The next healthcare horizon: improving maternal health through innovation and technology

By: Sophia Friedman and Gabrielle Bunney, MD 

Each year, Impact Engine selects key themes within Health Equity to focus on. These themes reflect areas with significant unmet need and high potential impact that are ripe for investment. We focus on solutions that strive to make access to healthcare more equitable to all, with a focus on populations that have historically struggled to receive equal access to care. One such area is women’s health. While women make up roughly 50% of the population, women often struggle to access healthcare services and face gender biases in healthcare settings, leading to poor health outcomes. This issue is especially acute within maternal health: maternal mortality is staggeringly high in the United States when compared to other developed countries. We wanted to better understand these trends, the systemic factors leading to inequalities in access to care, and how the private sector can play a role in addressing these challenges.

Maternal mortality, defined as deaths during pregnancy and up to 42 days postpartum, reached 23.8 per 100,000 pregnancies in the US in 2020. The US now ranks last overall among industrialized countries in terms of maternal health outcomes. While the topic of maternal mortality has often been overlooked in the US, the Supreme Court’s recent overturning of Roe v. Wade has brought more widespread attention to the issue. Some worry that the recent overturning of Roe v. Wade could worsen maternal health outcomes and exacerbate health inequalities in the US, making the need for innovation in this space all the more critical.  While the statistics are grim, women’s health, and maternal health specifically, is an area that investors are increasingly beginning to explore to fund solutions that close the gap between the US maternal mortality rate and the rest of the world. 

The medical causes of maternal mortality are multifaceted, ranging from hemorrhage, infection, hypertensive disorders, cardiac conditions and others. While some disorders are unavoidable, many complications can be addressed by providing women with early access to care. Screening and early monitoring can help detect hypertensive disorders and cardiac conditions and also reduce C-sections. However, prenatal care is not just about showing up for visits. While the US standard of prenatal care dictates that 12-14 visits are required, we know that women who are uninsured or are on Medicaid are more likely to attend less than 10 prenatal visits. This leads to the conclusion that attending more visits must therefore be better. However, our European counterparts have better maternal outcomes and average recommending nine prenatal visits, significantly fewer than the US recommendation. Therefore, impact will not only come from getting women to attend appointments, but also from examining the quality of care that is delivered in -- and between -- those visits.

  While medical causes have often been the focus, morbidity and mortality also stem from other causes, including mental health and the social determinants of health. These require a focus on multidisciplinary care, going beyond the health care provider and including those in the mental health professions, social work, dieticians, doulas, midwives and more. One argument for the success of prenatal care in Europe is that women have more social support and financial benefits, suggesting that a more integrative approach to care may be important.

Racial disparities account for a large portion of the maternal mortality rate. Black women have a much higher mortality rate when compared to women of other races in the US. Black women receive less prenatal care as they are less likely to initiate care, less likely to access timely and affordable care, and less likely to utilize care by the end of pregnancy. 

The key social factors that impact maternal health outcomes include income, lack of social support and child care, food instability and education, all of which disproportionately affect black women. While these are important drivers, a greater emphasis needs to be placed on culturally competent care. When providers understand the background of the patients they care for, it allows for them to build trust, leading to a therapeutic relationship and ultimately better care.

Rural areas are also plagued by high maternal mortality. Approximately 15% of annual US births occur in rural hospitals, and rural communities have higher maternal and infant mortality than the national average. Overall there is a shortage of providers in rural areas and births are primarily attended by a family practice physician or midwives, rather than an obstetrician-gynecologist.

It is important to note that Medicaid covers about 50-60% of rural births. Medicaid is an important source of insurance for pregnant women regardless of their location. Insurance status is often linked to employment, and women who are expecting are less likely to be employed during the year they are pregnant. Public insurance is therefore an integral factor for pregnant women. Having coverage by public insurance was associated with a lower likelihood of spending >10% of their income and reducing the economic burden on pregnant women. However, women who do not normally qualify for Medicaid lose their Medicaid insurance 60 days postpartum. Medicaid expansion is done on a state-by-state basis, and therefore solutions that can solve this gap are greatly needed, in addition to lobbying for policy change.

Maternal health is a subset of the broader women’s health and femtech¹ categories, which are experiencing significant growth. Some estimate that the women’s health market will be approximately $60 billion by 2027. Specifically, the current challenges in maternal health make this an area that is ripe for investment. In examining the landscape of digital health products addressing women’s health, approximately 19% are in maternal health. Overall, femtech investments are also rising, with increasing capital and an increasing number of deals. There was a notable increase in 2021 in the amount of VC capital that was raised – Impact Engine portfolio company Elvie raised $97M, Maven Clinic raised $110M and Flo Health raised $50M. 

