Impact Investing in Public Equities: Recap

By Elise O’Malley

The relationship between impact investors and public equity markets began long before the recent boom of traction and media coverage we see today. For decades, institutions and individuals have used public equity strategies to support their personal values or influence corporate behavior. Priya Parrish, Impact Engine’s Managing Partner of Private Equity, spoke to her experience as an institutional investor while moderating our “Impact Investing in Public Equities” panel, hosted by Legal & General Investment Management of America (LGIMA). Joining her was John Hoeppner of LGIMA and Steve Mesirow of Mesirow Financial, both of whom are veterans within the sustainable investment space. The panelists discussed their paths to sustainable investing, strategies, challenges, and expectations for the future.

Historical Evolution of Sustainable Investing in Public Equities

Priya began the conversation with an initial introduction to the divestment movement of the 1980s: “Much like a consumer boycott, investors can choose to divest from a company or actively engage with a board about specific business policies, with the theory that the company may change their practices. That’s exactly what happened when asset owners stopped investing in companies operating in South Africa, ultimately driving business out of the country and contributing to the end of the Apartheid.” In the latter half of the same decade, mutual funds began incorporating negative screens into their portfolios, with investors intentionally avoiding products like tobacco, gambling, and firearms manufacturers. Instead of a focus on shifting corporate behavior, asset owners sought to align portfolios and values.

Investors then began asking, “What is the materiality of these social and environmental factors?” The emphasis transitioned from alignment-focused investing to ESG factor integration, which is a more nuanced analysis of the different drivers of profits and revenues. And with this nuanced approach, mainstream asset managers began responding to client demand and creating products that considered these factors.

“As public markets strategies focused more heavily on factor integration, the causal relationship weakened,” Priya said. This is when she personally began gravitating towards impact investing, which entails investing in companies that are deliberately contributing to social issues as part of their business model. Priya noted that impact investing represents $224 billion of AUM today, saying “it’s smaller than the ESG AUM but it seems to have influenced a revival around the initial pillar of seeking to affect corporate behavior with public markets strategies.”

Public Markets Impact Investing Strategies

John Hoeppner, now the Head of US Stewardship and Sustainable Investments at LGIMA, was able to shed light on a few impact strategies he has encountered throughout his tenure:

• Market theory is a style in which asset managers withhold investment, with the expectation they can influence price and consequently send a signal to the public company that they do not endorse their practices.

• Transparency theory involves investors requiring companies to report on their gender pay gaps, environmental impacts, etc. with the expectation that the market will change prices as a result of transparency.

• Rare theory assumes change occurs when an asset manager owns a significant piece of a company and uses that ownership to influence its practices so that they align with the manager’s values. This approach is the most proactive and aggressive, and normally requires that the asset manager owns a large portion of the company.

Steve Mesirow is a third-generation wealth advisor at Mesirow Financial, where his team manages money for high net worth families. Steve recently incorporated impact investing into the 81-year-old firm and uses deeply ingrained business values as a screen: be good to employees, treat the clients’ money as well as your own, and give back to the community. Steve noted that companies who treat their employees well ultimately develop a superior workforce. Additionally, companies who give back to their community and environment are more likely to recover after making a mistake, as they have better relationships with the public and government. “Superior corporate culture is a competitive advantage that’s unseen by the market. These advantages are very real but just overlooked,” Steve said.

Challenges

A major challenge that the panelists, as well as some guests, shared was the pressure for mass customization. Clients sometimes want to select impact objectives so specifically that they become limited in their options. For example, a client may want to only invest in companies that address the challenges of water scarcity or they want to avoid carbon entirely. As a result, they have eliminated so many companies and industries that they have reduced their potential for generating strong returns. Panelists noted that taking an approach of seeking to optimize financial and social returns across a broad portfolio may achieve stronger results.

Panelists also mentioned that a lack of advisors who are knowledgeable about impact investing can present a challenge as well, as many investment advisors will routinely advise clients to just invest regularly and donate to their desired charities.” Additionally, a bias still exists within the investment community that impact funds give up performance.

