Impact startups and impact investing are logical reactions to the countless global issues we’re facing. While extractive capitalism has played a big role in bringing us here, more and more people realize that we need something entirely different to move us forward. We need alternative business models that not only ‘do no harm’, but create a positive change instead.
The rise of impact startups signifies a shift in mindset, where purpose and profit are intertwined, and businesses take accountability for their impact. The founders and investors take it upon themselves to tackle societal and environmental challenges and create innovative solutions that go beyond profit maximization.
It’s important to note that impact startups are not miracle workers who solve everything; systemic change requires collective efforts from various parties, including governments, corporations, and society in general. However, the rise of impact startups reflects a growing recognition that the existing capitalist models need to be reevaluated and that entrepreneurship can be a powerful force for positive change.
If you believe it’s possible to generate financial returns in a sustainable or even regenerative way, keep reading.
What exactly is an impact startup?
Let’s get one thing clear, an impact startup is still a for-profit company. It has a dual mission to create a positive social or environmental impact AND generate financial returns.
Here are some key characteristics of impact startups:
The mission is the core of their business – their social or environmental impact is not merely nice-to-have, but a fundamental part of their business model, products, or service. They have a measurable impact – impact startups diligently measure their impact to ensure transparency and accountability, as well as constantly improve and scale their impact. Their solution is sustainable and scalable – impact startups go big or go home. They want to offer innovative sustainable solutions that you can apply fast on a large scale for maximum impact (thus the name ‘impact startups’).
Companies like ClearFlame and Zipline have successfully combined their missions with financial success, proving that purpose-driven entrepreneurship can be profitable for both the company as well as its customers, and also lead to a meaningful change.
ClearFlame enables diesel engines to burn renewable biofuels. They recognized that electrifying the fleet is not yet a feasible choice for those operating heavy-duty engines, for a variety of reasons. At the same time, change is needed today (or even yesterday). So they developed a technology that allows existing diesel engines to work on biofuels decreasing the air pollution and demand for fossil fuels. It also saves their customers money since biofuel is cheaper than diesel. Win for the environment, win for road transportation, and win for ClearFlame!
The drone delivery company Zipline focuses on providing medical supplies and blood products to remote areas in Rwanda, Ghana, and other countries with limited access to healthcare facilities. Zipline’s impact-driven approach has gained recognition and support from investors. They recently raised $330 million in funding – an accomplishment ever the great considering the unfavourable market.
What is not an impact startup?
Not all businesses that have a positive impact fall under the category of impact startups. If the sustainability mission is not the core of their business, but rather a PR or charity project that has minimal or uncharted impact, it’s not an impact startup (even if it’s a startup with some positive impact).
For example, traditional businesses or startups may make valuable social or environmental contributions, but if the mission is not at the core of their business, their impact is minimal, or their activities qualify as borderline greenwashing, it’s not an impact startup. On the other hand, nonprofit organizations that have nothing but a mission at their core, but produce no profit, are also not considered impact startups.
Read more: Sustainable startups or greenwashing? An angel investor’s guide to spot the difference
Top 3 myths about impact startups
1. Impact startups don’t deliver financial returns
Some people think impact entrepreneurs are only driven by their cause and lack business sense. They assume that impact startups are synonymous with nonprofit organizations and don’t deliver financial returns. However, as we’ve discussed, impact entrepreneurs combine their passion with strategic thinking and entrepreneurial skills to build both sustainable and successful businesses. Countless impact startups have shown that profitability and positive impact can go hand in hand.
2. Impact startups have limited market potential
Many people think that impact startups only cater to niche or socially or ethically conscious consumers. While ethical consumerism is a significant driver, impact startups target a broader customer base through their innovative products, competitive pricing, and strong value propositions. As we’ve discussed, they aim to solve societal or environmental challenges on a large scale while meeting market demand.
3. The impact of impact startups is questionable
People often think that impact measurement is complex and subjective, questioning the effectiveness of impact startups. While impact measurement can be challenging and we’re increasingly aware of different forms of greenwashing, the field is rapidly evolving. Different impact measurement frameworks and methodologies are emerging to help impact startups provide transparent and verifiable impact data.
Why investing in impact startups is a win for everyone
In conclusion, investing in impact startups is not just a financial decision – it’s a powerful tool to create positive change in the world. By investing in impact startups, you can help actively solve pressing global challenges such as poverty, climate change, healthcare access, and education. You become an agent of impact and contribute to a more sustainable and inclusive future.
The beauty of investing in impact startups lies in its potential for both financial returns and the fulfilment of knowing that your investments are making a difference. It’s also a great way to diversify your portfolio with entirely new industries and business ideas. One might even say, it’s a win-win-win situation, or quadruple-win if also counting the happy customers who get something that benefits them. So, embrace the opportunity to invest in ventures that align with your values, drive innovation, and address critical issues. Together, we can shape a better world and leave a lasting legacy of positive impact for generations to come.
This article belongs to the series that forms Best Practices of Angel Investing Guidebook. Click on the link to gain more knowledge and insights that help you make informed investment decisions and foster thriving startups.