Startups in women’s health have been primarily divided between devices, diagnostics, and digital solutions. We focused on digital solutions because that is our primary lens on investing in this space. Digital solutions span online community resources, telehealth, and remote monitoring. Key themes of focus within the maternal health space include:

• Software solutions that help to educate and engage women of reproductive age, specifically those who may soon become pregnant or who already are pregnant. Focusing on women who may soon become pregnant is critical, as often women have undiagnosed pre-existing conditions, and improving the health of women before they become pregnant or early on in the pregnancy is critical to improving health outcomes throughout the pregnancy and beyond. 
  

• Solutions to pair pregnant women with additional support services such as doulas, midwives, nutritionists and mental health professionals. Given current labor challenges, it will be important for these solutions to also focus on increasing the supply of such professionals, which has a dual impact of increasing economic opportunity while improving health outcomes.
  

• Remote patient monitoring solutions that can be used in the home. These solutions, some of which integrate innovative devices and hardware, can bridge gaps in care as they can aggregate data and take a woman’s vitals (e.g., weight, blood pressure, and even fetal monitoring) to monitor women between visits and escalate issues as they arise, rather than waiting for a regularly scheduled check-up. 

While point solutions can target specific parts of the patient journey, it is important to keep in mind the holistic health of the woman throughout the entire process when considering solutions in this space. We believe that the winners will be solutions that address the woman’s whole health and/or integrate with other solutions to support various social and medical factors that may affect a woman’s health throughout her pregnancy and beyond.  

The increasing number of firms entering the women’s health space is encouraging. However, many solutions that target maternal health specifically are still early-stage and therefore have yet to show the correlation between the product or service and improved maternal health outcomes. It will be important to evaluate the impact that the solutions will have as well as women’s access to these services (e.g., via insurance coverage) in order for them to make lasting change and improve health outcomes. Hard questions need to be asked: How can we change the delivery of prenatal care to reduce the burden of receiving care? How can we provide culturally competent care to women? What outcomes should we be looking at e.g., reduced C-section rates, reduced preterm birth rates, reduced NICU days? How can we provide access in rural areas without compromising the quality of care? How can we reduce the cost burden on pregnant families beyond Medicaid expansion? These are a few questions that attempt to get at the core of the disparities that pregnant women experience in our current healthcare system and should guide the evaluation of new solutions. 

¹The femtech industry refers to a range of health software and tech-enabled products to improve healthcare for women across a number of female-specific conditions.

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References:

1. https://www.commonwealthfund.org/publications/issue-briefs/2020/nov/maternal-mortality-maternity-care-us-compared-10-countries

2. Collier AY, Molina RL. Maternal Mortality in the United States: Updates on Trends, Causes, and Solutions. Neoreviews. 2019 Oct;20(10):e561-e574. doi: 10.1542/neo.20-10-e561. PMID: 31575778; PMCID: PMC7377107.

3. https://www.cdc.gov/reproductivehealth/maternalinfanthealth/infantmortality.htm

4. https://www.americashealthrankings.org/learn/reports/2019-annual-report/international-comparison

5. Peahl AF, Smith RD, Moniz MH. Prenatal care redesign: creating flexible maternity care models through virtual care. Am J Obstet Gynecol. 2020 Sep;223(3):389.e1-389.e10. doi: 10.1016/j.ajog.2020.05.029. Epub 2020 May 17. PMID: 32425200; PMCID: PMC7231494.

6. Carter EB, Tuuli MG, Caughey AB, Odibo AO, Macones GA, Cahill AG. Number of prenatal visits and pregnancy outcomes in low-risk women. J Perinatol. 2016;36(3):178-181. doi:10.1038/jp.2015.183

7. Friedman Peahl A, Heisler M, Essenmacher LK, Dalton VK, Chopra V, Admon LK, Moniz MH. A comparison of international prenatal care guidelines for low-risk women to inform high-value care. Am J Obstet Gynecol. 2020 May;222(5):505-507. doi: 10.1016/j.ajog.2020.01.021. Epub 2020 Jan 18. PMID: 31962108.

8. Miller CA. Maternal and infant care: comparisons between Western Europe and the United States. Int J Health Serv. 1993;23(4):655-64. doi: 10.2190/RR4G-NTB1-L229-FVHG. PMID: 8276527.

9. Gadson A, Akpovi E, Mehta PK. Exploring the social determinants of racial/ethnic disparities in prenatal care utilization and maternal outcome. Semin Perinatol. 2017 Aug;41(5):308-317. doi: 10.1053/j.semperi.2017.04.008. Epub 2017 Jul 29. PMID: 28625554.

10. Kozhimannil KB, Hung P, Prasad S, Casey M, Moscovice I. Rural-urban differences in obstetric care, 2002-2010, and implications for the future. Med Care. 2014;52(1):4-9. doi:10.1097/MLR.0000000000000016

11. https://www.scientificamerican.com/article/maternal-health-care-is-disappearing-in-rural-america/

12. https://www.cms.gov/About-CMS/Agency-Information/OMH/equity-initiatives/rural-health/09032019-Maternal-Health-Care-in-Rural-Communities.pdf

13. Peterson JA, Albright BB, Moss HA, Bianco A. Catastrophic Health Expenditures With Pregnancy and Delivery in the United States. Obstet Gynecol. 2022 Mar 10. doi: 10.1097/AOG.0000000000004704. Epub ahead of print. PMID: 35271537.

