By Gilberto Ribeiro, Partner and COO at Vox Capital
Before talking about impact it is important to provide the context of the journey of an entrepreneur who seeks money from venture capital (VC) funds. In Brazil, the vocabulary for start-ups, scale-ups and VCs is already widespread. Most technology entrepreneurs know the ways of a Lean Startup, know how to test hypotheses with a Minimum Viable Product (MVP), can identify if a product is suitable for the market and can scale business by adjusting its “machines.” The investment terms of a VC are now widespread.
As there is plenty of information on each step of the entrepreneurial journey, the idea is not to repeat these teachings, but rather, to establish parallels and show how the adoption of impact management tools and techniques can be crucial for any business that wants to change the lives of customers and create value for shareholders.
Step 1: Intentionality, identifying motivation
The decision to start a business is not always rational nor does it follow a linear path. What may motivate founders is to “solve some pain” they felt as customers or correct market distortion that afflicts them.
At this point, start-ups usually need capital to validate their problem hypotheses and create prototypes, and MVPs to test whether their first customers and users feel these same “pains.” This is usually the big goal of an angel or pre-seed round.
At such an early stage, the entrepreneur’s focus should be exclusively on this validation. At Vox we say, “the impact of a start-up that doesn’t exist is zero.” This means that if you are not solving anyone’s problem, your company will probably cease to exist soon. So here, our first impact management step is to understand the founders’ motivation, the reason that led them to undertake this journey or, in the jargon of impact investments, intentionality.
It is a subjective assessment, but being clear about your purpose can be powerful; it facilitates your communication with stakeholders, helps mobilize people for the same cause and in hard times helps you remember why you started in the first place. There are several ways to reflect on this, but some techniques can help – such as the Golden Circle by Simon Sinek.
Another helpful way to state your intentions and track your goals is by using the UN’s Sustainable Development Goals (SDGs) framework. The SDGs are a blueprint to achieve a better and sustainable global future through 17 interconnected goals. In this line, Business Call to Action, a global platform for companies hosted by UNDP, provides toolkits and content to help entrepreneurs using the SDGs as a roadmap to measure their success.
Step 2: The search for a product-market fit and the theory of change
Once your customer’s pain is real and that there is a large enough market for people with the same problem looking for a solution, the search for Product-Market-Fit (PMF) begins. At this stage the company’s focus is to develop a product or service that is ) financially viable, has an experience design suitable for its customers, has clear ways of reaching users and solves the pain that the hypothesis test validated.
It is obvious that a start-up product is never “ready” as there is always room for improvement. However, the Product-Market-Fit (PMF) is an important milestone for a start-up because once identified the company can begin to dedicate efforts to scale the solution. Reaching the PMF and showing the first metrics of how this translates into revenue is often the goal of seed investment rounds.
For impact investors, this is also often the time to take the second step in the impact management journey by creating the first Theory of Change. Theory of Change (ToC) is a planning technique that has its origins in the evaluation of public policies and philanthropic interventions. Its goal is to create a map of causal relationships that help the entrepreneur walk the path from where the start-up is today towards the type of change it wants to cause in the world.
ToC is an extremely useful tool for strategic planning precisely because it was created for a context of uncertainties similar to the context in which start-up entrepreneurs live. With it, it is possible to establish dynamic plans (inputs), derive operational indicators and immediate results (outputs), as well as deeper or long-term results in the lives of customers (outcomes) that help guide how well the entrepreneur is making his or her way (impact).
Step 3: Listening to your customer
The third step of impact management is to start listening to your customers. Knowing the client’s reality and how he or she interacts with the solution is one of the ways to speed up PMF and serves as feedback to the ToC design. There are some simple techniques on how to do this in a systematic way.
Step 4: Collecting output data and deriving proxies to impact
With the product/service validated and greater clarity that there is a market for it, the start-up’s new mission is to prove its “unit economics,” that is, to ensure that for each transaction/interaction, each dollar spent to acquire a customer (Customer Acquisition Cost – CAC) generates more value for the company than what was spent to acquire it (Life Time Value – LTV).
A quick internet search will show you countless ways to measure CAC and LTV and the appropriate ratios for these metrics for your business model.
Achieving a good LTV/CAC ratio, showing success in the first hypothesis of traction and scale of the business are the main success metrics of a Series A round.
At this stage, the impact investor can take the fourth step in impact management. Here the company has a clearer picture of the outputs it must follow to ensure that its solution reaches the largest number of people, is viable and has more value than the alternatives available to solve the same problem and reaches the intended audience.
A simple way to organize the gathering of this information is to adopt the 5 dimensions of the Impact Management Project (IMP), a global effort undertaken by more than 2,000 organizations with the objective of creating consensus on what is and how to measure the social and environmental impact of business and investments.
The five dimensions are a comprehensive framework that allows you to track and communicate your impact by assessing what are the outcomes intended by your business, who do they serve, how much of them do you expect to reach, what is the contribution of your intervention in comparison to what would have occurred and what is the risk the impact manifests in a different way than expected?
One way to simplify data gathering to feed the five dimensions of the IMP is to adopt Lean Data, a technique that combines the simplified design customers surveys and the use of technology to make data collection cheaper and quicker.
Step 5: Searching for your outcomes
Problem identified, product tested and viability validated. Generally, growth rounds happen here and start-ups (now scale-ups) can convince investors that each dollar added to their business accelerates the speed with which it grows.
The resources in these rounds (Series B, C and beyond) are used to acquire customers, open new markets, develop new features or products that improve customer service and create barriers to entry for competitors.
Impact investors who have businesses at this stage in their portfolios can take the fifth step in impact management.
What is the value of managing impact?
At Vox Capital we believe that good assessment and impact management increase the value of investments and can contribute in at least two ways to the business:
Firstly by evaluating and gathering evidence of the impact you are generating makes for powerful branding and communication as it reinforces mission and identity, creates differentials in attracting human capital and increases customer engagement. Secondly, if evaluation does not generate satisfactory evidence of impact, it is fundamental feedback for your product development as it helps to understand why it is not meeting customer needs. This allows the impact investor to improve the attributes and quality of the product, reduce the reputational risk of being perceived as social/greenwash and helps make the start-up’s value proposition more competitive.
We know that the journey of entrepreneurship is not always as linear as this post makes it seem, but we believe that by being aware of the maturity of your business and knowing what to do at each stage, it is possible to adopt tools that in the long-run will make impact businesses more valuable for investors and society.