What We Can Expect

The ESG industry has grown significantly over the last 15 years. Today, 9 out of the 10 largest asset managers have an ESG offering. “Where does it go from here?” Priya asked of the panelists and audience. Both John and Steve emphasized the emergence of effective technology tools. With the introduction of new data software, asset owners will be able to have a much more precise understanding of their impact investments. Asset managers will claim their impact, but the data will be able to confirm their legitimacy. Steve noted, “The data from even the past 3 years is so much better than it was 4 or 5 years ago. It’s easier to make changes. Solutions are coming.”

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Does Your Company Have the Right KPIs?

By Chris Wu

Impact Engine recently had our annual portfolio summit where many of our portfolio company CEOs gathered together to share their successes, learn from each other’s experiences, and discuss key challenges. One of the highlights of the event was when Mike Evans and Josh Evnin from Fixer, one of our most recent investments, led the group through an extremely useful exercise on developing and evaluating key performance indicators (KPIs).

Here’s a recap of the exercise:

Performance Takes Priority over Measurement

Mike began the session by setting performance indicators (PI) in the proper context. He made it clear that tracking and measuring business performance should be subordinate to making sure the business is actually performing well. The primary goal of every business is to achieve success (regardless of what constitutes success for each individual company). It’s far more important to ensure that the company is performing well than it is to always have an exact value to report. Reporting on performance metrics has limited benefits if your business has little to no sales revenue; your time would be better spent on building up the business before worrying about measurement.

Every Measurement Needs a Reference Point

If a company’s odds of success shoot up dramatically by achieving the target for a particular PI, or if the PI is necessary in order to have a proper handle on the business, then it is actually a Key Performance Indicator (KPI). Generally, it’s recommended to track no more than 10 KPIs at a time, any more than that can be too cumbersome and less effective.

A KPI value is meaningless unless you can evaluate it against a reference point, a foil, in order to determine whether that value reflects positively or negatively on the performance of the business. Josh and Mike went on to describe four main types of references:

• Gut Feel — Early-stage companies often lack the requisite amount of historical data necessary in order to make meaningful archival comparisons. In situations like these, gut feel can serve as a valuable foil.

• Comparison to Historical — While past performance is not necessarily an indication of future results, when done properly, comparing KPIs to historical values can be a helpful tool to understanding the health of the business.

• Comparison to Ideal — Some KPIs have optimal values that represent an upper bound; the goal would be to maximize their value (i.e. # of clients, MRR). Others KPIs have optimal values that represent lower bound numbers; the goal would be to minimize their value (i.e. downtime, defect rates). Also, there are certain KPIs that should ideally shoot for a local maximum, in other words a sweet spot between the lower and upper bound values (i.e. sales pipeline conversion rate)

• Comparison to Projections — Modeling helps provide clarity about the key levers of the business, but it can require a significant commitment of time and/or resources in order to generate that level of insight. If you’re able to incorporate elements from the other three reference types (gut, historical, and ideal) into its design, then the model becomes a much more powerful and effective predictive tool.

KPIs values should be reviewed and compared to its benchmark reference point on a regular basis. Every delta from the benchmark serves as an indicator of which aspects of the business management should focus on, and the company must act to resolve the underlying cause of the deviation in order to improve the performance of the business. Furthermore, the company needs to put in place a framework that prioritizes or ranks the different deltas in terms of importance.

Figure 1: Cycle of Model Refinement

KPIs Aren’t Theoretical, They’re Actual

As startup companies set about determining which KPIs make the most sense for their business, they should bear in mind that KPIs aren’t some theoretical construct, rather they are grounded in real numbers that are directly related to how the business is actually performing. KPIs are empirical, which means that they have inherent flaws. The act of measuring and recording them will typically introduce a certain degree of inaccuracy and error, which needs to be taken into account during post-analysis.

