of course, we don't have the exact numbers to prove this, but I think it was interesting that many of the GPs and LPs, they were seeing that we, for example, also Christian Hernandez from 2150 highlighted this. So I think, interestingly enough, if it's true, right, that you can sort of de-risk some of your investments by focusing on this impact part because you have the ITO ones going your way.

5:58And I totally agree with you on how insightful John's comments were there. I think we've learned a lot in our work at BSC from ongoing conversations with John, Camilla, and the wider ECA team about how they think about that shared value concept. And I think that the broader point you make on how proven some of this is, is an interesting one. So we spoke to several of the LPs we had on about the data that they are seeing in terms of the performance of impact companies versus other companies in their portfolios. And this is sort of the proof in the pudding. It will be these really big companies being built or otherwise, and the performance of their fund portfolios that are investing in this way.

6:37And there are some caveats around the data that's emerging so far in terms of controlling for vintage effects. A lot of it's unrealized returns. It's quite lumpy around certain big performers, different investors, well, different definitions of what impact is. So include different things inside and outside of their samples in different ways. So this comes with a lot of caveats. But we heard essentially the same story from each of the LPs we asked this question to, where Cyril Guifas of EIF, who's arguably written the most checks into impact venture funds of anyone in Europe, talked about the correlation between impact performance and financial performance in the data as they see it.

7:12Where Chloe Dagnol of Isomer talked about the level of performance between impact-oriented companies or SDG-aligned companies in their portfolio as being essentially the same as the performance of all other companies in their portfolio. And when we've run this analysis ourselves at BSC, we've seen effectively the same story. That impact appears to perform similarly or at least as well as non-impact companies in a venture context and I think that's that's an encouraging conclusion but as I say there are caveats around it for now and we hope to see this progress over time in the future but so far it looks like it's about the same as the rest of venture and you get the impact side as well it's a hard one right Dougie because I think we need DPI what do you think the timeline will look like a little bit to to get some of the to solve the final data.

8:04Do you have a feeling for that already when you look at the BSC data? Yeah, it's a great point. A lot of this isn't proven until you see the money coming back through the DPI element. We're starting to see some of that in the BSC portfolio, but we've been investing in venture for 13 years now. And a majority of our live portfolio are funds that are six or seven years older or younger. So much of that DPI is still coming down the line. As you'll be aware, liquidity is a challenge in the venture market more broadly at the moment so it's top of mind for folks to think about when that liquidity might be coming from whether it be IPO acquisition secondary or others it's hard to put a timeline on it I think to definitively prove out returns in venture can take you know decades so I think we might be we would hope to have more definitive data over the next five years or so but in need to be cognizant that it might take time that point around you won't have the definitive proof for a little while yet speaks to the second big theme that we pulled out from our season of podcasts, which is around understanding what makes the great fund stand out from a good fund.

9:13And we asked this question of a number of LPs, and we got the kind of VC take on this in some of the ways that they're executing on different strategies as well. And I think there are a few themes to pull out from the LP lens on fund selection that I think are worth just touching upon. So Cyril from EIF talked about great funds having partner level skills around and strengths around traditional finance and also deep impact expertise and looking for that combination of things together. And I really very much agree with that in terms of what we look for in BSE and RLP investing. We're looking for people who can be great partners to impact companies, both from a commercial perspective and from an impact perspective.

9:53And that I think is what Cyril was describing as he looks for as well. He sees in the great funds that helps us stand out from the good funds. Chloe at Isma made a really interesting point around GP thesis fit and the sort of why you question as to why this person should be running this fund. And again, in terms of what we look for at BSE, that really resonates. And we talk a lot about EDGE. And for those who want to know more about EDGE, actually EUVC and Flow released a really good report recently around some of the different drivers of edge as it's a term that's thrown around a lot but not deeply defined i think the way chloe thought about it and talked about it was was really powerful actually saying people are raising off the back of experience and therefore track record or they're raising off a unique market view which is typically developed through some kind of academic specialism or unique career experience and effectively comes down to has this team gotten advantage in executing on a particular strategy?

