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Venture Capital’s Place In Impact Investing Jigsaw

Kjartan Rist, 14 February 2019

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Impact investing is on the rise, but is it the only way to ‘make an impact’ with your cash?

Impact investing – putting money to work to achieve non-financial and financial results – is a popular talking point in today’s wealth management arena. What are effective ways to put impact investment ideas into practice? There are impact bonds, and equity-style impact investments, or direct stakes in companies and projects that fit into no clear category. In the US, the arrival of Qualified Opportunity Zones, for example, gives a sort of tax-advantaged way to play on this theme. The infrastructure around this investment approach is still evolving. Another area for discussion is what “impact” means – the term can apply to far more than areas such as cutting poverty, crime or illiteracy. Measuring results and gathering data to benchmark performance is going to become ever more important.

Where might venture capital fit in? According to the author of this article, Kjartan Rist, of Concentric (full details below), VC has much to offer, if only because of the size of the sector today. Venture capital has certainly been growing in Europe recently, as well as in Asia, taking a lead from the US, where the sector is oldest and largest. According to latest data from Preqin, the research firm, VC-backed deal making totalled $69 billion in the third quarter of 2018, bringing year-to-date activity to $195 billion, which means the first three quarters of 2018 beat the full-year record of $189 billion set in 2017.

Venture capital, then, could be an important part of the impact investing jigsaw. The editors of this publication are pleased to share these views with readers and invite responses. The editors do not necessarily agree with all views of contributors. Email tom.burroughes@wealthbriefing.com

If you want to invest in a way that makes a positive difference to the world, and delivers healthy returns, then impact investing holds a lot of appeal. Sometimes known as socially responsible investing (SRI), or ESG investing (environmental, social, governance), the idea has taken off in a big way in the last few years, as investors aim for so-called triple-line returns; combining people, planet and profits. 

You can’t knock the sentiment behind the new drive for more ethical investing, or the desire to use funds to have a positive and sustainable impact on society and the environment. However, the rise of impact investing can also be somewhat misleading, suggesting that other forms of investment do not have an impact. Or worse, that their impact is negative. When in many cases, particularly in venture capital, this is patently not the case. 

In fact, look a little deeper and you could say that venture capital investing is the original impact investing, for a number of reasons:

Driving productivity and progress 
The venture capital industry funnels under-utilised capital into areas of the economy where there is greatest demand and opportunity to drive change and progress. In many cases, these areas naturally overlap with those of interest to impact investors, due to the opportunity to solve the problems facing underserved customer groups. For example, Concentric has invested in a new banking service for the unbanked, and a cryptocurrency exchange to bring alternative currencies to emerging markets. These businesses are helping to bring valuable services to those who need them, while at the same time driving productivity, employment and growth more widely. This fits the criteria for an impact investment.   

Life-changing products and services 
VC investment powers products and services that are making life better and cheaper, for people at all levels of society. From taxi apps, that make it easier for people to get from A to B without a car, to online marketplaces that enable sole traders to sell services more easily, these services drive impact by reducing cost, increasing convenience, and enabling a better quality of life. Life-changing products and services that were previously the preserve of only a certain section of society are gradually being opened up to everybody, and VC is integral to making that happen. 

Keeping powerful corporates in check 
Supporting the growth of start-ups is vital to controlling the power of incumbent players, by offering consumers an alternative way of doing things, and simultaneously pushing the whole market to innovate and evolve. Without this influence, the biggest and most powerful organisations would inevitably take advantage of their monopolies to raise prices and become lazy about the service and products they offer in return. This is particularly true in heavily regulated industries that have high barriers to entry such as financial services, insurance or utilities. New players in these sectors can only make a dent with the backing of venture cash but, as we have seen by the wave of challenger banks and insurtechs entering the market in recent years, it works.

Future-proofing the market 
By protecting markets against a failure to innovate and reliance on the old way of doing things, start-ups also help to protect society from new risks and possible “black swan events” as they emerge. From cyber-attacks, to global warming, or geopolitical events such as Brexit, societies and markets constantly face a whole range of threats that could impact key services and the ability of the system to function. By funding a constant stream of innovations and new approaches, VC cash helps to ensure the system remains resilient against these emerging risks. 

rEmpowering individuals 
VCs enable talented and highly skilled individuals to break free from traditional structures, to use their creativity to the maximum and solve new and complex challenges. This may sound like a minor point, but the empowerment of individuals is fundamental to the success of modern economic systems and societies. It works by decentralising power structures and fostering idea generation. And with the emerging technologies now coming to the fore, there has never been a better time to start a business. And the world has never needed talented entrepreneurs more. 

While impact investing should be applauded, we should not become blinkered to the idea that it is the only way that invested funds can make a difference to the world. People and society have a wide variety of needs, and “impact” can be so very difficult to predict or to measure in advance – or even after the event. That is why it is so important for the VC industry to keep supporting a whole range of different types of businesses and sectors, with a whole host of missions and aims. After all, it could be those ideas you least expect that have the greatest legacy.  

About the author

Kjartan has spent the last 20 years working in the technology sector as a founder, advisor, board member and investor. As a founding partner of Concentric, the London and Copenhagen-based venture capital firm, he works with early stage tech businesses (Seed+ through Series A) to support their development and accelerate growth. Investments include Airsorted, Huckletree, PayAsUGym, Pockit, Public.io and Digital Risks. Concentric says it is “passionate about increasing the profile of the European VC sector amongst family offices and institutional investors.”

Prior to Concentric, Kjartan co-founded the venture fund DN Capital and the merchant bank Korral Partners, and has been instrumental in over 60 transactions over the course of his career, as both investor and advisor.

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