Measuring Impact has become a major challenge for impact investors. The main reason is that for all their good intents, organizations that develop impact metrics ultimately end up trying to fit a square peg into a round hole. Impact metrics systems struggle to compare apples and oranges in order to demonstrate that the social and environmental benefit can be measured in the same way that financial benefits can be. As our Impact Landscape canvas shows, “impact investing” is not a vertical market. It is futile to try to compare the metrics for bringing education vs. clean water to a community. Both are important and someone will focus on each. Ultimately, the metrics for both must be different.
A lot of great work has gone into developing metrics for impact. There are templates, sample measurements within various verticals, and thoughtful approaches to measuring impact without drawing too much energy away from the impact organizations whose outcomes are being measured.
Our metrics thesis is not superior to nor a replacement of other metrics. We appreciate the values and intents behind GIIRS, B Corp Certification, IRIS, Guide Star, SOPACT (Actionable Impact Management), GRI and the SDGs, as well as gender lens metrics, diligence metrics, reporting metrics, performance metrics and others. These are all great frameworks for a Rockies Impact Fund portfolio company to use in determining the best key metrics for themselves to use, along with their investors and stakeholders, to guide their actions.
Regardless of the metrics system used, one important principle is to think of metrics as something that happens on the front-end of a transaction, not just one of measuring whether the outcomes were successful or not. Students of business process will remember the revolution that occurred in American manufacturing when W. Edwards Deming studied manufacturing process and found that in the 1950’s people were engaging in “quality control” by culling out the defects at the end of the manufacturing process. He envisioned building quality in from the beginning of the process and greatly improved efficiency of American manufacturing.
What if we applied those same principles to impact investing metrics? Instead of making investments and waiting to see if they produced the outcomes we had hoped for, we build impact metrics in from the beginning?
We view metrics in two ways.
Inbound Metrics – Is it an “Impact Investment” According to our Thesis?
Impact companies do not always present themselves with an “impact” label and it is important for us to be able to determine which companies from the flow of deals will qualify as “impact” investments. As such, we expect many companies approaching the Rockies Impact Fund and qualifying for investment will not need to present themselves as “impact companies”. They may be focused on health, education, environment or other impact causes, but they present themselves primarily as a business enterprise. Because of this and because the Rockies Impact Fund will invest across multiple markets ranging from healthcare to education to agriculture, the Fund’s managers do not arbitrarily choose any one system to measure whether something is an impact investment or not. Most existing impact metrics systems have a hard time telling us whether it is better to invest in a company that can provide education to one hundred students or to provide clean water to those same people. Instead the Fund’s Management uses a simple version of metrics based on Utilitarian Ethics founded by 17th century philosopher Jeremy Bentham[1] in which the moral choice was one that benefited “the greatest number of people with the greatest good.” Rockies Impact Fund managers have added a venture capital twist to make it a three-fold metric that includes “…at the greatest financial return.”
The Rockies Impact Fund intends to measure each incoming opportunity against these three criteria of number, impact and return, each scored on a one to ten scale. A company needs to have a score of 19 or greater, without a large standard deviation among the three scores to qualify for investment. For example, in the “financial return” category, potential for a 10X return in five years falls at “7” on the one to ten scale.
| IMPACT ASSESSMENT SCALE | # of people | Depth of Impact | Financial Return (Multiple) |
| 1 | Unknown | Negative | None |
| 2 | Tens | None | 0-1 |
| 3 | Hundreds | Very Low | 2-3 |
| 4 | Thousands | Low | 4-5 |
| 5 | Tens of thousands | Low Medium | 6-7 |
| 6 | Hundreds of thousands | Medium | 8-9 |
| 7 | Millions | High Medium | 10 |
| 8 | Tens of Millions | High | 20 |
| 9 | Hundreds of Millions | Very High | 30 |
| 10 | Billions | Critical | 50+ |
Rockies Impact Fund’s managers have evaluated their past investment portfolios and have found that approximately fifty percent of the portfolio companies under management in the Rockies Venture Fund I (32 investments) and Rockies Venture Management (40 investments) would qualify under these measures as being Impact Investments. The Rockies Impact Fund will invest in impact opportunities using these metrics where companies qualifying score at 19 points or greater. Our goal is to create consistency in determining the amount of impact so that investors and Limited Partners can calibrate with a scale that is understood to all.
By “beginning with the end in mind” we believe that we can maximize social and environmental impact in the investments we make. With a clear path to outcomes and pre-established metrics, we can create an “Impact Proforma” that we use just like the financial proformas that model future revenues and expenses for a Venture Capital Portfolio company. By using the impact proforma we can help companies to adjust their strategies to maximize impact while also pursuing 10X investment returns.
Post-Investment Metrics – Is the Company’s Execution Creating Good in the World?
We develop post-investment metrics for each portfolio company based on their Primary Impact. We use guidelines from existing metrics systems such as GIIN’s IRIS+ Thematic Taxonomy (Global Impact Investing Network) which provides suggested metrics for many, but not all impact types.
We’ve struggled, as many have, to develop or select an existing single set of metrics for impact companies which we believe is impossible. One simply can’t use the same metrics for edtech and agtech and metrics that CAN be applied to both, would be Secondary metrics about how the company operated, thus ignoring the most import Primary impact output that the company creates. At the end of the day, we’ve determined that each company needs to set its own metrics for impact as a part of the Key Performance Indicators (KPIs) that they measure on a regular basis as a part of managing their business. That being said, using a consistent set of metrics, when available, such as IRIS+ can be useful, ultimately, each company has its own outcomes that it tracks and by focusing on Primary Impact, investors will settle on investment metrics that are based on the individual company’s outcomes.
So, for example, a company that uses telemedicine to reduce the cost of healthcare by keeping people out of emergency rooms and to increase access to health care by underserved and rural populations might set about measuring:
● Number of people diverted from the emergency room (and the cost savings because of that)
● Number of people in rural communities served.
● Number of other underserved communities who gain access to healthcare.
Because the Rockies Impact Fund focuses on Primary Impact, these mission specific metrics make sense. Each company is creating good by what it does when it carries out its mission. Additionally, these company-specific metrics are also their commercial raison d’etre, and thus, should be measured as part of their commercial KPIs even if they are not demanded for by the Fund.
The Sustainable Development Goals categories, for example, provide a good framework for understanding the scope of most impact investments. The metrics that fall under these categories will be well understood among investors who are analyzing various investment opportunities. The Rockies Impact Fund’s management finds these categories to be useful and comprehensive and therefore we strive to work within this framework, while measuring each investment individually.
At the end of the day, impact investors want both a significant social and/or environmental impact, plus market rate returns. Impact investors who develop inbound metrics find that they are investing in companies that create significant outcomes which can be modelled using an impact proforma. Others who invest based on passion and cause alone may find that the impact they create is not as great as they had hoped.
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