14. https://www.statista.com/statistics/1125599/femtech-market-size-worldwide/

15. https://www.coyote.ventures/_files/ugd/e768ef_ea188df766ed445db2c3f02b47014c60.pdf

16. Pitchbook data

17. https://www.mobihealthnews.com/news/femtech-startups-nearly-double-funding-dollars-last-year-still-make-small-percent-market

18. https://news.crunchbase.com/startups/femtech-vc-investment-startups-womens-health/

THE VITAL ROLE GROWTH EQUITY IMPACT INVESTORS PLAY AND THE CASE TO BACK THEM

IE Case Study

By: Ander Iruretagoyena and Priya Parrish

In many ways growth equity is the middle child of the private markets spectrum. "Middle-child syndrome" is the idea that if you're neither the oldest child nor the youngest, you get less attention from your parents and feel “caught in the middle.” Similarly, at times, it feels like the market forgets about growth stage companies and instead focuses all of its attention on when companies are ideas with the potential to change the world or when they are proven leaders. There is a lot of space between early venture and exits, and without the right backers companies may become yet another statistic. Of all companies, only about 60% of start-ups survive to age three and roughly 35% survive to age 10. In the case of impactful ventures, the perceived challenges to make it out of this valley alive may even be greater as companies are not only fighting traditional hurdles, but oftentimes have the added burden of convincing mainstream investors and the broader market that their inherently impactful business model is actually scalable and profitable. Investing in impactful companies at every stage is important; that is why we manage a platform that has the flexibility to back impactful funds and companies at all stages through a number of different investment strategies. 

Many people think that impact investors are most needed at the early stage, as this is when impact gets “baked in.” However, in reality impact is solidified over a much longer time period before it becomes embedded into  a company’s business model and value proposition. As a company matures it needs different kinds of support, and the role of the impact investor shifts as well. We at Impact Engine believe that the growth equity impact space represents an interesting spot in the risk return spectrum, while also being a critical financing juncture to create scaled businesses driving impact.  Before diving into this topic, it is a helpful exercise to establish some common vernacular to frame the conversation.

Even though the growth equity investment strategy lies in the middle of a theoretical company lifecycle, it should not be confused with the strategy PE/Buyout firms utilize when acquiring mid-market companies. The investment strategy utilized for these lower middle market companies often relies on garnering outright control of relatively stable, cash flow positive business through leverage, and optimizing operations to increase margins, pay down debt, and create a compelling narrative to exit at a higher multiple than the one used to purchase the business.  The upside potential to these investments is much lower than what most venture funds aim for, but buyout strategies also see few, if any, write-offs, leading to a consistent risk-return profile.

In early venture, GPs (General Partners) are often securing single to mid-teen % ownership stakes in a much greater number of companies via a combination of small initial checks, followed by additional participation in subsequent rounds to prevent dilution and increase exposure. The investments made typically have the potential for a 10x+ return, but in reality most will fail and the fund returns will be driven by a small number of companies. These funds thus have the potential for much higher returns than buyout funds, but also a higher probability of a lower return.

The # and AUM in growth equity is dwarfed in comparison to PE & VC

Currently in the Pitchbook platform there are a total of 5,635 primarily PE-VC managers with traditional market structures (commingled LPs, primary funds w/. 10 year life, and raising more than $50M). Of those, 2,974 are venture (53%), 2,240 (40%) are buyout, and 421 (7%) are growth equity. Collectively these managers oversee 14,309 funds for a total of $7.29 Trillion.

• Buyout- 5,367 funds (38%) managing $4.66 T (64%)
• Growth- 1,615 funds (11%) managing $0.89 T (12%)
• Venture- 7,327 funds (51%) managing $1.74 T (24%)

Growth equity investing typically focuses on companies with established product market fit, a proven revenue model (often translating to $10M+ in revenues) and who have attractive unit economics making them either EBITDA profitable or in a position to achieve this milestone within 2 years of the current funding round. In other words, these companies are at an inflection point and need capital to scale an already proven business model that is well beyond the typical venture risks of product/business model development and product market fit; rather, they are mainly facing scaling and execution risk. Companies begin to professionalize, start meaningful collaborations, and come into their own by learning from their BODs (Board of Directors) who might include sophisticated institutional investors for the first time. From a risk/return profile, growth equity is therefore rightfully less risky than venture while offering buyout-like consistent performance without the need for heavy leverage to magnify returns. GPs deploying this strategy often have a relatively concentrated portfolio (high single to low double digits) of significant minority positions with each of them being underwritten to base cases in the 3-4x range while expecting low single digit write-offs.

