Measuring Impact has become a major challenge for impact investors.  The main reason is that for all their good intents, organizations that develop impact metrics ultimately end up trying to fit a square peg into a round hole.  Impact metrics systems struggle to compare apples and oranges in order to demonstrate that the social and environmental benefit can be measured in the same way that financial benefits can be.  As our Impact Landscape canvas shows, “impact investing” is not a vertical market. It is futile to try to compare the metrics for bringing education vs. clean water to a community. Both are important and someone will focus on each.  Ultimately, the metrics for both must be different. 

A lot of great work has gone into developing metrics for impact.  There are templates, sample measurements within various verticals, and thoughtful approaches to measuring impact without drawing too much energy away from the impact organizations whose outcomes are being measured.  

Our metrics thesis is not superior to nor a replacement of other metrics. We appreciate the values and intents behind GIIRS, B Corp Certification, IRIS, Guide Star, SOPACT (Actionable Impact Management), GRI and the SDGs, as well as gender lens metrics, diligence metrics, reporting metrics, performance metrics and others.  These are all great frameworks for a Rockies Impact Fund portfolio company to use in determining the best key metrics for themselves to use, along with their investors and stakeholders, to guide their actions.

Regardless of the metrics system used, one important principle is to think of metrics as something that happens on the front-end of a transaction, not just one of measuring whether the outcomes were successful or not.  Students of business process will remember the revolution that occurred in American manufacturing when W. Edwards Deming studied manufacturing process and found that in the 1950’s people were engaging in “quality control” by culling out the defects at the end of the manufacturing process.  He envisioned building quality in from the beginning of the process and greatly improved efficiency of American manufacturing.

What if we applied those same principles to impact investing metrics?  Instead of making investments and waiting to see if they produced the outcomes we had hoped for, we build impact metrics in from the beginning?

We view metrics in two ways.

Inbound Metrics – Is it an “Impact Investment” According to our Thesis?

Impact companies do not always present themselves with an “impact” label and it is important for us to be able to determine which companies from the flow of deals will qualify as “impact” investments. As such, we expect many companies approaching the Rockies Impact Fund and qualifying for investment will not need to present themselves as “impact companies”.  They may be focused on health, education, environment or other impact causes, but they present themselves primarily as a business enterprise. Because of this and because the Rockies Impact Fund will invest across multiple markets ranging from healthcare to education to agriculture, the Fund’s managers do not arbitrarily choose any one system to measure whether something is an impact investment or not.  Most existing impact metrics systems have a hard time telling us whether it is better to invest in a company that can provide education to one hundred students or to provide clean water to those same people. Instead the Fund’s Management uses a simple version of metrics based on Utilitarian Ethics founded by 17th century philosopher Jeremy Bentham[1] in which the moral choice was one that benefited “the greatest number of people with the greatest good.”  Rockies Impact Fund managers have added a venture capital twist to make it a three-fold metric that includes “…at the greatest financial return.”

The Rockies Impact Fund intends to measure each incoming opportunity against these three criteria of number, impact and return, each scored on a one to ten scale.  A company needs to have a score of 19 or greater, without a large standard deviation among the three scores to qualify for investment. For example, in the “financial return” category, potential for a 10X return in five years falls at “7” on the one to ten scale.

IMPACT
ASSESSMENT
SCALE
# of peopleDepth of ImpactFinancial
Return
(Multiple)
1UnknownNegativeNone
2TensNone0-1
3HundredsVery Low2-3
4ThousandsLow4-5
5Tens of thousandsLow Medium6-7
6Hundreds of thousandsMedium8-9
7MillionsHigh Medium10
8Tens of MillionsHigh20
9Hundreds of MillionsVery High30
10BillionsCritical50+

Rockies Impact Fund’s managers have evaluated their past investment portfolios and have found that approximately fifty percent of the portfolio companies under management in the Rockies Venture Fund I (32 investments) and Rockies Venture Management (40 investments) would qualify under these measures as being Impact Investments. The Rockies Impact Fund will invest in impact opportunities using these metrics where companies qualifying score at 19 points or greater.  Our goal is to create consistency in determining the amount of impact so that investors and Limited Partners can calibrate with a scale that is understood to all.

