ESG (environmental, social, and corporate governance) and impact investing have entered the mainstream investment landscape. As more venture capitalists advocate for it, we ask whether impact should always be placed above everything else when it comes to determining investment strategies.
On November 17, we brought together four speakers to engage in a friendly debate on whether all VCs should prioritize social impact.
The proposition team was formed by a partner at a leading impact VC firm and an investor-turned-chief impact officer at a mental health startup. The opposition team was a Gen-Z venture capital associate and the executive director of one of Southeast Asia’s oldest VC firms.
Defining social impact
From the get go, the two sides clashed by disagreeing about the definition of social impact.
Wen Li Lim, chief impact officer at FlourishDx, said social impact is the net effect of an activity in a community, and that we should not just look at it from a macro social perspective, but also consider the well-being of individuals and families.
“The founding team and employees’ mental well-being has a correlated impact on the whole company and all its stakeholders,” said Lim. To maximize the positive impact of an enterprise, VCs also need to attach great importance to individuals’ personal growth.
Ban Shen Ho, associate at Protege Ventures, felt social impact concerns social matters rather than individual-level effects. “When we think about social impact, the topics that come to our minds are usually the likes of alleviating poverty, addressing prejudice, and providing accessible education,” he said.
Impact first, or survival first
While both parties agreed that entrepreneurship and VC investment should try to create the greatest positive impact to society, the proposition team believed the only way this can be accomplished is for investors to put social impact above everything else and implement it from top to bottom.
Venture capitalists have a great role in decision-making and driving impact, said Beau Seil, partner and co-founder of Patamar Capital.
“In order for there to be real change, you have to make sure not only the entrepreneurs care about it, but the venture funds care about it, then the investors of the venture funds care about it,” Seil said.
Placing an emphasis on impact doesn’t mean sacrificing profit and sustainability for VCs and their portfolio companies. Seil mentioned the example of Mapan, a fintech startup that Patamar invested in and was acquired by Gojek in 2017. The company was founded with a vision to provide accessible digital finance solutions to people in Indonesia, and it continues to do that after becoming part of Gojek.
However, taking social impact as the sole investment requirement may result in “impact-washing”, the practice of overstating or falsely claiming the good benefits of a product or service to drive sales. To prevent “impact-washing,” Puiyan Leung, executive director at Vertex Ventures, said VCs should take a pragmatic approach to holistically identify the positive and negative impacts of a company’s business, and determine whether it can scale.
“For any company to scale, whether it’s impact-focused or not, its products and services need to address a range of institutional needs, like maintain a healthy cash flow, address a big enough market size, and have a good market strategy,” Leung said. “Otherwise the company would either not survive, or remain subscale.”
Subsequently, they may find that the level of impact they can deliver is very limited and not meaningful, she said.
Also, it’s hard to put a universally recognized measurement on social impact, which makes it difficult for VCs to calculate the risk and return.
There are already major discrepancies in how this field is evaluated. “The Global Impact Investing Network estimated that the size of the global impact investing market was around USD 75 billion in 2019, while Global Social Impact [an international social investment fund] estimated that the figure was USD 30 trillion,” said Leung.
In the post-debate vote, 55% of the audience voted for the proposition as the winning team, suggesting that our viewers narrowly favor VCs prioritizing social impact over other concerns.