The Dualities of Metrics

Next, Mike and Josh broke down some of the distinguishing factors of KPIs:

• Maximal/Optimal — There is a clear distinction between optimal and maximal KPIs. For certain metrics achieving a maximal level is ideal (i.e. # customers — no upper bound), whereas for some KPIs reaching a local optimum is sufficient (i.e. optimal # clinicians on staff per day — bell curve/sweet spot).

• Leading/Lagging — Weight loss regimens are a classic example of leading and lagging indicators. In order to reach your weight loss goal, you must measure and record both the amount of calories consumed and the amount of calories burned. These are leading indicators. Stepping on the scale to track change in weight over time represents the lagging indicator.

• Influenced/Not Influenced by Macroeconomics — Is the KPI sensitive to system level changes in the aggregate economy (i.e. net profit margin, net burn rate)?

• High/Low context — High context KPIs have an implied meaning that are context-specific (i.e. operating costs, market share). They typically require further explanation in order to be understood properly, whereas low context KPIs are clearly and explicitly spelled out, and can stand on their own (i.e. cash & cash equivalents).

Mapping KPIs Graphically

Plotting all the company KPIs graphically (Relevance versus KPI-Type) can be a useful exercise and lead to meaningful internal team discussions.

Figure 2: Mapping KPIs

Placement along the Y-axis will clearly illustrate which metrics are closely tied to the health of the business versus other metrics which are less relevant. The metrics that lie close to the top are true KPIs, while the metrics that fall closer to the X-axis are essentially just PI’s.

Placement along the X-axis refers back to the different reference or foil types described earlier. At first, the company will most likely have a broad mix of KPIs across the different foil types. Over time, you may start to see more of the company KPIs bunch towards the upper right corner. Modeling involves a thoughtful combination of the other 3 categories, and as the business matures its ability to build more accurate predictive models also improves.

KPIs are like vital signs for the current health of your company, they can validate past success and lend support to claims of future growth, or they can serve as an early warning system when the business is in trouble. Every startup is aiming for success, however they choose to define it. Having the right set of KPIs and foils in place will allow you to keep your finger on the pulse of your startup.

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The Rise of Impact Seed Funds

By Tasha Seitz

Last month, I had the pleasure of attending SOCAP (Social Capital Markets), the world’s largest conference on social enterprise and impact investing, at the Fort Mason Center in San Francisco, California. As a veteran attendee (this is my sixth SOCAP conference), I am always energized to be around smart people who are passionate about the potential of the intersection of impact and markets. At the conference, I spoke on a panel called “The Rise of Impact Seed Funds” with Wes Selke from Better Ventures, Shauntel Poulson from Reach Capital, Brian Dixon from Kapor Capital and Julie Lein from the Urban Innovation Fund. We discussed the evolution of seed-stage funds and talked about specific investment strategies, and how our focus on impact boosts performance. Below, I’ve recapped some of the key takeaways from our panel discussion (feel free to check out a video recording here).

Defining and measuring impact as an impact fund

Social impact is a loaded word and means different things to different people. While each fund on the panel considers themselves an impact fund, we each define it very differently. Brian Dixon from Kapor Capital shared that, “when we’re making an investment we’re not only thinking about whether this investment will get us a 3x return of the fund, but also how does this actually make a difference.” At Reach Capital, “we invest in missionaries, not mercenaries” said Shauntel Poulson. When it comes to impact, they focus on three things: a user base that targets underserved and under-resourced populations, usage penetration in terms of depth of usage and user satisfaction, and long-term improvement in student outcomes and achievement. The Urban Innovation Fund, Julie Lein noted, is a market rate-driven fund with an investment thesis that is impact-driven, mission-driven and world positive. “More and more we’re moving towards a place where you don’t have to be concessionary when you’re achieving impact goals” said Lein. At Impact Engine, being impact-focused is part of our brand. We look for entrepreneurs that are impact-motivated. For each company we invest in, we work with the entrepreneur to create a logic model that links the product to the positive impact outcomes that product can create. It’s also important on the investor side as well. We bring in investors that are impact-motivated and provide opportunities to deepen their understanding and portfolio of impact investing.

