LP in impact VC wanting to create ecosystem change, interview w. Dougie Sloan (Better Society Capital) 💫
Impact Supporters Issue #36. Thanks for being here. If you have comments or feedback drop me a message.
Disclaimer from August Solliv: The views expressed are solely my own, i.e., it’s my Sunday fun work 😉
Key insights:
Interview with Douglas (Dougie) Sloan, Managing Director at Better Society Capital
Investments are an important part of delivering impact, but to create systemic change we need to draw on a range of other tools too – this insight led to BSC launching the ImpactVC community
You need different types of investments for various kinds of problems - impact VC is best placed to solve the problems that high-scale technology can solve
According to Dougie, the best impact VC funds have a really clear idea of the change they want to create in the world – and how they can apply their unique ‘edge’ when investing to deliver that change
The highest risk for LPs in emerging VC firms is partnership breakup – for GPs, thinking through alignment on motivation and incentives as well as partnership dynamics and firm culture are important in demonstrating that you’re taking this seriously
Greetings to 2k+ Impact Supporters! 🌍 It's August Solliv 👋 Let's talk dive into Dougie's vision for impact VC and how he wants to create systems change (≈12 min reading time):
Different investment tools for different societal problems 🛠️
Characterizing good impact funds 🌟
Evolution of the impact investment ecosystem in recent years 📈
Proof of returns in impact VC 💰
Learnings from helping traditional investors get good at impact 📚
Partnership breakups 💔
The top LPs in impact VC 🏆
UK particularities vs the rest of Europe 🇬🇧
Extra: Social outcomes contracts 📄
Tips for impact VC investors 📝
Meet Douglas (Dougie) Sloan 👋
Dougie is Managing Director at Better Society Capital (BSC) and heads up the Impact Venture division. Dougie has been at BSC for 8 years - and in the last 6 years, he has been involved with building the LP venture investment arm of BSC. In the last 2 years, he has been part of creating ImpactVC, a community for impact VC investors to share and learn together 🌱 Before his time at BSC, he worked as a strategy consultant at BCG.
Meet Better Society Capital 💼
Better Society Capital was set up in 2012 to channel more money into tackling social issues and inequalities in the UK. BSC focuses on creating a market for impact investing in two ways: 1. as an investor in private market funds with a social impact in the UK (BSC was capitalised with £600m on their balance sheet in 2012 from dormant accounts and support from the UK's 4 largest banks), and 2. as a market builder, where they look to create systemic change with activities like learning sharing, policy, engaging with investors, and building the impact movement.
Dougie considers BSC a systems change organization that uses investments as a tool, and draws on a range of other tools to create system change 💡
For the last four years, BSC has been focused on four "market systems "that they are trying to change: 1. social housing (creating safe, secure and affordable homes), 2. social lending (debt the growth and resilience of charities and social enterprises), 3. social outcomes contracts (improving public service delivery), and 4. impact venture (trying to tilt the venture ecosystem towards impact, delivering positive change through technology).
In impact venture, Dougie and BSC genuinely believe that technology can be part of creating quick ecosystem change 🌐 They do that activity in 3 categories: 1. Investment into funds (which is now 20% of their portfolio), 2. Work with funds and start-ups on impact practice, and 3. Build the impact movement (through the ImpactVC community). BSC is currently invested in 23 impact funds, working with a dozen fund managers.
In impact venture, they have two mandates:
They help impact-first managers (often emerging managers) by investing and providing them with an investor perspective on things like fund management, firm management, scaling a franchise, and managing their impact.
They help "impact pivoters", mainstream top-tier VC investors who wish to sharpen their focus on investing in impact by setting an impact thesis and impact KPIs – with a focus on where doing impact well in practice can better drive commercial returns alongside impact.
They help funds coming from the impact sphere and funds coming from traditional VC because BSC believes that impact skills and business-building skillsets are just as important in impact VC. Moreover, Dougie thinks it can create systems change when they help top-tier VCs focus on impact, as it can hopefully inspire others 🌟
Meet the ImpactVC community 🌍
Dougie and fellow BSCers launched the ImpactVC community to create a common place for people to share learnings about impact venture investing across investment stages and geographies.