10:50And that might look like access. It might look like support. It might look like some other set of partnerships, whatever it looks like. I think that was really powerful. And maybe the last point I'll pull out, when we spoke to Jacqueline Vandenenda at Carbon Equity, we spoke and she called out that piece around portfolio support, differentiated ecosystems that can help people do that. But we also spoke about impact practice and when we were speaking about impact practice actually a lot of the points she made were really points about mindset rather than process as it just shows you how often this this comes back to people that selection lens particularly in a slightly ambiguous environment before the dpi comes through really comes back to some of those points around skills edge mindsets and those sorts of aspects and jumping on what you're saying here to be right i think it's quite interesting how i think pretty much all the lps we've had on sort of agreed that there's like a lot of different ways to have edge, to have an edge, as you just said yourself with the data from EUVC and flow, but also sort of that is probably also a little bit different, maybe an impact than in generalist VCs.

11:55It's very similar because it's this GP thesis fit, but then the edge you have could be a little bit different. And that's what I would love to talk about a little bit here. Like you can set yourself up for success in different ways when you're an we see like we discussed quite a lot whether you should be a specialist or a generalist in impact and that could be different than what would be sort of outside of impact and here we i think what sort of came out was that even the generalist funds they are probably specialists on some topics like they they're quite research driven i think fabian from my inner he talked about how they're superficies driven focus in europe so they're trying to go deep on some verticals like I think he mentioned energy storage, circularity, industrial decarbonization.

12:40They created sort of a way to be a specialist and a way to stick out on specific topics, even though they have more of a generalist platform. And the same was actually the case for John at Ike. He mentioned sort of how they've chosen specific themes within Impact as well, where they really go deep. he brought really a number that has stuck with me whenever I talk about some of these episodes afterwards. And he said that in DevFund1, 70 % of the investments that they made did not have a competing term sheet, which I find crazy. I think there's quite a few funds in Europe, at least, that can say that because that is actually where you have true impact additionality because you go into funds or firms and startups here that wouldn't have gotten your capital if you hadn't been there.

13:31So you're really pushing sort of impacts through the roof when you're doing that. So I think it's an interesting take on this sort of specialist against generalist. And I think my view on it after all these episodes and just talking with the ecosystem in general is that even if you're a generalist, you still have to be a little bit of a specialist on some topics to sort of get the sort of depth of knowledge and expertise to actually be able to make a decision, which does kind of make sense as well, because when you're specialist, you need to be able to compete a little bit on the knowledge to make sure you invest in the right companies.

14:06And that also brings us a little bit to this idea of overlooked areas. I think both Jacqueline from Carbon Equity talked about it, also Christian from 2150. They talked about how there's still some areas in climate and impact that are sort of overlooked and there could still be areas of specialism somehow. Now, Christian talked about how adaptation is a little bit overlooked right now. 94 % of climate investment right now go into mitigation, climate mitigation, and therefore only around 6 % goes to adaptation. Very low number. He was seeing that there's going to be a larger and larger need for adaptation going forward.

14:47So he was seeing that as one of the topics that could be super interesting going forward. And Jacqueline sort of mentioned folk, these first-of-a-kind plants. investing into those as being one of the next areas that would be very interesting, both for, I guess, specialist and generalist funds. So quite interesting to see this sort of choice of competition between going for a generalist and a specialist position and how it fits into the DP thesis fit. Yeah, it's a really interesting point there. And I think this generalist versus specialist debate is one of those ongoing, probably will never be solved debates in venture capital.

15:26And there's a lot of data that points one way and a lot of data that points another way. And you have to kind of reconcile those confounding data points. And I think where you've landed is a really interesting balanced place. I think also, and this is maybe a slightly cheat answer to the question in some ways, but I think it comes almost more down to if you're a generalist, are you a fantastic generalist? If you're a specialist, are you a fantastic specialist? It's more quality within the categories than necessarily choice of category, I think. A lot of that comes down to, as you say, in terms of which sectors you're playing, your choice of where to play, your edge in playing there, and actually also how consistently you can show up in a repeatable, disciplined way, executing in a really high-quality way, applying that edge over time to build compounding gains.