The difference continues in the world of impact

Of those same 5,635 managers and 14,309 funds there are 257 managers who self-report that they seek ESG/Impact Investments. Of those, 127 are venture (49%), 107 (42%) are buyout, and 23 (9%) are growth equity Collectively these managers oversee 378 funds for a total of $137B.

• Buyout- 121 funds (32%) managing $80.7 B (59%)
• Growth- 75 funds (20%) managing $23.6 B (17%)
• Venture- 182 funds (48%) managing $32.7 B (24%)

Buyout, early venture, and growth GPs not only differ in investment strategies and the underlying stage of the companies but they also have some important differences in how they support the companies they invest in. This is especially true for impact investors relative to mainstream investors. These differences are summarized in the table below. Of course there are going to be some similarities across the stages, given that a good GP is often doing a wide variety of activities to add value and help the underlying portco grow, but there is definitely a palpable shift in emphasis depending on which stage the company is in.

Despite the difference, AUM growth in GE is quickly on the rise driven by technology…

Digital technology has forced growth equity and late-stage venture capital to the forefront over the past few years, and fast-moving investors with innovative new business models have joined the battle to control this burgeoning market under the belief that the digital disruption is still in its early stages. The numbers are shocking.

Growth and venture assets under management have expanded at about twice the rate of traditional buyout AUM over the past 10 years. Since 2014, $367 billion has been raised globally for growth equity.

Global Buyout, Growth Equity, and Venture Capital AUM ($T) | Preqin as of 06/30/21

… and that same pattern is observed in capital deployed

Growth equity and late-stage venture capital deployment has grown at 1.5 times the pace of buyout funding and now represents 61% of its levels.

Within growth equity, the SaaS vertical accounted for around 30% of total deal value in 2021.

Global Buyout, Growth Equity, and Venture Capital Deal Value ($B) | Preqin as of 06/30/21

To further illustrate the highlighted blue square and its underlying investment strategy, let's spotlight the work of one of our impact growth equity investees, Lumos Capital Group.

• Overview: Lumos invests in high growth private companies developing innovative technologies and platforms in education technology, knowledge services and human capital development.

• History: The firm was established in 2019 by Victor Hu and James Tieng  who were longtime friends and worked together at Exceed Capital Partners (a single LP fund with the vision of democratizing education by unlocking how technology can be used to provide greater access to learners of all ages). Together James and Victor have over 30 years of combined experience in the education sector. Victor was responsible for establishing  the education practice at Goldman Sachs, which he led for close to a decade, and James has invested over $1.5B in education and tech through his roles in Quad Partners, Apax Partners, and Irving Place Capital. This powerful combination of backgrounds (transaction advisory in M&A, strategy, corporate finance + principal investing) is exactly the type of backgrounds we like to see and the ideal one to source, secure, and support winning investments.

• Investment Strategy / Portfolio Construction / Impact Thesis & Fund Cycle: In July 2021 Lumos held its final close for Fund I and currently has ~$200M AUM (assets under management). With it Lumos has executed several growth equity investments where they saw room for value creation and potential for global scale. Transaction structures are typically Series B+ with Lumos as the lead investor. Initial equity checks have generally fallen in the $10-20M range with up to 30% of the fund reserved for additional follow on opportunities. The fund expects to allocate 75% of the investments in North America and 25% globally. Some of the guardrails the GP has put in place include setting minimum revenue hurdles of $10m, targeting EBITDA profitability in at-most a 18-24 month window, and detailed investment screens for strong unit economics. Furthermore Lumos invests with structural protection in terms of preference shares and enhanced governance rights, and typically secures other protective provisions such as exit rights (ie. early-exit protection, lock-up periods, drags with return thresholds, and tag rights). Lumos has made 7 investments to date with the following characteristics and impact theses.

  • Ellevation – Led a $15mm Series B-1 round in March 2020. Ellevation is a market-leading software-as-a-service (SaaS) business for K-12 school districts in the US, serving English Language Learners (ELLs). ELLs experience outsized achievement gaps relative to non ELL students (41% of ELL fourth graders score below basic in math and 69% score below basic in reading) and there is a tremendous shortage in administrator and teacher capacity across the education system to support them (only 24% of teacher training programs train teacher candidates in strategies to support ELLs specifically).  Ellevation’s Platform product allows schools and administrators to comply with the requirements of federal law and other regulations surrounding ELLs. Ellevation also helps to close achievement gaps through both their Strategies product, which provides teachers with instructional support to help them differentiate instruction, and Ellevation Math, which is an academic language product used directly by students.

    • In June 2021, Ellevation announced the closing of an acquisition by Curriculum Associates. Lumos exited the investment as a result and served on the Transaction Committee, working to ensure that the company’s impact mission would be maintained through any strategic sale by the counterparty.