By “beginning with the end in mind” we believe that we can maximize social and environmental impact in the investments we make.  With a clear path to outcomes and pre-established metrics, we can create an “Impact Proforma” that we use just like the financial proformas that model future revenues and expenses for a Venture Capital Portfolio company.  By using the impact proforma we can help companies to adjust their strategies to maximize impact while also pursuing 10X investment returns.

Post-Investment Metrics – Is the Company’s Execution Creating Good in the World?

We develop post-investment metrics for each portfolio company based on their Primary Impact.  We use guidelines from existing metrics systems such as GIIN’s IRIS+ Thematic Taxonomy (Global Impact Investing Network) which provides suggested metrics for many, but not all impact types. 

We’ve struggled, as many have, to develop or select an existing single set of metrics for impact companies which we believe is impossible. One simply can’t use the same metrics for edtech and agtech and metrics that CAN be applied to both, would be Secondary metrics about how the company operated, thus ignoring the most import Primary impact output that the company creates. At the end of the day, we’ve determined that each company needs to set its own metrics for impact as a part of the Key Performance Indicators (KPIs) that they measure on a regular basis as a part of managing their business. That being said, using a consistent set of metrics, when available, such as IRIS+ can be useful, ultimately, each company has its own outcomes that it tracks and by focusing on Primary Impact, investors will settle on investment metrics that are based on the individual company’s outcomes.

So, for example, a company that uses telemedicine to reduce the cost of healthcare by keeping people out of emergency rooms and to increase access to health care by underserved and rural populations might set about measuring:

●        Number of people diverted from the emergency room (and the cost savings because of that)

●        Number of people in rural communities served.

●        Number of other underserved communities who gain access to healthcare.

Because the Rockies Impact Fund focuses on Primary Impact, these mission specific metrics make sense.  Each company is creating good by what it does when it carries out its mission. Additionally, these company-specific metrics are also their commercial raison d’etre, and thus, should be measured as part of their commercial KPIs even if they are not demanded for by the Fund.

The Sustainable Development Goals categories, for example, provide a good framework for understanding the scope of most impact investments. The metrics that fall under these categories will be well understood among investors who are analyzing various investment opportunities.  The Rockies Impact Fund’s management finds these categories to be useful and comprehensive and therefore we strive to work within this framework, while measuring each investment individually.

At the end of the day, impact investors want both a significant social and/or environmental impact, plus market rate returns.  Impact investors who develop inbound metrics find that they are investing in companies that create significant outcomes which can be modelled using an impact proforma.  Others who invest based on passion and cause alone may find that the impact they create is not as great as they had hoped.

We’ve known for years that Colorado has more startups per capital than anywhere else.  Yes – per capita.  It’s a great location to start up a company and maybe you’re wondering if there’s a Venture Capital infrastructure to support that?  Well, now there’s incontrovertible evidence for Colorado’s leadership position in MicroVCs and it all comes down to … beer.

Just check out this CB Insights research relating MicroVC Tech Deals to Microbreweries.  That’s right – the more microbreweries you have, the more MicroVC deals you get.  And take a look at Colorado’s number 3 position in Microbreweries – what does that tell you?

 

Yes – a vibrant MicroVC community is brewing here in Colorado.  We’re seeing a huge influx of MicroVC and NanoVC funds as the state begins to mobilize its local capital to support its burgeoning startup community.

Ok, maybe that’s just a facetious stretch of statistical comparisons – but there is definitely a rapidly moving trend in Micro Venture Capital and Colorado is feeling the benefits of new sources of capital coming on-line!