What seed-stage impact funds are looking for

At the seed-stage, many entrepreneurs find themselves in a “chicken and egg” situation: they need the capital to build the product, but they need the product to raise the capital. Even at an early stage, there are many signs of success an entrepreneur can demonstrate, like initial traction and potential market penetration. Each fund shared insight about what they look for in a company that signals they are ready to invest. A strong, driven team that sees a larger vision and can execute is key, especially at the earliest stages. “We believe that the right team will figure out the right market, and if it’s not the right market, they’ll pivot to a better market” said Poulson. At Impact Engine, we believe that an “A team” with a “B product or market” is better than an “A product/market” with “B team.” We look for entrepreneurs who are targeting large markets and market adjacencies where there’s big opportunity. We also ask: are they a GSD (get shit done) entrepreneur? Have they hustled, gotten something built, tested it, and gotten in front of customers? As an entrepreneur, you always need more money to make your product more robust and scalable, but the more scrappy you can be, the more impressed I am! As Lein remarked, “show a willingness to get things done immediately. There is power in being passionate, scrappy and tenacious!”

The evolution of seed funds

Though accelerators and incubators first addressed the dearth of funding for mission-oriented companies, producing a cohort of early-stage startups searching for seed funding, many of these accelerators have transformed into seed funds as the field has matured. As Dixon says, “when it comes to accelerators and funds, there’s been a natural progression over time”. For example, as smaller seed-stage funds become successful, they raise larger subsequent funds with bigger check sizes and become better suited to invest in companies raising larger rounds. But recently, there’s been a rise in micro VCs, seed capital and pre-seed rounds, which is a great thing for entrepreneurs. As Poulson described, “today’s seed round is yesterday’s series A and today’s pre-seed round is yesterday’s seed round.” In today’s landscape, seed rounds can be upwards of $5M and companies can have multiple seed rounds.

The dos and don’ts of fundraising

The group shared lots of tips for entrepreneurs that are fundraising. The most important? Know how much you’re raising. When it comes to rounds, the landscape for seed stage companies has shifted towards SAFEs or convertible notes. While impact funds are certainly flexible and open-minded to both notes and priced rounds, entrepreneurs should understand the pros & cons of their funding choices. Notes can be less expensive and great if you want to be scrappy, but a priced model can be easier and clearer in terms of determining ownership percentage. It’s also important to know why you’re fundraising and why you want to work with a specific fund. Demonstrate a strong team, have a most viable product and customers to show, and have a clear vision of where you’re going. Be able to articulate your impact story.

Portfolio construction & follow-on investments

While each fund has a unique philosophy on portfolio construction, they all reflect the evolving landscape of seed funds. Some funds used to steer clear of follow-on investments, but now they are more open to reserve capital for companies in their portfolio if the company meets certain milestones. Poulson noted, “today, half of our capital is for follow-on investments and the other half is for new seed stage companies”. At Impact Engine, we have a similar strategy: we strive to invest our reserved capital in portfolio companies that are doing well, where we see potential for great returns and great impact.

The landscape for seed-stage funds continues to evolve, and each fund is always learning, growing, and evolving its strategy. It was a pleasure to share my experiences with Impact Engine at SOCAP. The conference is always an excellent reminder just how much this movement has grown over the years, and I look forward to attending the SOCAP conference for many years to come!

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5 Questions You Need to Ask Before You Start Hiring

By Lindsay Verstegen

Last month at Impact Engine, we celebrated our five-year anniversary with a celebration and showcase event with our investors, mentors, and portfolio companies. The following day, we continued the celebration with a gathering of our portfolio company CEOs. We were grateful to have Lindsay Verstegen, VP of Talent at ShopRunner, speak to our CEOs about recruiting and hiring, including the five questions to ask before hiring, below.

