Lean screening
For climate or impact investors, assessing the impact of an early-stage company used to be a time-consuming task normally including both founder interviews, and investment team members skilled in impact metrics, frameworks and theories. If you want to screen hundreds, or as is the reality of many - thousands of companies throughout a year - it means putting in thousands of manual hours.
At NorthStar, we have reduced that initial first impact screening to seconds. With the recent add-ons to the “augmented analysis” in our application the first impact assessment is available immediately. It will give you the initial information you need to decide if the impact matches your mandate. It is matched with the business models, corresponding SDGs, signals of impact intentionality evidenced by the team, as well the “Theory of Change'' you should expect the company to have. Together with an impact summary, this arms you with relevant information making the first interview into a deep-dive DD.
Impact Power Law
Impact and climate investing is fundamentally about picking the few winners amongst a limitless haystack of startups and experiments trying to solve problems. If the problem is real and big enough, there should never be a compromise or trade-off between profits and impact. There should be a direct correlation between market size, business model, and potential impact. If the company succeeds, people and the planet succeed. Meaning that you need to look for the same scalability in the impact indicators and KPIs as for the business model and technology.
False impact negatives?
Impact and climate investing is fundamentally about picking the impact winners amongst a limitless haystack of problem solving startups. If the problem is big enough, there should not be a compromise or trade-off between profits and impact. What we particularly look for is the direct correlation between market size, business model, and impact. If the company succeeds at scale, large problem are solved - at scale. Ideally you should be able to identify the same scalability in the impact indicators and KPIs as for the business model and technology.
The winners in your portfolio will drive most of the impact, and the impact ideally follow the same “Power Law” distribution, and are as scalable as the profit. Identifying that scalability early is crucial to not spend time on “false positives” - deals looking good turning out to be bad. Even more important is not dismissing “false negatives” - deals not identified as relevant by the investment team, or in the early screening, and later turning out to be the winners. The latter is also the most expensive mistake to make for any VC, as the cost of a false negative is x times the cost of a false positive. As such, biases, incomplete information, or inexperienced team members risk missing impact opportunities. It hurts the overall impact and it cuts both your profit and impact-adjusted carry.
The impact analysis at an early stage is crucial to quickly get this right and reduce the likelihood of losing out on “false negatives” - or spending too much time nurturing “false positives”.
Regulations, reporting, and carry.
There is by nature limited data available for early-stage startups, and this goes for impact assessments as well. Meaning the hard job is looking for predictors, proxies, signals, and indicators that may form a rough idea of what their intention and ultimate positive impact is.
The benefits
If your fund ambitions aim to comply with the SFDR Article 9 requirements, or if you have impact measures as part of your carry, you need to sort the unstructured impact data from the pre-seed stage. The flip side of being able to do this in the early screening process, is being better prepared for setting up the reporting structure afterwards. You already get an augmented idea of their ToC, their impact KPIs, and a clear idea of the intentionality signals they send to other impact investors. You can advise and support their messaging, and help them structure their impact facts, and impact management plan with a solid foundation to build upon.
Surfacing this early knowledge of their impact, allows you to actively guide, support, showcase and influence during the early construction stage of your portfolio companies at an early stage with limited resources-
More to come
Since The Power Law distribution of your funds impact is as ambitious, as it is for your profits, we take pride in making better impact assessments and expect these features to be even more targeted going forward. It means you will be quicker and more precise at impact assessing, shaving off weeks of screening work, and both reducing risks of missing out, as well as getting better at documenting the impact from the get go.
(The back end of the impact assessment was developed by our development partner Bakken & Bæck)