This trend mirrors a national trend in increasing Micro VC firms.  Following the drastic drop in VC firms from over 1000 to just over 500 after the economic downturn in 2008, MicroVCs have flourished.  There were fewer than fifty active MicroVCs in 2011 and today there are over 550 in the U.S. A tenfold increase in just a few short years and many of them are in Colorado.

MicroVC is changing the venture investing landscape and is responding to the needs of startups who need small amounts of capital to prove their product market fit and grow big.  MicroVCs offer a scale that the big firms can’t efficiently provide and they get companies up and going quickly and efficiently.

MicroVCs aren’t just for small companies though.  Check out these results from MicroVCs who are growing a new crop of Unicorns (private companies with valuations of $1B or greater)  It’s not just the big funds that are hitting the grand slams – the Micro’s are slamming it home as well.

MicroVCs are creating a huge impact in the startup world and Colorado is the place to see this transformation taking place on a rapid pace.

You can learn more about MicroVC, NanoVC, and how accelerator VC funds are changing how startups get funded, and how angel investors can get involved in new ways previously unavailable to them.  You’ve got just a few days to sign up for the Colorado Capital Conference coming up November 6-7, 2017 in Denver, CO.

Visit www. coloradocapitalconference.org for more

information and to register.

The conference is hosted by Rockies Venture Club, the longest running angel group in the U.S.  Membership is NOT required to attend the conference, but if you’re an entrepreneur or angel investor, this would be a good time to look into the savings that RVC members enjoy on conferences, angel groups, workshops, masterminds and classes.

 

 

 

 

 

 

 

 

 

 

 

 

Rockies Venture ClubAs the cost of starting a tech company has gone down, VCs have moved upstream, funding bigger and bigger deals while angels and angel groups have taken up the sub-five million funding space. Meanwhile, accelerators and platforms have also taken a place with funds to jump start companies going through their programs.  MicroVCs are venture capital firms with assets under management of less than $100,000,000.  That sounds like a pretty big fund to angel investors, but in the big picture venture capital world, these truly are micro venture capital funds.

MicroVCs have taken on a huge role in filling the gap between seed and angel funding and big scale unicorn-track venture funding.  If you think about basic fund structure, a $100 million fund will invest about half of committed capital, or $50 million into its first round investments.  The fund will want to diversify to twenty or more investments, so you might see an average of $2 million for a first round.  Then they’ll have the remaining $50 million to continue investing in the top winners from the portfolio.  $2 million is a great amount for a post-angel round, but is far less than the $10 million that an average VC deal is doing today.

The MicroVC area is more understandable if we look at what kind of entities fill this space. There are sub $25 million funds, also known as NanoVC Funds which operate very differently than $100 million funds.  Then there are the accelerators which are actually MicroVCs.  Also, more and more angel groups are creating funds (Like the Rockies Venture Fund) and are moving upstream a bit to do larger deals.  Finally, angel groups are syndicating actively, so they can move into larger and larger deals.  Some examples of the power of angel groups leveraging their investments by working in syndicates include Richard Sudek’s work at Tech Coast Angels who syndicated a $10 million raise via syndication and similarly Rockies Venture Club Participated in a Series F syndicate for PharmaJet locally.  These are not deals that we would typically expect to see angels playing in.  This means that angels, when working together can start filling the space occupied by the MicroVCs.  Rather than competing, we’re seeing angels investing alongside MicroVCs at an increasing pace.

There are other considerations, however.  MicroVCs will typically hold back half of their fund for follow-ons, while angels are less predictable and many still use a “one and done” approach to their investments.  Even with MicroVC follow-on investment of up to $10 million, this is still not enough to propel some companies to the scale they’re shooting for, so they’ll still need to engage with traditional VC once they get big enough.

Angel investors should help startups to figure out their financial strategies so that they can work on building relationships with the right kinds of investors from the beginning so that they don’t paint themselves into a financial corner by working with the wrong investors.  Similarly, startups need to understand the goals of any type of VC so that they don’t waste their time barking up the wrong tree.