Hiring is a highly personal process, one that should be very specific to you and your company. It’s important to approach the hiring process with enough of a game plan that you’re organized, but also with agility that allows for feedback to shape the process as it plays out. I’ve outlined five key questions that get at guidelines to the hiring process that every organization should consider when expanding their team. (Keep in mind, these are not hard-and-fast rules, but rather tips that should guide you!)

Who are you?

Before you begin the hiring process, it is important to go inward and answer some crucial questions to understand who you are as a company. This is a time for self-reflection. Ask yourself who you are and what you value. Remember that Sigmund Freud once said: “Being entirely honest with oneself is a good exercise.” It’s an especially good exercise when hiring. You should also ask customers and existing employees how they see you, and synthesize that information to determine your “true north.” If you’re not headed in the direction you want to be, this is the time to reroute and align your goals and vision. Hiring can often help steer more broad organizational evolution by way of the introspection that accompanies the process.

What is your value proposition?

Every company should have a value proposition, both a one-sentence version and a longer version. You want a version you can tell in an elevator but also one you can go into more deeply over cocktails at a happy hour. The statement should summarize why someone would want to work at your company and why it will add more value to their lives and create a richer experience than a similar organization might. It’s important that everyone at your organization knows this value proposition and can speak to it. This may seem simple but so often the basic building blocks of information are hazy and the team isn’t as aligned as needed to identify the right hire. Opportunities are lost and candidates become uninterested with no clear alignment on what the bigger value is for them both now and in the future.

What is your story?

One of the best ways to stand out from the competition is to share your story. People love stories. Stories humanize the hiring process by giving candidates the chance to learn about and connect with your vision and growth. Other companies may have similar job descriptions and work culture, but no one else has the same story.

How does the world see you?

It’s important to understand how you are communicating who you are, your value proposition and your story through your website and other outlets. This is what represents you when you’re not in the elevator or happy hour. Great candidates are always curious about interesting things going on in the world. Provide places that a potential candidate can peek into a window of your organization. What’s known about you publicly? Look at the experience of going through the “contact us” page on your website. The best talent doesn’t have much time to navigate a process that might take them nowhere. Too many processes take too many clicks and great candidates move on before the connection is made. Tools like LinkedIn and recruitment firms can be great to learn more about potential candidates through a less direct channel (that isn’t your career page), but make sure these tools are a good fit for your company’s hiring needs. You never get a second chance to make a first impression and if someone else is making that impression for you, be sure it’s the right one.

Do you have a game plan?

The most important thing to have when you begin the hiring process is a game plan. You want to create a process that gets the results you want and gives you the information about each potential candidate so that you can make a sound decision. It’s important to remain organized and communicate along the way. Time can also kill hiring momentum, so decide upon a timeline that works well for potential candidates and is also comfortable with your company’s needs. Take the time to get alignment across the various people involved in evaluation. A huge complaint from candidates comes from the basic concept that the interviewing panel wasn’t aligned and the depth of conversation was stifled as a result. Take the time to get your ducks in a row.

For more reading on recruiting, check out these articles below:

• 5 Ways to Recruit Top Talent During Rapid Growth

• The Future of Recruiting is Inbound

• Greenhouse Blog: The Modern Recruiter

• How to Hire Ninjas: The Secret Advantage of Small Startups

Lindsay Verstegen is currently VP of Talent at ShopRunner, leading the people function for the company. She lead Recruiting + People Ops at Braintree and Venmo (now PayPal companies) and, before that, was a part of the growth of early days Groupon. She holds a BFA in Musical Theatre from University of Wisconsin-Stevens Point. She ended up in the people profession after recognizing it as the place for the telling and sharing of important stories and a place for powerful connection. She’s always fiercely advocated for women inside and outside of the workplace and looks for ways to create high performing teams with diverse perspectives. Only through true diversity in team makeup does she believe companies stand a chance to build the best products of tomorrow.

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What Does 100% Impact Look Like?