[Side comment from the author: I joined the community around a year ago and can only recommend it - it's a great mix of super smart people, and the community has a similar ambition as this newsletter of driving an impact]
Dougie says that the community's purpose is to unlock the global VC ecosystem's impact potential 🚀 There are currently approximately 800 people from approximately 600 firms in the group, with around 85% being European. The community is for people who are entering impact VC on their first day, as well as those who have been there for years.
ImpactVC creates a space for VCs to learn about impact, meet and share ideas, and build useful resources together. Their two flagship resources are the VC Impact Playbook and Founder Impact Playbook – and they are now offering training and coaching for those that want to take their work in impact to the next level.
Better Society Capital's investment criteria 🏅
BSC focuses on driving social impact in the UK, especially for underserved, vulnerable, and disadvantaged groups. Therefore, they invest in UK-focused early-stage and growth funds as well as broader funds that invest a significant proportion in socially impactful companies in the UK. The themes that they are looking at are health, mental health, financial inclusion, education, and the future of work.
Different investment tools for different societal problems 🛠️
In venture, BSC focuses on companies that can use tech and data to iterate around customers needs, user profiles, feedback loops, and low marginal costs to solve social problems at scale.
However, there are many areas where technology won't work. For example, BSC also purchases residential housing or helps charities purchase residential housing to host vulnerable groups—or BSC builds social outcome contracts for people with multiple types of chronic diseases to ensure they get the proper support. These other approaches can complement venture investing by making a difference where they are better suited to solving the problem🏠
One way of thinking about what BSC does is to find and frame social problems, work out what kind of investment tools solve impact, start using them, and get others to use them as well 🔄
Characterizing good impact funds 🌟
According to Dougie, impact and impact investing is a mindset and an approach that is more than a specific process you follow. Impact is not just about measurement; it's more about understanding what change you want in the world and how you will get there. Here is a quote of what Dougie said about good impact funds:
The first point is that the best funds have a really clear idea of the change they want to create in the world. They understand how they will get there in terms of the businesses they will back that will be successful commercially and drive impact. Ideally, they see that the impact that the start-ups drive is what adds commercial value. That sums up to a compelling impact investment thesis and strategy.
The second point is that we look for an edge: a really clear explanation of why they are the best at delivering that thesis based on skills, networks, and firm processes. The element of "why you" or team-thesis fit. That looks different in different contexts, but it is often a mix of knowledge, skills, networks, and a view of the world and how it will change.
The third point is repeatability. This comes down to culture, hiring, fund management, portfolio construction, processes, etc., as well as answering "Where do you want your fund management business to be in 5, 10, 15 years? "and then making choices accordingly. The best fund managers think just as much about that as they do about the investments that they make day to day.
Evolution of the impact investment ecosystem in recent years 📈
The impact venture ecosystem has matured significantly within the last 5-6 years. In 2016-2017, many VC investors had the perception that ‘impact’ meant charitable activity without any return potential. Today, Dougie says that most people believe in the potential for strong returns in the impact sphere. This means that there are many more impact funds today, and these make many more deals. A newer trend is the emergence of more specialized impact funds focusing on one sector or theme - rather than impact generalists.
Dougie believes there is a much larger understanding of why we do impact but still questions about how to do impact well in practice. And, Dougie says that there are still some funding gaps - Dougie especially highlights the impact growth stage.
Proof of returns in impact VC 💰
Dougie gives us a sneak peek into BSC's returns data. He says that, while returns are still emergent and largely unrealized given the maturity of their portfolio, they are seeing that investments in impact companies perform at least as well as traditional commercial VC strategies.
The two areas that BSC has seen doing best in their portfolio to date are health and financial inclusion (also called inclusive fintech). It is especially models that draw on data and advanced analytics that do well, e.g., prediction in healthcare or more effective assessment of individual financial profiles. Dougie thinks those are areas of real commercial and impact value.