 

To learn more about the evolving role of MicroVCs, consider attending the RVC Colorado Capital Conference.  It’s coming up November 6-7th in Denver, CO.  Visit www.coloradocapitalconference.org for more information on speakers and presenters.  This event is on of Colorado’s largest angel and vc investment conferences of the year and there are great networking opportunities.   We hope that  the audience will come away with an idea about how all these types of capital are evolving and the different strategies that companies can take in choosing who they want to pursue for their capital needs.

Peter Adams

Managing Director, Rockies Venture Fund I, LP
Executive Director, Rockies Venture Club, Inc.
 Buy Venture Capital For Dummies on Amazon

 

alternatives to venture captialVenture capital is a great solution to many startups’ finance problems, but it’s often not the best solution and, even when it is the best solution, it often works best as a part of a suite of financial solutions rather than a silver bullet that solves everything in one move.

Venture capital, including angel investment, is the most expensive type of capital out there. So why would so many people be intent on going for the most expensive option when others exist?  A typical VC is looking for a return of 60% or greater on their investment – compounded annually.  That means that at three years they want 4X. At five years it’s 10X. At seven years it’s 25X and at 10 years it’s a whopping 100X return on investment.  All of these are 60% compounding returns.

Venture capitalists need big returns to help offset their big risks.  About half of their investments might result in a complete loss of invested capital, so they need to have investments capable of being home runs in order to pay for all the losers.

There are different ways to create a capital strategy for startups who want to both grow fast, but minimize dilution and reduce the cost of capital.  Rather than using just one very expensive type of capital for their startup, they may use a suite of different sources that are appropriate to the phase of development.

Early Stage – Before VC

Early stage companies have many sources of capital available to them, even if they don’t know it.

SBIR (Small Business Innovation Research), Advanced Industries Proof of Concept and many other federal and state grants are available for early research and proof of concept.  Often these are expensive research projects whose risk is much greater than can be justified even for venture capital.  Startups that use these sources of funds can increase their value and decrease their technical risk without any dilution to the founders.

Another source of early stage funding comes from specialty service providers.  Attorneys and CPAs will often defer compensation or work out an equity deal in exchange for early work.  You might be able to get your patent filed for zero out of pocket costs using this kind of deal.

In Revenue

Companies that are in revenue have lots of new non-VC sources of funding available.  Consider accounts receivable finance to cover your rapidly growing need of cash to carry AR through thirty to ninety days before it gets paid.  Some lenders will even lend on purchase orders so you can get the capital you need to buy the components you need to build your product.

If your product is a SaaS (Software as a Service) platform, then your cost of goods is going to be people, not product.  Consider using Equity Compensation for all or part of your payment to your developers.  There are both individuals and development companies who will swap a portion of their compensation for equity.  You’ll need to have a good handle on your valuation, but why not give equity directly to your developers rather than give it to VCs who give you cash which you then turn around and give to developers?

So, there are many more types of finance options available to you than can be described here.  The main point to remember is that you are not required to use just one mode of funding.  Look at all of the available sources and design a suite of solutions that provides the best solution to your situation.

To learn more about how to use creative funding along with venture capital, or instead of it, consider attending the RVC’s Colorado Capital Conference November 15-16, 2016.  If you’re not in Denver on those days, you can register to participate in the conference via live-feed.

More information and registration at www.coloradocapitalconference.org

Colorado Capital Conference

 

 

 

Peter Adams

 

Peter is Executive Director of the Rockies Venture Club, Managing Director of the Rockies Venture Fund and teaches in the Colorado StaVenture Capital for Dummieste University MBA Program.  Peter is co-author of Venture Capital for Dummies, (John Wiley & Sons 2013) Available at Amazon, Barnes and Noble and your local book store.

 

 

 

 

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