Impact in Early-Stage VCs: Amasia’s Impact Assessment Framework
Amasia is a single bottom-line investor. However, our investment theses—first global expansion and best practices and now climate and sustainability—lend themselves to backing companies that drive positive impact on our world. We recognized this impact potential in our investments, but our focus on climate led us to conclude we needed to assess that impact, climate impact in particular, in a more robust way.
When we talk of Amasia’s “impact,” we mean making investments in companies providing products and services that directly support our theses.
The conundrum we face should be immediately acknowledged: these are very early-stage companies. For our portfolio companies, impact is core to their business and therefore managing impact is directly tied to their financial success. But reporting on impact is nuanced, and we cannot and should not overburden either ourselves or our companies with box-checking measurement exercises, something that we see happening within ESG and to a certain extent with “climatetech” investing.
For early-stage companies, everything measured should be deliberate and value-additive—otherwise it’s a net drain on the business and defeats the purpose.
That's why we partnered with Malk Partners to craft an impact assessment framework that could work not just for us, but for many other early-stage VC firms. Malk is the preeminent advisor to private market investors on ESG and impact, and they were also deeply interested in applying their expertise to the early-stage VC world.
While there are existing models for impact assessment—such as the Impact Management Project (IMP) and IRIS+ by the Global Impact Investing Network (GIIN)—we felt there was no clear framework to define and identify impact for early-stage VC firms.
So we built our own with Malk’s help: a framework which was applicable to an early-stage VC like ours and which deeply embedded our own climate and sustainability investment thesis. We view this framework as a step towards capturing our companies’ impact potential in a form that can be understood by our companies and also other stakeholders (such as our co-investors).
Our impact framework aims first to inform our investment decisions, and second to track our portfolio’s impact after the investment. It includes an intuitive Impact Screen, which assesses climate and sustainability impact potential across five key qualities, and a more thorough impact diligence process for “Core” investments, those where we typically have significant ownership, are deeply engaged, and hold a board seat.
We foresee impact assessment and management continuing to evolve; this framework is what works for us, at this time, with our current investment thesis. We do recognize the value of aligning with the consensus in the bigger impact assessment sphere and have embedded leading industry practices into our framework.
Our Investment Thesis
Our investment thesis—the “4 Rs of Behavior Change”—is built around the conviction that it is behavior change at scale that will get us to a sustainable world. In our framework, each “R” is guided by a fundamental question, with the answer to be found in companies that address the question in various ways:
R1: Review — “How do we help consumers, corporations and governments make better data-driven decisions about climate and sustainability?”
R2: Renew — “How can we turbocharge the shift in views on consumption towards re-use and recycling?”
R3: Rethink — “How do we help build the infrastructure required for a dramatic consumer consumption expansion in remote services?”
R4: Rebuild — “How do we help make supply chains for consumer consumption far less wasteful?”
This way of thinking about climate and sustainability is very different, for it is rooted in common sense rather than the usual sector-driven approach that VCs (including us!) are used to. But we do find our way ultimately to sectors within each “R”, and a non-exhaustive list can be found here.
In conjunction with Malk, we conducted a “Theory of Change” exercise to clearly define the route to impact for each of the “Rs” and support our investment strategies. A sample (for R1) can be found below for anyone who is interested in the details. These are not perfect and don’t capture every nuance, and will evolve, but help place our thinking in the context of a process flow that results in impact.
Figure 1: "R1 - Review" Theory of Change
Benefits of Assessing Impact
Beyond simply having a shared way of talking about a company’s impact potential, assessing impact has a multitude of benefits for the companies themselves. First, just as companies perform market sizing, assessing the impact potential of a business gives the company a gauge of how their product or service can positively impact the planet. Continuing to assess and manage that impact allows companies to evaluate the progress of their impact goals more objectively.
From a financial standpoint, consistently collecting data and compiling impact metrics give companies the ability to show their quantified impact to investors, customers, and other stakeholders. Companies can also find weak spots in their impact potential, which can guide their business decisions.
Amasia invests at the intersection of purpose and profit. We believe the world is evolving to a state where doing good does not imply sacrificing economic returns. Showing this with data and performance will help attract more investment into companies doing good for the world.
