Why You Should Set Up an Impact Startup

What do investors expect from the startups they plough money into? Lots of money back, naturally. But in recent years we’ve seen a significant paradigm shift, with those brandishing big bucks increasingly looking to propel companies that yield a positiveWhat do investors expect from the startups they plough money into? Lots of money back, naturally. But in recent years we’ve seen a significant paradigm shift, with those brandishing big bucks increasingly looking to propel companies that yield a positive societal impact as well as financial returns.

It’s certainly food for thought for tech entrepreneurs, so here’s our quick guide to the lay of the land as it is right now.

Impact startups are companies which are founded to tackle specific societal problems. The important distinguishing aspect is that having a measurable, beneficial effect isn’t just an ‘added bonus’ of operations, but is just as much a motivating factor as making a profit. 

What constitutes an impact startup? A common reference is the UN’s list of 17 Sustainable Development Goals. Described as a ‘shared blueprint for peace and prosperity for people and the planet, now and into the future’, they were set out in 2015 and include such ambitious aims as ‘no poverty’, ‘zero hunger’, ‘gender equality’, ‘affordable and clean energy’, ‘sustainable cities and communities’, ‘climate action’, and ‘responsible consumption and production’. 

So, if you found a company with the goal of tackling any of these issues, chances are you’ll be heading up an impact startup. 

As Luisa Alemany of the London Business School’s Institute of Entrepreneurship and Private Capital, said last year, ‘Impact investing has come a long way since its start in the late 90s when it was considered more of a philanthropic endeavour until investors realised these investments could deliver not only a social benefit but also a financial return.’

In other words, what was once regarded as a more tangential concern for investors has become a significant pathway for entrepreneurs to access capital. This isn’t simply down to unexpectedly idealistic thinking on the part of hard-nosed financiers – it’s about the bottom line. Thanks to a general values shift among consumers – particularly millennials and Gen Zers – companies making a positive impact stand to attract loyal customers and ongoing revenues. 

This was highlighted by a recent study by global communications firm Porter Novelli in which 71% of consumers surveyed said they’d prefer to buy from purpose-driven companies over alternatives, all other things being equal. Another study, by PwC, has shown that those in the millennial and Gen Z cohorts are likely to actively assess the ethical credentials of brands on social media. 

Such trends are reflected by the growth of the impact-investing market in recent years. For example, a 42% surge in the impact-investing market was seen between 2019 and 2020, while global impact investments from venture capital in 2021 totalled $64.1 billion.

Certain parts of the world have become known for being very fertile grounds for impact startups. The Nordics, for example, saw $5.5 billion in impact investment in 2021, while in the first half of 2022 more than 26% of VC investment flowed to impact companies – a considerably higher percentage than other parts of Europe and the US. 

Sweden has a particularly impact-friendly ecosystem. Its capital, Stockholm, is second only to Silicon Valley when it comes to billion dollar companies per capita, and benefits from a high concentration of VC firms and angel investors, as well as enterprise support from government-run agencies. And, as the former Stockholm mayor Anna König Jerlmyr has said, it’s been actively encouraging ‘the development of more sustainable solutions and technologies’.

A major impact startup success story in Stockholm is Northvolt, which produces lithium-ion technology for electric vehicles and became Europe’s highest-funded clean energy startup over the course of just five years. Another is ClimateView, whose ClimateOS platform helps local governments make the make the transition to net zero. It raised almost $10 million in Series A funding last year.  

The UK is another impact tech hub, with startups in this space raising £2 billion in investment last year – up from £1.7 billion the year before. Indeed, impact investment shot up by 127% between 2018 and 2021. Budding impact entrepreneurs certainly don’t need to make a beeline for London, with half of the country’s impact unicorns being based outside the capital in cities like Sheffield and Bristol.

These unicorns include the green energy supplier Octopus Energy and healthtech firm BenevolentAI, which designs predictive AI tools for the clinical setting in order to ‘build a healthier world in which no disease goes untreated’. 

So far, impact investing has largely favoured startups tackling climate issues and providing clean energy. However, it’s likely that firms specialising in the many other UN Sustainable Development Goals, such as those regarding social issues like gender and income equality, will see more attention in the months and years to come. 

See, for example, the recent creation of the Schroder BSC Social Impact Trust, which is partly backed by leading impact investor Big Society Capital. The fund targets ‘organisations who use all their resources to contribute to solutions to social challenges such as homelessness, mental health, unemployment and fuel poverty.’ 

It’s also worth noting the skyrocketing interest in the Environmental, Social and Governance credentials of companies. As discussed in Hampleton’s newest sector report, careful assessment of ESG reports is now part of the screening process for investors as they weigh up risks and opportunities. This is an indicator of the way the wind is blowing, and that wind will fill the sails of companies that don’t just fulfil ESG criteria, but actively put social good front and centre of what they do. 

As tech veteran Jack Mardack has written, ‘My advice for today’s founders is you want to put yourself in this asset class. Be intentional. Be creative. This world is far from perfect and that is your opportunity… Now is a time for the boldest of visions and for creating business models that align well with positive impact.’