  • Ironhack – Led a $20mm Series B-1 round in December 2020. Ironhack offers technology-oriented programs for adult learners in areas such as web development, UX/UI design, data analytics, cybersecurity, and JavaScript. Adults without a postsecondary degree who hold a certificate or certification have higher full time employment rates than their peers with no credentials, as well as higher salaries ($45K versus $30K). Ironhack provides a quality education and relevant job skills to students and employees for a fraction of the time and money that traditional postsecondary education requires (typically 4 years and $100K+). By providing high quality technology skills training, Ironhack helps students start careers in high demand technology fields, improving their economic mobility by achieving high post program salaries. The company recently submitted their B-Corp Certification application with Lumos’ active support. 

  • OnlineMedEd – Led a $20mm Series A growth round in March 2021. OnlineMedEd (“OME”) is a digital healthcare learning platform primarily serving medical students globally. Healthcare education remains expensive and inaccessible in many parts of the world. Much of this is attributable to a traditional pedagogical approach that has yet to embrace innovation. In addition, people of color continue to be underrepresented in the healthcare community and inequity in health outcomes persists among these underrepresented demographics (people of color fare worse across a range of health measures including lower life expectancy). With over 80% of medical students in the US using OME and users in over 190 countries, OME can potentially improve outcomes by offering inclusive educational content and helping improve diversity of medical practitioners in the US, which in turn may contribute to closing health outcome disparities. For its part, Lumos has worked closely with the company to, among other things, recruit mission-aligned executives.

  • Openclassrooms – Led a $80mm Series C round in April 2021. OpenClassrooms (“OC”) is a leading global digital education-to-employment, reskilling and upskilling platform headquartered in Paris. OC provides a product suite of both free and paid online programs that trains a diverse global workforce for the future. An estimated 1B jobs will disappear worldwide between 2020-2030 while 300M people are estimated to enter the workforce during that same timeframe. Even for people with existing competencies, additional training/ reskilling will be necessary to keep up with the rapidly evolving world of work. The company intentionally provides access for the underserved  to participate in the digital economy through apprenticeships and a robust job placement support system. Additionally, to make its products more financially accessible, OC helps students unlock 3rd party funding; today a majority of its students are able to access its products such as technology apprenticeships with no out-of-pocket costs. The company tracks its impact goals and reports on them through an annual impact report which measures its success in job placements. Lumos has worked actively with the company’s executives on global expansion initiatives, both organic and inorganic, to help OC reach more learners and underserved populations.

  • Podium – Led a $20mm Series B round in December 2021. Podium is a high-growth digital learning company that provides credit-bearing, turnkey online courses for in-demand skills, delivered in partnership with universities to undergraduate students. In a recent survey run by Gallup, Strada, and McGraw-Hill, 86% of students said gaining skills to be successful in work was very important in deciding to pursue college. However only 36% of them believe they will graduate with the skills they need to be successful in the workplace. Podium’s offering combines high quality asynchronous content, real-world case studies, live interactions across schools, on-demand support, and seamless integrations to make for a student experience that stands on its own compared to traditional courses. In its most recent semester, Podium’s courses achieved a +68 NPS with completion rates at ~95% ( vs. ~50% for traditional undergraduate compsci courses for non-majors). Importantly, all courses can access federal financial aid and in some cases (e.g. Arizona State University) the university charges no incremental tuition for a Podium class.

  • BookNook – Led a $25mm Series B round in January 2022. BookNook provides a digital education platform that allows schools and districts to deliver high quality ELA (reading and literacy) supplemental support for K-8 students, both remotely and in-person. Today, the K-8 workforce is in ‘crisis’ mode due to staffing challenges, high student:teacher ratios and limited budgets; many of these existing difficulties were significantly exacerbated by the global pandemic As a result, the education system is struggling to provide personalized learning to students. BookNook has the ability to help readers achieve foundational skills more quickly and is able to reach a broader base of students than traditional in-person tutoring services. BookNook can leverage tutors anywhere in the world to provide access to students in both rural and urban settings that may not have otherwise had access to an in-person tutor. The company’s offering is differentiated given the use of real tutors and synchronous teaching in a small group setting, which is unique compared to the increasingly common asynchronous and gamified delivery methods. Most importantly, the solution democratizes tutoring by shifting the cost from individual families to the school district, enabling a service that previously was affordable to only a minority of families to become accessible to all.

  • TRANSFR – Led a $33mm Series B round in February 2022. Transfr is an emerging leader in the field of immersive learning (virtual reality simulations) for workforce development and training, particularly in the skilled trades. While graduating college does not necessarily have to be the ultimate goal, it is a pretty telling sign that the US higher education is deficient when approximately 2/3rds of US adults never see that system to completion and do not earn a college degree. As if this wasn’t enough, even the ones that do are often overburdened with debt, carrying an average student loan balance of $29,800, and only half say that the lifetime financial benefits of their degree outweigh the cost. TRANSFR’s career exploration modules expose students to a wider variety of jobs and immerses them in hands-on practice / training which are accessible, cost-effective, low-stakes, and effective ways to gain skills required for in demand jobs. TRANSFR also has strong relationships with local employers to complete the bridge to employment. Some of the delivered outcomes include 50% improvement in troubleshooting time; 93% retention of employees in the job at 6 months vs. 30% from employees sourced from temp agencies and 90%+ learner preference for VR training relative to traditional methods. The learners who utilize the solution are generally underserved by traditional higher education and include high school students, adults seeking to re-enter the workforce without a degree, students or job seekers with disabilities, and those formerly incarcerated. Lumos has worked with the company in its financing strategy, introducing its network of commercial partners, and has assisted in various other strategic growth initiatives.