Our Impact Screen
Figure 2: Amasia's Impact Screen
The core of our framework is the Impact Screen, which evaluates every potential investee company and measures impact potential on a three-point scale across five qualities of impact, each guided by a question:
Positive Impact — How well aligned are the Company’s products/services with Amasia’s thesis?
Intentionality — How core is thesis-specific action to the Company’s business model?
Scale of Impact — Does the Company have the potential for global scale?
Depth of Impact — How significant is the Company’s thesis-related impact to customers or end-users?
Additionality — How additional is the Company’s impact (e.g., compared to competitor products/services and/or existing market trends)?
We will use the example of Clarity, a global leader in air quality management where we led the Series A and Series A+, to showcase how our framework works in practice. Here is Clarity assessed against our Impact Screen:
Positive Impact (Score: 3): Clarity fits within “R1” of our thesis, as it provides environmental data that guides decision-making around air quality management. Mitigating air pollution brings massive climate-positive co-benefits—the effects are immediate and measurable, which can be especially helpful for timely and accurate evaluations of climate change mitigation policies.
Intentionality (Score: 3): Climate impact is core to Clarity’s business model. Measuring air quality spurs and enables efforts to mitigate air pollution, which directly contributes to reducing carbon emissions. Impact and profit move in lockstep.
Scale of Impact (Score: 3): Clarity has a strong global presence, operating in 60+ countries across multiple continents, which includes cities measuring air quality data for the first time. The company continues to expand its customer base to more regions.
Depth of Impact (Score: 2): While measuring air quality data is the key first step to tackling air pollution, Clarity does not directly assist efforts to reduce air pollution and thus carbon emissions. Nevertheless, the company provides insightful air quality data and analytics which are crucial in spurring and evaluating mitigation efforts.
Additionality (Score: 2): Other companies and governments are already measuring air quality in some locations, but rarely with the precision required to effectively guide targeted, local policy interventions. Clarity’s solution is unique in its affordability, scalability, and data accuracy, enabling more precise air quality measurement in both locations where air quality monitoring is already in place and those where air quality measurement was not readily available.
After giving a score to each of the qualities, we take the average of the five scores as the company’s overall score. We do not apply any kind of cutoff score, but the scores help us understand the company’s strengths and weaknesses in climate impact potential.
Incorporating impact into early investment screening helps prevent “impact-washing.” It’s important to note that this is not where we end our process—that would be falling into the trap of “box-checking”—but rather, we use this score to help us identify pros and cons related to a company’s impact before moving forward with the investment, alongside other business factors.
Our Impact Diligence Process
Our Core investments undergo an additional impact diligence process, engaging directly with Malk. Malk Partners advises VC firms and other private market investors on ESG and impact considerations including conducting due diligence pre-acquisition.
This diligence involves a deeper assessment of the company’s impact potential under our thesis and the extent to which the management team is currently aware of and managing impact. Malk also evaluates material ESG risks that threaten the potential for impact (e.g., poor labor practices, environmental mismanagement). The analysis is right-sized for early-stage companies and takes into account how their business will change as it rapidly scales.
It is very important to point out that this work is meant to be also helpful for the target company. One of the key results of this assessment is providing recommendations on how the company can maximize, manage, and measure its impact potential, which is later shared with the company.
In addition to analyzing the five qualities of impact from the Screen, the diligence process includes a sixth dimension of ‘Measurement’. The company is first evaluated on where it currently stands on impact measurement. For example, Clarity was already measuring “cities where we made monitoring possible” and “percent increase in monitoring coverage (area)” to assess their impact, but did not yet start leveraging the data to inform any actions or decision-making.
The ‘Measurement’ recommendations given are aligned with the IMP’s 5 Dimensions of Impact—who, what, how much, risks to impact, and contribution. These widely recognized criteria provide the building blocks to understand the breadth, depth, contribution, and likelihood of impact, and align impact measurement efforts across impact investors, enterprises, and practitioners in a way that can be clearly communicated.
