The What, Why, Who and How of Impact Tech VC
The future of venture capital is in impact tech.
Although COVID-19 is posing numerous challenges to the VC world, it is also providing an unprecedented opportunity to rethink how we conduct business, and how we invest.
In our first edition of the Impact Tech VC Landscape (2019), we conducted the first ever deep dive into the impact tech industry. From sizing the market to showing who is investing in impact tech and where, we hope that this study is useful in understanding the gaps and opportunities of a fast-growing investment strategy.
[Access our impact tech VC landscape report here]
WHAT
The global venture capital industry has for decades been an enabler of innovation in the technology space. Yet, impact tech is only an emerging field. Little has been researched about the market trends of technologies who aim to do well while doing good.
At Impact First Investments, we define impact tech as the intentional use of science and technology to benefit people and the planet. When applied to the VC world, impact tech seeks both competitive financial and social/environmental returns. No returns, no success!
A word of caution: the term ‘impact tech’ is neither standardized nor fully embraced by mainstream VCs, who have been slow in adopting impact methodologies (e.g. ESG, SDG) into their operations and investments. But there is no escape: capital owners, especially high net worth individuals and family offices, are pressuring investors to look into sustainable, investable opportunities. It is now a matter of time that other investor classes (e.g. pension funds, sovereign wealth funds, foundations) start allocating capital into impact tech as well.
WHY
According to the UN, addressing the Sustainable Development Goals by 2030 requires an additional $2.5T in capital. Yet, of the current +$500B of impact assets under management, less than 1% is allocated to impact tech venture capital.
The demand for impact assets will only increase: millennials, who will inherit at least $30T by 2030, want more sustainable investment options. Most of this intergenerational wealth will be specifically inherited by women, who are more values-driven in their investment decisions. Given the current market impact demand forces, in addition to the global and scalable nature of technology, a remarkable opportunity lies right in front of our eyes.
The numbers are clear: 2019 marked a new beginning for the impact tech VC industry. In 2019 alone, $2B was invested in impact tech in ~200 deals throughout the funding lifecycle. With an annualized CAGR (dollars invested) of 50% over the last 5 years (as compared to 16.5% for conventional VC), the impact tech industry has the potential to become the biggest share of VC investments by 2025!
Total Capital Invested ($M) and Number of Deals (Impact Tech Startups)
WHO
The new wave of impact investing is reaching brand names all around the world. Shops like TPG or Khosla Ventures have fundraised hundreds of millions of dollars for side impact tech funds that meet the demands of conscious capitalists. Investors are starting to recognize that implementing an integrated profit-impact lens can bring superior returns over legacy finance. For example, Kapor Capital recently published its top-quartile returns (~30% IRR).
More than 3,000 investors around the world have made bets on hundreds of impact tech startups that are addressing social and environmental challenges, while creating profitable and scalable startups. Out of these, around 200 are impact tech venture capital firms. Familiar names in the impact tech industry include: Fifty Years, Better Ventures, SJF Ventures, Impact Engine, and Ananda Impact Ventures, among many others. The number of new impact tech VCs is reflective of an industry that is nascent but growing rapidly.
(Some) Impact Tech VCs
HOW
Our report highlights how investors are allocating dollars into the impact tech industry across different categories: stage, sector, and geography. These are some of the most interesting findings:
- Record number of deals and dollars invested — $2B in 2019 vs. $1.4B in 2018
- Increasing late stage activity 1/4th of deals in 2019 were Series B or later
- U.S. leads the pack — 44% of impact tech deals worldwide were recorded in the United States; India followed at 12.5%
- FinTech is the favorite impact tech theme — there were 37 FinTech deals attracting $500M+ in 2019
- Absence of exits — there are not many recorded exits in the industry yet; corporates are the number one impact tech acquirers
You can access the entire report here.
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Financial markets are moving toward one direction: reimagining how we invest. Especially in these difficult times, social and planet-conscious investments are becoming the “new normal.” With COVID-19, ESG and other impact factors are a key layer of diligence in evaluating investments (Morgan Stanley).
In order to get ahead of the curve, traditional tech VCs have the potential to implement and/or integrate an investment strategy around impact tech that both differentiates them from the crowd and creates value for their startups and LPs. In our next article, we will explore and analyze current impact tech strategies — stay tuned!
This is only the beginning of impact tech venture capital. Join us for the ride!
About the Author: Melina Sánchez Montañés is an entrepreneur in the public, non-profit, and financial sectors. She is an investor at the Tuck Social Venture Fund and Impact First Investments. Melina is also a consultant for tech startups on impact strategy and analysis.
Originally published at https://medium.com on April 30, 2020.
