Harnessing Strategic Philanthropy To Optimize Impact Investing
We believe that under-resourced sectors require a full ecosystem to thrive. Often this is not a problem which market forces will organically address, which is why subscribe to a blended finance approach which deploys philanthropy and investment capital towards a unified goal, albeit with differing targeted outcomes and impact.
More than an entrepreneurial ecosystem…
For entrepreneurs the top three challenges everywhere are access to talent, excessive bureaucracy, and scarce early stage capital.
When these three challenges can be overcome an entrepreneurial ecosystem can thrive, however this only applies in sectors where healthy market forces exist. Unfortunately, this is not the case in many areas of society where the potential for social impact is immense but the financial returns are humbler.
Arc Impact was founded to address the mismatch between potential and actual impact.
At Arc, we acknowledge that despite the progress of data driven decision making in philanthropy it remains an area driven by emotion. We also acknowledge that despite the genuine desire for socially responsible capital management, it remains an area driven by risk adjusted returns.
By acknowledging these two truths we don’t attempt to camouflage our philanthropy as investments nor our investments as altruistic, rather we harness the force of both drivers towards a unified goal.
How do we achieve this?
Impact investing is perpetually stuck in the act of balancing financial returns with social impact, while philanthropy seeks an operating model which allows its cumbersome benevolence to harness market forces without strangling them. At Arc we approach this differently, we set the true North to provide directional guidance for both our philanthropic and commercial investments, allowing each capital to address the issues for which it is best suited. Therefore, we deploy philanthropy to build the ecosystem, and once it is up and running, we deploy investments to grow the ecosystem.
This approach allows us to promise and deliver to our various stakeholders across the philanthropy-investment continuum.
ARC'S IMPACT PHILOSOPHY
ARC Impact has conducted an impact due diligence on dozens of companies to date. In the process, we have refined our approach and calibrated our tools to meet the unique requirements of impact investing in early-stage technology startups in Israel. The Impact filters described below are a work in process, every few months we reflect on the efficacy of our processes and make updates and enhancements where required.
In our experience, we have found off-the-shelf impact measurement frameworks to be lacking. While these frameworks, such as the SDGs and Impact Themes are helpful for philanthropy and charity, we have found them inadequate to inform investment decisions for startup technology companies. It is for this reason that we have developed our own Impact filters. Where relevant we have used traditional KPIs, and in cases where existing KPIs do not adequately characterize the startup activities, new KPIs have been created with an attempt to preserve the intent and impartially of the SDG metrics.
How the impact filters are used
The impact filters are used for three purposes at three different stages in the due diligence process as follows:
Impact Filter 1 - This is the Stage 1 Due Diligence, and is used as a high-level quick filter when reviewing the initial pitch deck. Filter 1 serves to minimize effort wasted by rapidly winnowing out irrelevant opportunities
Impact Filter 2 - This is the Stage 2 Due Diligence and is used before proceeding to the pre-investment committee. Filter 2 is an internal ARC Impact exercise where the Impact KPIs and theory of change are assigned.
Impact Filter 3 -This is the Stage 3 Due Diligence and is used before proceeding to the investment committee. Filter 3 is an exercise where ARC Impact discusses their internal Impact KPIs assessment with the startup and calibrates the metrics based on better understanding the company goals, operations and intent.
After the Impact KPIs have been agreed upon in collaboration with the startup a reporting cadence for these KPIs is confirmed. In many cases, in addition to the Impact KPIs a further set of “stretch Impact KPIs” are also recorded based on the future ambitions of the startup as well as the forecast data collection ambitions. This process may sound technical but in our experience startups have bold future intentions but can seldom report on the Impact KPIs when they are raising Series A funding, so it is helpful to chart the course of impact reporting in advance.