Impact Due Diligence: The Questions We Ask

By Elizabeth Coston McCluskey

Impact Engine recently published a piece on how to diligence impact in private equity funds. As a follow up, we wanted to share the impact-related questions we ask of ourselves and of prospective companies during our diligence process when making venture investments. This is a reprise of an article we originally published in 2017, with a few updates.

We evaluate specific criteria to make sure each company we invest in is making a sustainable, lasting impact in its designated impact area. We’ve outlined a few of the questions we ask of ourselves and of prospective companies below.

+ How aligned is the impact with our core areas of focus?​ Our focus is on education, health, environmental sustainability, and economic empowerment. When selecting our portfolio companies, we want to make sure we have the experience, resources and connections to provide valuable, effective support for the entrepreneurs we invest in, so alignment is key.

+ How tightly is impact aligned with the business? We make sure that impact is an integral part of each company’s product or service offering, so that impact grows hand in hand with revenue. We want the impact to be very difficult to decouple from the business, and therefore highly likely to survive a corporate acquisition. This means that we do not invest in “buy one give one” models, where revenue generation is separate from impact creation. Ideally, there are not significant trade-offs between impact and financial returns. If a business has to sacrifice margins or profit to generate more impact, it is difficult to scale both successfully.

+ What are the scenarios in which this company can lose its impact focus? We’ve seen many startups that have had to adjust their path based on their early experiences bringing product to market. We fund companies that are committed to impact, but we also think through ways in which a company’s business might be disconnected from impact. Having impact directly tied to the business model helps mitigate this risk.

+ How deeply does the entrepreneur and leadership team care about and understand the problem they are solving? We want each company’s team to understand the social or environmental problem on a larger scale, while knowing exactly how their product or service can be a lever for impacting that problem. We look for founders who deeply understand the problem they are trying to solve and are committed to creating impact through their business. This can come in the form of experienced entrepreneurs, but can also be a first time founder who is steeped in the specific challenge their company is addressing. If we have better answers on impact than the entrepreneur, that’s a warning sign.

+ How much does the impact “matter”? We think about impact along three dimensions: breadth, depth, and access. For example, in the case of an EdTech company, for how many students does the product improve educational outcomes? How meaningfully does it improve those outcomes? And is it serving underserved students within public or charter schools, or does it just reach affluent families at private schools?

+ What evidence is there that the company’s product or service will lead to specific outcomes that matter? For each company we invest in, we develop a hypothesis around how the company creates impact, we identify key performance indicators (KPIs) that measure that impact, and we look for a connection between those KPIs and longer term outcomes. Evidence of outcomes can come from the company’s own examples or credible third-party research, but companies must be able to demonstrate the potential to achieve significant social or environmental outcomes. For example, our portfolio company MyVillage provides a franchise model for in-home childcare providers. Their goal is to improve access to and quality of childcare, which should lead to improved kindergarten readiness. In Illinois, only 16% of low-income students demonstrate kindergarten readiness in three core benchmarks (social-emotional learning, literacy, and math). And research shows an estimated 42% of children in the US live in “childcare deserts.” Therefore, the KPIs we are tracking include the number of children receiving care through MyVillage, including the percentage who are utilizing government subsidies, as well as affordability versus center-based care and parent satisfaction scores.

+ How will the company be able to measure impact — immediately and over time? We select for companies where the product or service they provide aligns with positive impact, and we give a great deal of thought to what companies can measure now and in the future to capture their impact. We discuss with the entrepreneurs what metrics they can collect, striving to balance pragmatism with rigor. Because we have a focus on products that create impact, the impact metrics that our portfolio companies are collecting should be valuable in the sales process as well. Whether it be improved education or health outcomes, economic savings to un- or underbanked customers, or improvements in sustainability, those tangible impacts should translate into an ROI for customers. We also recognize that businesses evolve and their metrics should too. We periodically revisit impact metrics to reflect on whether they still make sense in communicating a company’s impact. If not, we engage with the entrepreneur to determine which ones are more relevant.

+ Who else is at the table that cares about impact? Since we don’t typically lead rounds, syndicate partners are important to us. If a company has another impact investor committed to the round, that tells us that not only is the entrepreneur interested in an impact perspective, but that others who share our motivation are comfortable with the deal. That said, impact co-investors are not a requirement — aligned motivation can also come from board members, advisors, or even customers/channel partners.

Once we have concluded the impact diligence process, we ask entrepreneurs to sign a mutual commitment to impact, signifying their willingness to report back to us at least twice a year on the agreed upon metrics.

Along with our portfolio companies, we are constantly striving to become better at evaluating, measuring and reporting on impact. What other impact evaluation criteria have you seen? Please share!


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