2-3 more investments will round out the portfolio before a larger Fund II is raised in the first half of 2023.

Impact + Portfolio Support: As a co-investor in two of these transactions and as Chair of  Lumos’ Impact Advisory Board, Impact Engine has collaborated with and witnessed first hand how Lumos has embedded impact into every stage of their investment processes and how they have stayed true to the highlighted cell above. Leveraging its sector focus, relevant experience (operators, IPOs, M&As, principal investing) and networks & partnerships, Lumos’ portfolio support centers on helping their investments execute on (i) global growth (ii) follow-on M&A and (iii) capital financings and exits. 

• Global Growth: James & Victor have worked in the global education and human capital development industry for years, and bring their network and knowledge of international markets to bear on the Fund’s investments with value-added introductions to commercial partners, referred to by Lumos as Ecosystem Partners, as well as an extensive Advisory Board with significant networks in various global markets. Domestically, the Investment Team is also uniquely knowledgeable of the tailored go-to-market strategies required to be successful across different market segments (with both B2B and B2C models), having invested or advised in many such situations over the past decade.

• Follow-on M&A: A key strategy that Lumos has employed in past successful investments is to assist a portfolio company in consolidating a fragmented product category or extending its platform through accretive M&A. Lumos brings specific expertise in acquisition processes, as well as in-depth knowledge of the competitive landscape to be able to help companies execute on this strategy.

• Expertise in Financings, Exits and Growth Strategy: The Lumos Investment Team has worked with numerous human capital development companies in growth strategy and positioning for follow-on financings and exits, and brings a differentiated value-add in these areas to assist portfolio companies post-investment. For example, James and Victor personally know key decision-makers at strategic acquirers throughout the industry, have advised numerous companies in minority financing and sale processes, and have also guided many companies in the sector to successful initial public offerings.

Lumos’ impact processes and philosophy centers on an overarching theory of change which recognizes that for numerous reasons the global status quo is unsustainable (most of the global workforce has less than a college degree, annual earnings of <USD20K, and is in danger of being left behind due to accelerating automation), that education is THE crucial lever for systemic change, and that purposefully investing in impactful private sector innovation will drive a more prosperous and inclusive future for everyone. Utilizing various frameworks and tools they embed impact into their investment processes in the following ways:

• Sourcing – Multiple approaches, including thematic (e.g. education to employment outcomes) particularly in the wake of COVID-19, with a focus on proprietary opportunities aligned with broader impact theses and market trends; tracks deals with founders from marginalized backgrounds.

• Diligence – Their diligence process is designed to deepen their understanding of the prospective company’s thesis to improve outcomes for students and educators, especially marginalized communities, and to uncover opportunities to more deeply embed accessibility and outcomes into the product or service. The team thoroughly reviews any research studies or academic papers the company has produced.

• Investment – Formalize accountability with investee through explicit conversations with CEOs and impact side letters / legal documentation. Often ideate with CEOs as Lumos may be the first investor to ask for this thoughtfulness around impact.

• Portfolio Support – Seen as a partner to portfolio management teams and engage in regular dialogue on impact priorities and positive social returns as the business scales. Develop, monitor, and continuously report on impact KPIs. Active voice on the board in regards to impact priorities.

• Exit – Build relationships with impact aligned strategic and financial partners, and serve as a point of accountability at the board level in considering potential exit opportunities. Consistent dialogue and strategy planning with company on future plans.

As an example of how they used the Impact Management Framework and its 5 dimensions in the previously discussed first investment (and successful exit) please see the table below:

Lumos demonstrates that it takes a specific skill set to manage with success and impact at this stage.

Venture funds extending into later stages via opportunity funds or buyout funds being forced earlier due to competitive pressures need to understand that finding success at this stage requires much more than insider or sector knowledge. Take for instance the example of LendUp, a fintech company that had the mission to provide everyone with a path to better financial health. Through its proprietary software, it supposedly designed safe, transparent products that expanded access, lowered costs, and provided credit-building opportunities for the population of Americans who had limited options within the traditional banking system because of low credit scores and income volatility. Well after 9 years of operations and $366M in funding (including some of the most famous names in VC ie. Andreessen Horowitz, Google Ventures, Y Combinator, PayPal Ventures etc.) the US CFPB “shuttered the lending operations of this fintech for repeatedly lying and illegally cheating its customers,” causing the company to officially declare itself out of business on March 1st 2022.