Learnings from helping traditional investors get good at impact 📚
Our Nr 1 focus when investing in funds is values alignment
Dougie’s main learnings from helping traditional investors transition to impact are that it takes time and that the fund managers need to be truly engaged in the impact transition. To be successful, you need to change processes and ways of thinking about investments and impact, and that is not done from day one. So, choosing fund managers with whom you align values in order to go on that longer journey is key 🔑
Partnership breakups 💔
According to Dougie, partnership breakups are the single most significant risk for an LP investing in an emerging manager. It is tough to predict and measure, but some of the elements to look at are:
Values
Economic alignment
Vision for the business (i.e., Do you want to continue to do small fund sizes and repeat those? Or do you want to grow your AuM over time? Will you hire operating teams internally at some point?)
Role clarity early on
BSC tests all this during due diligence and even before. Usually, BSC gets to know the fund managers years before investing, so they track behavior during that time, but it will always remain a significant risk.
The top LPs in impact VC 🏆
I tried to ask Dougie whether there are any LPs he looks at to see who they invest in. He says that he is in touch regularly with a number of LPs with whom he compares notes in the space and at times thinks "if they have invested in the fund, then I should take an extra look at it”. But in general, signals from LPs plays less of a role than BSC building their own conviction on a GP's thesis.
I also asked Dougie whether GPs should be selective in who they raise capital from. Dougie believes that if he were a GP, he would think long and hard before taking money that is not value-aligned. If you are building for the long term, you want to have aligned partners with you along the way - he wouldn't compromise on that point. Dougie says he's not a GP in a challenging funding environment though - so does empathise with how hard these choices can be.
UK particularities vs the rest of Europe 🇬🇧
The impact ecosystem across borders generally invests along similar topics and themes. Dougie thinks that the countries within Europe are more similar than they are different. When asked about differences, Dougie, however, mentions some structural differences. The UK offers tax advantages around EIS and SEIS funds, for example.
The UK also has a deeper, larger, and more mature VC ecosystem as it has been around for longer than in the rest of Europe - especially around the London nexus. The UK has likewise been the center of many impact investments in the last 20-30 years, so it has a slight edge over other large and emerging impact ecosystems. But other countries in Europe are catching up in both respects, notably the Nordics, Germany, the Netherlands and France.
Extra: Social outcome contracts 📄
[Note from the author: This part is not related to impact VC but is such an exciting topic that I kept it in the article.]
A Social Outcomes Contract is an alliance of commissioners, delivery partners, and socially motivated investors whose incentives are aligned to deliver a service that improves people's lives - Better Society Capital.
Social outcomes contracts are a form of public service commissioning where the Government commissions outcomes for a specified group of individuals. Government funding is only released if the successful outcomes are actually achieved. Local delivery organisations receive upfront money from socially-motivated investors, and Importantly the financial risk sits with the investors.
BSC prioritises social outcomes contracts for groups with strong social needs as they believe this is where these models can make the biggest difference - including cases where there is a need for specialized, thoughtful, face-to-face care and where charities or social enterprises are heavily engrained in their local communities ❤️
For example, BSC’s work in this area has focused on tackling complex issues of child and family welfare, health, education, employment and training, homelessness, and criminal justice.
Tips for impact VC investors 📝
Dougie's first tip is to go into the ImpactVC community (and this newsletter) to learn about and from the space.
Dougie’s other main tip is to think about the change you want to create in the world and reflect on whether your fund setup is appropriate for that change. That will make it easier to raise from impact LPs such as BSC.
If you want to fundraise with BSC, then write to Dougie by email or LinkedIn.
Thanks for reading this week’s newsletter! Let me know what you think of this article and who else I should interview in this series - either in the comments section or in my DMs. Please subscribe to stay updated on articles about everything related to impact VC - and share with friends and colleagues. See you next week for another issue! 👋
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