What is impact investing and why it's not charity
Too often founders are fixated with “making a difference” whether it be social or environmental and miss the mark on delivering the financial returns that every investor expects. So how do you find the right balance and meet your customer’s needs?
Funding the future of food is no longer a “nice to have, it’s a must have”. The growing need to deal with the environmental and social problems we face is shaping a burgeoning sector: impact investing, that’s caught the attention of global investors with a whopping $20billion market in Australia alone.
The asset pool has risen 250% in the last two years and is trending upward. Seizing the value of this ever-growing capital is exciting but often misunderstood. So, what does impact investing really mean for the future of food, how is it different from other forms of investment and where should startups channel their energy?
Industry heavyweights, Michael Dean, founding partner of AgFunder, Sarah Nolet, co-founder of Tenacious Ventures, Rachel Yang, investment manager of Giant Leap Fund and Kylie Frazer, co-founder of Eleanor Ventures got together to break down the basics: what it is, how it’s measured, and why the model is key in solving our greatest agrifood challenges.
With $15million under her belt, Rachel Yang, investment manager of Giant Leap, Australia’s first 100% impact fund, is the go-to for deal flow and knows what works for startups and what doesn’t.
Rachel puts it plainly. “Impact investing is really investing in assets with the intention to generate a positive, social or environmental impact alongside financial return. So not trading off one for the other and looking at a way to have both.”
While the definition varies depending on the investor and what type of return they’re looking for, the equation of balancing impact and delivering financial returns is the key message. Rachel calls this blending, where the returns are just as powerful as the measurable social and environmental benefits.
The measure of impact investment
How impact is measured differs between funds, but each follow a set of rules or filters to determine risk and performance – and equally ensure alignment to its business goals.
“The beauty of impact investing is it’s a lens, not an asset class.” Firstly, people should understand what impact means to them, Rachel said. Once this is clear, there is ample offering for startups to seek capital, whether it be a venture capital fund, an angel network, which pools capital through crowdfunding platforms, or a broader fund like Impact Investment Group.
Sarah Nolet, co-founder of Australia’s first dedicated agrifood tech venture capital firm, Tenacious Ventures, strongly agrees with this approach. “When we look at investing in a company, if achieving impact would be at odds with achieving returns, then we say impact isn’t baked into their DNA.” Therefore it doesn’t pass our filter, Sarah added.
“We would never want to end up with a situation where the impact is coming at expense of the returns or vice versa. We really want those things to be aligned as the company grows.”
No matter what investment type, at the end of the day – “We’re all here to make money,” Kylie Frazer, explained who founded the angel network, Eleanor Venture. She is regularly asked, “Whether impact investing is a form of philanthropy?” Her answer is no.
Closed loop business models unlock “big value”
Giant Leap and Tenacious Ventures’ recent co-investment in Canberra based waste management business, Goterra is a prime example of a closed loop solution that ticks the boxes, which unlocks “big value” for investors including: opportunity, company, team, business model and impact.
The founder, Olympia Yarger breeds Black Soldier flies to consume organic waste that’s converted into livestock feed, diverting tonnes of landfill and saved emissions. “We were really excited about the kind of nuanced understanding of how a biological process could help to solve a really big problem and how technology could enable that.”
Sarah defines impact as helping agriculture transition to a carbon neutral and climate change resilient future – and now is an opportune moment with more capital entering this space.
“In the last six to nine months Australia has seen talent from other industries and founders from outside of agriculture looking to agrifood innovation to invest or start companies.”
Top tips for startups to cash in on capital:
1. Live and breathe your customer’s world
Not unlike a software company, agrifood tech startups must be completely obsessed with their customer, Kylie said, to better understand the nuances and deliver solutions to real problems that add value and result in adoption.
“If you don’t have customers, then you can’t have the impact that your business has set out to have,” Sarah said. “To get customers, you really need to be solving their problem and speak their language and that takes living and breathing their world and getting out and experiencing it firsthand.”
Michael Dean, founding partner of Silicon Valley and Singapore based venture capital firm, AgFunder agrees, “It’s super crucial to understand who your customer is and what problems they’re facing and really drill in on that.”
2. Passion is important but the pitch needs to add up
“We as investors look for that passion and the real, get up out of bed everyday drive, to solve that problem,” Sarah said. But you need to explain how you’re going to do it.
“We see pitches, unfortunately, probably too frequently that have all of the passion and the big problem, but not enough clarity on how they’re actually going to solve it.”
Michael said, “We see so many nice to haves and not many must haves. And that’s really what’s going to make a business big.”
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Opportunities for impact
From robotics to vertical farming, plant-based plastics and smart city approaches looking for circular economies, Michael sees ample opportunities to be impactful.
Earlier this year AgFunder launched its own impact investment fund GROW, dedicated to nurturing the next generation – of at least 60 – agrifood tech startups globally. GROW has invested in a line up of transformative startups shifting the needle for agrifood tech innovation, including Kenny Ewan’s WeFarm, an online information tool for small scale farmers in East Africa, seeking local agronomic advice to solve problems together.
“Fast forward a couple of years and they’ve got over two million active users and introduced a proper marketplace where farmers are able to purchase inputs, even household goods.”
The impact for growers has been immense, Michael added with greater access to better quality seed and fertiliser crop yields and wealth has accelerated. “They’re able to connect with people who can help sell their produce too – so their lives are better in many ways.”
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In Australia, it’s a whopping $20 billion market.
But, what does impact investing really mean for the future of food, how is it different from other forms of investment and where should startups channel their energy to cash in on this capital?
We teamed up with industry heavyweights to find these answers;
- Michael Dean – Founder of AgFunder
- Sarah Nolet – Co-Founder of Tenacious Ventures
- Rachael Yang – Investment Manager of Giant Leap
- Kylie Frazer – Co-Founder of Eleanor Venture
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