By Jessica Droste Yagan

Last month, Impact Engine hosted breakfast with Richard Muller of Toniic Network, a global action community for impact investors from over 22 countries. Muller shared results from the T100 Project, a multi-year study of the portfolios of Toniic Network members who are committed to investing 100% of their portfolio for impact. The T100 project came out of a need for quantitative and qualitative data as a way to inspire and enable others to accelerate their impact investing journeys as well as to demonstrate a growing market for impact products and services. To date the group has deployed $2.6 billion of $4 billion committed to impact. The study reveals new insights from over 50 portfolios and highlights the various paths towards 100% impact (to read the entire report, click here). Below we’ve shared key takeaways from the report and answer the question: what does 100% impact look like?

“Every investor has to find his or her own way, and be ready to adapt. And when you get to 100%, that is when the real journey starts.” — Toni Johnson, Heron Foundation

100% impact portfolios are achievable today.

Early findings from 51 Toniic portfolios committed to 100% impact are promising: impact investments making up an average of 64% of all portfolios, with one-third of portfolios with over 90% deployed into impact. These impact investments include 36% thematic investments (see below), 19% sustainable investments (investments integrating environmental, social and governance factors into the decision-making process) and 9% responsible investments (investments screened for conflicts or inconsistencies with personal or organizational values, codes of practice, or other impact performance criteria). For thematic investments, Toniic shows the breakdown of the following impact areas on average across portfolios, including 32% environment, 12% poverty alleviation, 9% financial system, and 7% health.

From T100 Launch Report: Insights from the Frontier of Impact Investing 2016.

100% impact portfolios can be constructed across all asset classes.

Another takeaway is that portfolios with 100% impact can extend across asset classes. A breakdown of asset classes shows an average of 29% public equity and 21% private equity investments, as well as 19% fixed income, 15% real assets, 12% cash and equivalents, and 4% hedge funds.

From T100 Launch Report: Insights from the Frontier of Impact Investing 2016.

Impact investors are aligning to the UN Sustainable Development Goals.

Toniic has created an online directory and impact portfolio tool for investors to better understand how their investments address UN Sustainable Development Goals, seventeen goals to end poverty, protect the planet, and ensure prosperity for all as part of the United Nations’ sustainable development agenda. For each Toniic impact area and theme, the platform correlates the investment with a UN sustainable development goal. The next step is using these goals to determine impact measurement metrics for each portfolio investment. Toniic expects to roll out this impact measurement report at the end of Q2 2017.

Both impact and financial return expectations can be met.

Toniic found that most investors (83% overall) expect their portfolios to generate market rate returns, with foundations and high net worth individuals showing more willingness to accept below market rate or capital preservation strategies to generate impact (36% and 14%, respectively). In terms of performance, 83% of participants said that their portfolio met or exceeded financial objectives and 87% said their impact objectives were met.

Impact investing faces challenges…

Muller notes that investing for impact is still an uphill battle. He explains the biggest perceived roadblocks to impact investing are a shortage of quality deals across asset classes, immature impact measurement and a lack of research about the field. The T100 report strives to be the research-backed resource that interested LPs can use to transition their portfolios to impact.

But a supportive community helps.

Toniic believes there are three keys to becoming a successful impact investor. The first is finding a professional, trusted impact advisor to guide you through the process (and in case your advisor is new to impact, we’ve outlined steps to working with your financial advisor to incorporate impact into your portfolio). The second key is having a community of impact investors, friends and family who support your impact portfolio. Impact investing is not a solo journey. At Impact Engine, we know the value of investing as a community and take pride in our network of more than 120 fund investors. The final key to becoming a successful impact investor is personal engagement, another essential component of Toniic’s international community. Through events and comprehensive reports on impact investing, Toniic creates multiple opportunities for investors to engage with its network of impact investors and the portfolio companies they invest in.

While impact investing looks very different from portfolio to portfolio, Toniic has demonstrated that reaching 100% impact is achievable. In the words of Toni Johnson from the Heron Foundation, “every investor has to find his or her own way, and be ready to adapt. And when you get to 100%, that is when the real journey starts.”

