Building an Impactful Portfolio

Posted: 3 Oct 2023

Global macro issues like wealth inequality, mental health, obesity and financial inclusion currently loom large in the minds and hearts of consumers, politicians and the media. In the UK and across Europe these areas have all gained greater attention because of events like Covid-19, climate change, energy prices and the cost of living crisis. Societal challenges are unquestionably getting harder for many vulnerable and disadvantaged communities. But against this backdrop, there’s also a collective drive to tackle these issues like never before.

The venture world is playing an increasing role, with stronger focus being placed on impact investing and ESG – not least because there’s increasing evidence to suggest that impact-oriented businesses drive superior returns. In this two-part blog post series, we’ll unpack our approach to both these areas, kicking things off with Impact.

Investing in the world we want to live in

Investing in purpose-driven entrepreneurs solving some of the world’s big problems has always been a central part of our thesis. A founder’s purpose creates the motivation for them to build a venture-scale outcome, and our evaluation of their passion for solving the problem they are addressing forms a critical part of our investment thesis:

“Founder love is the ingredient that ensures the company will always build a world-class product that solves a genuine problem for their users.”

Our thesis has guided us to back founders that create the world we want to live in and for us, this has resulted in many investments addressing social problems that can be solved at scale through the combination of entrepreneurship, venture scale ambition, digital products, and the profit motive.

Building an impactful portfolio

So, what’s an impact investment? Here’s how the ImpactVC playbook puts it:

“Impact Investments are made with the intention to generate optimal positive, measurable, social and/or environmental impact alongside a financial return. This is achieved by investing in start-ups whose purpose is to contribute to solutions that create positive change – and over time enables and evidences strong impact performance through proportionate impact practice.”

Outside of this definition, all of our impact investments share the same characteristics as our other portfolio companies: they fit our thesis, are product-first, are founded in Europe and are all pre-seed or seed stage.

Examples from our early portfolio (investments made prior to 2019) include:

Formalising our approach to impact

We recently announced our fourth fund and are delighted to have the continued backing of our LP, Big Society Capital (BSC), with whom we first partnered in 2019 in our third fund.

BSC is the UK’s leading social impact investor and since meeting the team, it was clear that we had aligned interests and values. Some of our portfolio companies were already addressing significant societal challenges; it was also clear that many of the new founders we were meeting were increasingly driven by the impact their businesses could have, alongside financial returns.

Partnering with BSC enabled us to formalise our approach to impact investing. We’ve leveraged their expertise to help us implement best practices in evaluating potential impact companies as well as helping those companies assess and measure their own impact.

The BSC team has also played a central role in helping our impact companies develop and build on their own impact theses. BSC is leading the way when it comes to setting out how impact can in itself be a source of value across company design: whether in terms of recruiting and retaining talent, acquiring customers, raising capital or being ahead of the game when it comes to the regulatory curve.

Hayley Hand, Investment Director at BSC, comments “Technology has the power to transform how solutions reach and support those in greatest need. Entrepreneurs are now harnessing that power and building what we believe will be the most successful companies of the future. We are already seeing, in Connect’s portfolio and elsewhere, how this impact focus is a driver of financial value – from acquiring loyal customers who previously had no alternative to attracting the best purpose-driven talent to the business.”

Signs of success

The venture asset class is unique with its remarkably long feedback loops – you can make an investment in year 1 but won’t know the scale of its outcome for many years. That said, we have emerging evidence that our hypothesis on impact venture is already starting to prove itself out, with a number of promising companies emerging. Here are some of the highlights so far:

Changing the paradigm

Achieving significant scale – where a business reaches as many customers as possible – is one of the hardest challenges facing any company. Doing this whilst simultaneously targeting a socially impactful mission has previously been seen as even harder – in the past this meant socially responsible investments underperformed the rest of the market.

Our partnership with BSC and the initial traction our impact companies are experiencing convinces us that this pattern is changing. Founders building impactful, venture-scale companies can deliver outlier returns and outlier positive outcomes for people, the planet and the systems that dominate society today.

What's next?

Stay tuned for the next edition of this series where we’ll tackle ESG in VC.