The sector’s promise has inspired a number of the top buyout firms to launch large growth funds

Examples include: Bain Capital, TPG, and KKR. Blackstone, which manages $881 billion in assets across a diverse set of funds, is one of them. In March of 2021 it raised $4.5 billion for Blackstone Growth, its first-ever fund devoted to growth equity, and built a team of growth specialists led by Jon Korngold, an 18-year growth equity veteran from General Atlantic. Now it is supposedly already raising the 2nd vintage with over $3B secured in the first close.

Having said that, long standing growth equity players like Insight Partners are doubling down and protecting their lead by successfully raising its 12th flagship fund with over $20 billion in commitments.

As deal sizes increase growing companies can stay private longer

While in the past most growth companies eventually turned to the public markets to finance their expansion via IPOs, many today are delaying it and instead are tapping the ever deeper pools of private capital. IPOs are not going away, in fact they had a record year in 2021, but companies are reaching a relatively more mature stage of growth before subjecting themselves to the notoriously distracting and expensive IPO process. This trend has steadily increased the average deal size in the growth equity and late-stage venture markets, bringing (at least the $ figure) much closer to the range historically attractive to PE investors.

Average US Late-stage Venture & Growth Equity Deal Value ($M) | Pitchbook as of 06/30/21

As evidenced by the various callouts throughout the article, the rise of growth equity is evident but it is still in its early stages. Elevated valuations and general euphoria are certainly producing questionable transactions (not exclusive to growth), making it hard to assess which strategy will be the most lucrative over the long term. Nonetheless, the current investment wave driven by technology innovation seems to have stronger fundamentals than previous investment cycles like the dot.com era. In the approximately 1,700 calls/meetings Impact Engine has had with funds in the last three years, we have seen a variety of approaches, and we believe there are multiple ways to win. A wise person once said, “There are many ways to make money and there are many ways to lose money.” However, beyond financial outcomes, as this article has argued, we believe that supporting impactful growth investors is critical to the health and success of the broader impact investment ecosystem; as such impact growth equity holds a special place in our hearts and minds.

Pooled Horizon Net IRR for Global Funds | Cambridge Associates as of 06/30/21

Performance of Impact Growth Equity vs. Growth Equity (2006-2018) | Pitchbook

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Impact Investing & ESG: Combining Strategies to Achieve Greater Impact

By Jessica Droste Yagan and Priya Parrish

Impact investors build their investment strategies with an outcome in mind. They seek to invest in ways that measurably address specific problems in the world, such as increasing access to clean water or creating jobs in a specific neighborhood. We categorize the various ways that impact investors can intentionally create impact through the 5 P Framework. Impact Engine’s strategy focuses on the “Product” P by investing in companies whose products improve education, health, economic empowerment, or environmental sustainability. We believe that investing in product-based impact is one of the strongest ways to create alignment between scaling impact and revenues.

One of the other Ps in the 5 Ps Framework is “Process,” through which an impact investor may very specifically target and facilitate improvements in the management practices of its portfolio, such as reducing carbon or improving employee wellness. To truly be considered impact investing, these strategies should include active involvement with the business through the board of directors, a control investment, or other ways of directly influencing strategic decisions.

Related to “Process” impact investing, but at the passive end of the spectrum, is environmental-social-governance (ESG) investing, which is quickly becoming a ubiquitous strategy for investors who are thorough about managing risks and seeking opportunities to generate alpha. ESG investors understand that companies providing exemplary working conditions or minimizing the environmental impact from operations may both contribute positively to society and also improve financial returns. Typically, they build ESG data into their investment models much like any other financially-relevant data in order to build portfolios focused on these companies.

Although impact investing and ESG investing are different strategies which have developed as different industries, we believe that, at their best, each incorporates the other. A great ESG strategy will take into account the impacts of the products that are being sold. For example, MSCI ESG Fund Ratings include the weighted average of each portfolio company’s percent of revenue generated from goods and services with a positive impact on society and the environment. Likewise, an effective impact investing strategy will take into account that a business’s impacts will go well beyond its product, especially as it scales. Principle 5 of the Operating Principles for Impact Management from the IFC specifically calls out this opportunity.

In line with our goal of continuous improvement, we have recently revisited and formalized our thinking on integrating ESG into our decision-making and portfolio management processes. Materiality is a key driver in how and when we consider ESG factors. Because materiality will evolve over the lifecycle of a company, we accordingly focus on different ESG factors and with different levels of scrutiny as a company matures. Because we manage both early-stage venture capital and later stage private equity strategies, we are in a unique position to see this evolution over time.

In our venture strategy, we have always focused on a few components of ESG in our due diligence and portfolio management. Specifically, we note the diversity of the management team and board of directors as a risk or strength, we aim to ensure that customer security and privacy are addressed from the beginning, and that ethical practices and strong governance are in place. The venture strategy has not focused on the environmental impacts of our companies (outside of their products, if relevant) because we invest in early-stage software companies, and their environmental impact tends to be much less material than other factors.