Chicago: The Homegrown Impact Investing Hub

This article originally appeared in Social Innovations Journal: Issue 33 Chicago Edition on April 24, 2017.

By Jessica Droste Yagan & Tasha Seitz

From early conversations in 2011 to the deployment of our $10 million impact fund today, Impact Engine has grown and evolved in parallel with the companies in our portfolio driving innovation and impact. Today, we operate as a venture fund that invests financial and human capital in early-stage, for-profit technology businesses improving education, health, economic empowerment and resource efficiency. Our fund is backed by a group of engaged, like-minded impact investors who support our expanding portfolio of impact companies. Our strength is in our dedicated, supportive and engaged community of impact entrepreneurs and impact investors in Chicago. We’ve shared our journey here in the hopes that other communities may learn from our path.

“We have approached this journey with a learning mindset, an openness to change, and a lot of scrappiness.”

At Impact Engine, we have worked over the past several years to build a market for impact investing around these two firm beliefs: (1) there are many talented entrepreneurs using for-profit business models to tackle social and environmental challenges that are also large, profitable market opportunities, and (2) there are a growing number of individuals that are realizing the power of their investment dollars and seeking to direct that power toward positive social and environmental outcomes at scale. We have approached this journey with a learning mindset, an openness to change, and a lot of scrappiness.

Our founders, Linda Darragh, then Director of Entrepreneurship at the University of Chicago’s Booth School of Business, and Jamie Jones, who was leading the social entrepreneurship program at Northwestern University’s Kellogg School of Management, saw a need in the market and stepped up to fill it. Through their work with MBA students, Darragh and Jones observed that students looking to launch businesses with impact were often deterred by the lack of access to capital and mentorship. They also knew angel investors who were interested in the concept of impact investing, but didn’t see any investable opportunities. In 2011, the two decided to bring together investors, entrepreneurs and philanthropists throughout Chicago for a series of conversations, asking the question, “What can we do to fill the gap in impact investing in Chicago?” The answer was a twelve-week startup accelerator program called Impact Engine.

In retrospect, an accelerator was an ideal starting point. Unlike other groups who were “all talk” about impact investing, the Impact Engine accelerator involved real entrepreneurs, real investors, and real investments. Yet, it was a manageable size to test interest in the community. It was also perfect for entrepreneurs looking to get started on the right path, since critical early-stage financial and human capital can make all the difference in the very early stages of a company and Chicago did not have a lot of early-stage resources at that time.

Launching an accelerator was no small undertaking. First, Darragh and Jones had to find the right leadership. Luckily, they found and convinced Chuck Templeton, founder of OpenTable and successful Chicago-based angel investor, to take the lead as Impact Engine’s first Managing Director. Templeton’s talent as an investor and mentor, combined with his reputation in the Chicago community, made him the ideal leader to pull together the entrepreneurs, mentors, investors and volunteers that it takes to run a successful accelerator. With the addition of board members Tasha Seitz, General Partner at JK&B Capital, and Dennis Barsema, serial entrepreneur and instructor at Northern Illinois University College of Business, the accelerator was ready to launch.

Attendees at our Demo Day event, January 17, 2014.

After successfully raising the first fund of $525,000 from 22 local, individual investors to test the concept for the first cohort, the team put out the call for applications in May 2012. The accelerator was modeled after Excelerate Labs, a successful Chicago-based accelerator program focused on technology startups. Each company selected would receive $25,000 in seed funding, as well as mentorship, training, legal advice, tax consulting, marketing, sales strategies and a workspace at 1871, the largest tech hub in Chicago, for twelve weeks. In exchange, Impact Engine received a seven percent stake in each company. Eight companies were selected and completed the rigorous three-month program, and in December 2012, they presented at our first Demo Day to a crowd of more than 300 outside investors and community supporters.

“Finally, investors were opening their eyes to new investment possibilities. A local market for impact investing was born and ready to grow.”