For Clarity, here are a few examples of the suggested metrics for each of the IMP’s dimensions:
Who: Demographics of populations affected by policy and business changes
What: How customers are leveraging data to create change toward higher air quality
How Much: Number of policy changes performed utilizing the Company’s data; percent change in air quality over time
Risks to Impact: Data accuracy; customer feedback
Contribution: Customers who did not have access to (due to affordability, etc.) alternative data on air quality prior to the Company
These metrics can be obtained through customer surveys, and Malk recommends using lean data methodologies and collecting low-burden data on a regular basis (e.g., annually).
It is, always, up to the company how they want to use these recommendations; we do not impose our will, as founding teams of frazzled startups need to make their own decisions on when, how and what to measure. We find, though, that they tend to agree with us 😀.
Why should early-stage companies care?
Although early-stage startups know that assessing impact is useful, this is not a trivial task. Putting aside the fact that startup teams are frazzled almost all the time, “impact” is not an easily quantifiable term. But if impact is truly intentional and core to the Company’s business value, then impact management is critical to making smart business decisions.
To help guide companies in their impact assessment journey, it is important to first mutually understand how assessment can be useful for the company and get their commitment to impact assessment.
In the case of our sustainability thesis, the most obvious reason all companies should care is that climate change is undeniably the biggest global challenge of our time. Countries have signed the Paris Agreement, declared nationally determined contributions, and it’s prime time to act. For us to get to a sustainable planet, everyone must contribute towards our common goal of net zero emissions.
For climate-impact businesses, assessing and sharing their climate impact is bound to attract more support (e.g., from customers, investors, governments, etc.) for their climate-positive actions to further amplify impact. It is also important to showcase how we can leverage diverse climate solutions—including those which may not typically be labeled “climate solutions”—to tackle this crisis together.
From a practical standpoint, regulations requiring companies to disclose their climate impact and risks are increasingly becoming widespread. Taking an early step toward what will certainly be required of them in the future will give them a significant advantage. (This is also the case with ESG risk management, but that is not the focus of our particular framework.)
Where does “ESG” fit in?
We think the ESG movement has turned into a giant box-checking exercise, and we were originally reluctant to do much here. There has been so much top-down pressure in ESG that investors and companies have been eager to adopt the easiest approach, with few investors truly committed to improving ESG management, leading to “green-washing.” These types of compliance requirements are burdensome on early-stage companies, and distract from the real point of ESG for start-ups: scaling responsibly.
Ultimately, we concluded that there is value in our companies thinking about ESG risk mitigation early as it produces rewards in the future. An ESG risk assessment is included in the diligence process for Core investments, with recommendations for building strong practices where operationally relevant at scale.
Though frequently confused, impact and ESG are not the same. ESG refers to the risks and opportunities that arise from environmental, social, or governance factors within a company’s operations (e.g., fair wages, emissions reductions). As discussed above, impact relates to the social or environmental changes resulting from a business’s products or services. Material ESG risks are relevant to all companies, but impact companies have a particular responsibility to manage ESG factors as a risk to their impact potential.
We view ESG risk mitigation from a ‘risks to impact’ perspective—looking at which ESG factors pose material risks to the company’s impact and ways to mitigate those risks. Thus, the core ESG issue areas we focus on include: Climate Change, Data Privacy & Security, Ethics & Compliance, Social & Labor Conditions, and Diversity, Equity, and Inclusion. Other ESG issues are also reviewed (e.g., Supply Chain) when relevant to the business model.
Our impact assessment framework represents a significant step forward for Amasia in capturing the impact of our companies. We have now begun applying the framework to our investments. This is our first attempt at assessing the impact of our companies in a structured way, and we will continue to evolve our methods.
About Malk Partners
Malk Partners is the preeminent advisor to private market investors for creating and protecting value through environmental, social, and governance (“ESG”) management and impact investing. Founded in 2009, Malk Partners advises many of the world’s leading alternatives managers investing across private equity, growth equity, venture capital, and private credit by helping them define ESG goals, achieve ESG results, and guide their portfolio companies in driving value creation and mitigating risks. The firm is headquartered in La Jolla, California with a second office located in New York. For more information about Malk Partners, please visit www.malk.com.