16:14And I think that piece is really, really difficult to do. And it's about that element of execution as much as anything else in the really high-performing funds that I've seen. And then maybe actually even going back a little bit on what I said, I think one of the points in climate and impact is that it's probably not all, or some topics might need a bit more specialism than others, right? I remember one of the episodes we had with Chloe, right? She talked about how some parts of climate tech and some parts of, for example, biotech just needs a bit more specialism than you probably do in other areas.

16:48And I think also an interesting trend in the industry, going for more and more PhDs or more scientific backgrounds as investors. Also leans a bit that way, but I definitely agree. If you're a fantastic journalist, then you can probably make a lot of good deals still. Especially some of those overlooked areas you talked about are really technical areas. And having that technical expertise, I think, can only help. And particularly in the context of a world in which AI is changing a lot of industries very quickly, having that expertise to lean on and to understand which roles are being broken and which roles are being changed, these sorts of pieces.

17:24I think you can really see why, you can see the thesis of why that would really draw value in different ways. I guess one thing all VCs need to do is fundraise. And we heard some interesting themes about connecting LP capital to VCs in different ways. I'm interested in particular, August, I know you're thoughtful on the points around innovation in the instrument of connecting VC and LP capital. Interested in what you made of the various discussions we had with folks on that point. I think it's a really interesting one because we've had some people on that have tried to sort of innovate the VC model.

17:56Some people that have actually done it and some people that have sort of kept away from it. And I think it's quite interesting discussion also with you. You're also having the LP hat, right? Is that what we've sort of gathered is that it is just extremely hard to innovate the model. I think that's the sort of the ground, ground rule. And then I think people have done it in different ways. So I think we had Marie on who from 2050, where she talked a lot about how she has done it because she really sees a need to support companies in a different way. And that is sort of having an immigrant structure where we can support them for longer holding periods, but it's also supporting more from sort of an ecosystem angle.

18:40and therefore, because she has this key belief, it really made sense for her to try to change and adapt a little bit the model. Whereas others, they are seeing that standard VC structures still fit with how they have scoped out their part of impact. And I think that is maybe one of the learnings I've had in this series is that I think depending on how you scope impact, you can probably both have a sort of standard structure and a more innovative structure. But then that was the first point. Then the second point that really sort of stood out is that a lot of the people that have tried to innovate the model are just struggling to do it because it's so hard to attack institutional LP capital once you start doing it.

19:21You need to have a very strong platform before you start innovating. I remember Fabian saying that if they had been, I don't know if he mentioned that, but if they had been a Sequoia maybe, they would be able to innovate a bit more because they would have a more sort of structured and well-grown platform. And then it's hard when you're a new player and then also wanting to change all the rules at the same time. So better to change some rules at first and then hopefully you can change them down the line. And that's a lot on the structure. And I think we've talked a lot about the structure, but we also talked a little bit about how else we can get sort of LP capital into the Impact VC environment, right?

20:01Because that's at least one of my goals, and I know yours as well, Doug, you're right, with the whole Impact VC community is we want to get more capital into it. And what we heard, I think we got both Jacqueline and Cyril in quite a lot and what the sources could be to getting more capital into Impact VC. And Cyril was saying that public funding is not enough. I mean, he's sitting at EIF, right? He sees it himself. We need more public funding. But Jacqueline is kind of taking another way around this and saying, okay, carbon equity is sort of a platform to democratize investments into Impact VCs.

20:36And she's saying that pretty much anyone can be the one bringing the capital into big VC funds. I think my take on it, on sort of a personal point, is that with sort of wealth accumulating quite a lot in most countries around Europe, right, it's probably democratization can do a huge part of it. And then I think you also still need sort of more institutional LPs and high net worth individuals to make sure that democratization is a part of it. And then also a lot of the people that accumulate wealth will put it into impact. But yes, that's some of the things we've sort of seen, both of how people try to innovate the model, but also how they innovate how to get actual capital into impact.