The first accelerator was a major success: companies got connected to additional support in the form of customers, partners, investors and mentors, and investors were introduced to companies with potential to make a profit while also making a positive social or environmental impact. Finally, investors were opening their eyes to new investment possibilities. A local market for impact investing was born and ready to grow.

Over the next two years, we repeated and improved upon the accelerator model, running two more funds as accelerator cohorts in 2013 and 2014. By the end of the third year, we had invested in 23 companies that were employing 180 people and had raised $54.3 million in capital on top of our accelerator investments. Early success stories from our first class included ThinkCERCA and Piece & Co. ThinkCERCA, a web-based platform that gives teachers the tools to create and deliver personalized critical thinking instruction, is now serving over 310,000 students in 210 schools and helping improve critical reading skills by 1.5 to 2.5 grade levels each year. Piece & Co. is a marketplace that connects retail brands with artisans in the developing world. They have worked with notable brands like Nike, Tory Burch, Nordstrom and Banana Republic and have provided $640,000 to artisans in sixteen countries in the developing world. On the other side of the market, Impact Engine had engaged hundreds of mentors providing human capital to the companies, and more than 85 individuals became involved financially, making at least one investment in Impact Engine or its companies. It was clear that the market for impact investing in Chicago was thriving and had more potential.

As we began to grow and change, so did our team. Templeton stepped down as Managing Director in 2014 and joined Darragh and Jones on the Investment Committee. In his place, Jessica Droste Yagan and Tasha Seitz stepped in to tackle the question of how to evolve Impact Engine to meet the growing demand from investors and entrepreneurs, and it was decided that the next step was to become a seed-stage impact venture fund.

The decision to shift from accelerator to seed fund was driven by two factors. First, while there were a growing number of accredited investors interested in aligning profit and social return, early-stage investing requires a knowledge base and time commitment that many lacked, so entrepreneurs struggled to get checks written. Second, support systems for startup entrepreneurs were proliferating in Chicago and Impact Engine’s advantage was in its network of mentors and investors and its focus on impact, not in its accelerator curriculum. We thought more capital could be engaged and entrepreneurs more effectively supported if we took an active role and moved the capital on behalf of our investors through a fund structure. In 2015, we began raising a seed fund from individual investors, selling not only a stake in the fund, but also access to a strong community of Chicago-based investors who were on a similar impact investing journey.

“Our journey to grow the impact investing market in Chicago has taken many turns, but the constant priority has been supporting impact entrepreneurs and investors.”

In June 2016, we announced the close of a $10 million impact fund that invests in seed-stage companies with products that directly improve education, health, economic empowerment or resource efficiency. The fund maintains the spirit of our accelerator roots with a focus on deep investment of human and financial capital, but it’s customized, not delivered through a formalized program to a cohort of companies. The other notably unique character of the fund is the level of our engagement with investors through facilitation of co-investment opportunities as well as education and community-building events (e.g. an impact investment bootcamp with Forefront and Arabella Advisors, a fireside chat with Jean Case of the Case Foundation, and “Anatomy of a Deal” where investors learn more about the Impact Engine due diligence process).

Our journey to grow the impact investing market in Chicago has taken many turns over the years, but the constant priority has been supporting impact entrepreneurs and investors. Through our accelerator funds and our current seed fund, we’ve invested in more than thirty companies across the country and are actively supporting them and supporting their growth. Our goal is to continue to create impact within our growing portfolio and pave the way as a market maker and thought leader in the impact investing world. We plan on growing our network of connected investors and sharing what we’ve learned in the space with a broader audience of investors. We remain committed to the Chicago social impact ecosystem and will continue to use our platform to showcase other social impact funds investing in Chicago and the businesses tackling the city’s most pressing issues. Over the next five years, we look forward to bigger investments, greater impact and more opportunities to share and learn in the impact investing space.

Jessica Droste Yagan is the Chief Executive Officer (CEO) of Impact Engine & Tasha Seitz is the Chief Investment Officer (CIO) of Impact Engine.