More recently, we launched a private equity strategy that focuses on more mature companies across multiple business models (i.e. not exclusively software). This strategy also focuses on product-based impact, yet we see an increased need to assess ESG management in middle market companies due to the increased materiality of many factors on multiple stakeholders. For example, middle market companies often employ several hundred employees and have a more complex operational footprint and supply chain. For these companies, mismanaging ESG factors across business operations may offset the positive impact driven by its products, and the financial materiality of mismanagement is also more significant. Whereas the venture team will bring ESG issues up as needed and more informally, the PE team needs to be more formal and comprehensive in its evaluation.

In developing the PE strategy’s approach to ESG, our goal was to create value for our portfolio companies by identifying ESG risks and opportunities during the diligence process and sharing it with management teams. We then evaluate management’s ability and willingness to make these improvements and seek to actively work with them on these initiatives throughout the investment period. We feel this process can be beneficial to the company akin to the traditional private equity “value creation” process. What guides our investment decisions, from an impact perspective, remains a thesis about how the company’s products or services will drive impact along the dimensions of effectiveness, accessibility, and scale, yet we believe our ESG management process helps ensure total net impact of the company is positive.

We recently developed an ESG management tool for our portfolio companies to help achieve our goals, and will be using it and learning from it in the coming months. ESG practitioners have also developed many frameworks for assessment that can serve as valuable resources for impact investors. We incorporated some of the best practices from the ESG industry while making adjustments for our firm’s objectives and focus on product-based impact business strategies:

• SASB’s materiality map is a useful guide to identify the ESG factors that are most financially material to a business, yet we’ve found it valuable to apply our own additional view of what is material for each portfolio company. We also believe that certain factors, such as Employee Engagement, Diversity & Inclusion, are material to all companies.

• Sustainalytics, an ESG Ratings provider for public companies, utilizes a two-dimensional framework that measures a company’s exposure to material ESG risks and how well a company is managing those risks. This aligns with our objective of helping companies manage ESG risks, but we added a third dimension — manageability. This helps us avoid businesses with material risks that cannot be managed or have unrealistic expectations of management’s ESG performance.

• Finally, B Lab’s Impact Assessment is a comprehensive set of questions that helps to assess a company’s policies and practices in relation to workers, community, customers, the environment, and governance. While not all questions are relevant and material to each portfolio company, we’ve found it useful to think through the applicability for each investment and value the inclusion of all stakeholders in their questionnaire.

At Impact Engine, we are committed to continuously improving our process to generate better financial and social outcomes for society, our companies, and our investors. The fields of impact and ESG investing are rapidly changing, and we’re excited to adopt new tools as they emerge and learn from our and others’ experience.

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In Defense of Private Equity: Why Our Society Needs Middle Market Investments

By Priya Parrish

The private equity industry is increasingly under scrutiny from policymakers and the public about its negative impact on society. The failed turnaround of Toy ‘R Us, for example, raised questions about whether private equity funds profited on the backs of employees who lost their jobs. Failures and bad apples will exist in any high risk/reward industry, yet the oversimplified narrative about private equity funds using massive amounts of leverage, irrationally cutting jobs, and leading ill-conceived mergers being the only way to turn a profit misses the bigger picture. There are also countless examples of funds helping companies scale business through massive job creation, disruptive innovations, and lower prices. These are positives that are being amplified as intentional impact investors are entering the field.

While venture capital investments are more easily understood as capital to build a new business, private equity funds invest in established companies that need capital to develop new products, expand teams, pursue mergers and acquisitions, and restructure balance sheets. These support a range of outcomes such as revenue growth, improvement of margins or profits, or the turnaround of a distressed business. Companies that nearly failed due to economic recessions, for example, have also successfully been able to save jobs due to private equity investment.

With fewer companies going public, there are approximately 200,000 private middle market companies that, without capital, cannot continue to be the engine that employs approximately 35% of private sector jobs in the U.S. These companies are spread across rural and urban geographies and include every sector from manufacturing to technology and healthcare. Many create goods or sell services that benefit more than just their employees. For example, take Impact Engine’s recent investments: the combined company of Insight Telepsychiatry and Regroup Telehealth provides critical mental health services to the 51% of counties in the U.S. that otherwise lack access due to provider shortages, and Footprint International manufacturers biodegradable packaging that has diverted 60 million pounds of plastic.

None of this means that misalignment of incentives is not a serious issue in the industry that must be addressed. Short time horizons for determining compensation, high management fees on large funds that can create significant wealth without significant returns for investors, and lack of transparency about fund expenses are some of the many reasons investors and the public should continue to demand more from an industry with tremendous power and influence over society. However, I urge policy makers not to throw the baby out with the bathwater. The ability of a large profit incentive to motivate people to fund and partner with businesses that can create high positive impact, and may otherwise not succeed, is a unique differentiator in our economy that must be made better, not taken apart.

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