21:18And I think Jacqueline was really the one who had the most innovative way of getting LP capital into impact VC. There's some really interesting themes to pick up on, as you say, within this point. And I think that point you made almost around innovations on the model that might improve the enterprise experience, but are harder for the LPs or the investors in the funds to make work is a theme we've seen a few times in this area, where there are potentially upsides for certain business models for longer funding cycles and these various things for evergreen models or other experiments with incentive structures and linking carry to impact is one of those that's becoming more widespread, for example.

22:02And Marie talked a lot about alignment when she spoke to us, which had several meetings for her, including this incentive structure piece, but also centering impact in what you do and various other pieces. So I think there's a really interesting innovation there that has the potential to unlock a lot of impact. But I think the real break on that has been LP fundraising appetite or LP investment appetite for structures that look a little bit different. And many LPs are not set up to do venture at all. And many of those that are set up to do venture are not set up to look at funds that look a little bit different.

22:32And getting these innovations to the point of which they might move the needle on a systemic level, I think potentially quite a long journey for some of these really sort of inspiring people who are working away at some of those problems. The way AAU was looking at it was immigrant structures in terms of how LPs were coming in and out of the fund, but also sort of holding periods for the individual startups, looking at some of these different topics and figuring out for each of them, what can LPs accept and what can they not accept? And I think that's quite an interesting process that most GPs could go through of like, okay, make a list of the top 10 things that you would probably change or tweak a little bit in the model and then just test them out.

23:11And then with the LTs you already are in discussion with and figure out what's possible. And so it's changed a little bit along the way. And I think with many of these things, structures are part of the equation and investment thesis are part of the equation. And at the center of it all really is people. And that comes back to probably our fourth big theme from the series around. It comes back to people. and maybe reflecting a little bit on the LP side of that, we heard about, as we talked about actually 10 minutes ago or so, the GP thesis fit point from Chloe, the team composition point from Surreal, the kind of mindset point around how you approach impact from Jacqueline.

23:53Actually, Nicholas at Norsken also talked about the importance of personal motivation and looking at that kind of purpose piece and what drives people as a part of this as well. I think that applies very much at the VC level as well as it does at the founder level. And for me, with a LP hat on, I think so much of this comes back to people, whether that's values alignment, edge in execution, how they're building a firm in different ways. And it's ultimately about those relationships in venture in the long term. And that's really exciting. I think one of the great features of working in venture.

24:30It's all about people. Topic sort of goes across, right? As you say, it's all about people on the LP side, all about people on the GP side. One of the questions I think we asked the most in this series was sort of asking existing unicorn founders and GPs that have found unicorns, who are the unicorn founders of tomorrow? I think they all agreed that you still need, like that you need a sort of this dual lens of commercial success or commercial acumen. And then as well, the impact acumen, or at least the motivation, the intrinsic motivation to really make things uh things work and i think tony was probably the one who was the most adamant in this impact side of like how he had felt like in his uh when he was building his second unicorn as he's built one sort of more non-impact unicorn and now his second impact unicorn how he's really felt like that he's got an extra intrinsic value from just being guided by a motivation and impact goal.

25:29Both Tony's Jemus from Oyster, Nicholas Adalbert that built Norskin, but also Klana before that, and Fabian, who's built a unicorn as well, they all talked about how you need the commercial on the impact side, but the impact could really be driving a lot of these people because it's less of an ego-driven goal, but more of a societal-driven goal. So that's at least what they are looking for. They look for people that lead the way on some of the impact side, but that still, as you say, have this commercial mindset. They probably also see that there's a lot of people in the big space that don't have that commercial mindset.

26:09And they need people that can prove that they have it. I think it's a really, really powerful point about that combination. It's interesting. I think it was John EcoVentures who made the comment around founder learning velocity and speed of iteration as being critical to success. and sitting as something that drives both impact success and commercial success. I think there's some really interesting kind of shared traits and overlap there, as well as perhaps some areas within the impact ecosystem where those two things can sit in tension and finding the places where they reinforce is really where a lot of the value is.