Startups & Impact - Are impact businesses necessarily less competitive?

Reflecting on impact is becoming essential in the world of French startups. However, many remain skeptical about the performance of impact businesses, opposing the search for impact to the search for profits.

” Today, a startup that starts with an activity without impact is has-been. ”
A business angel

This sentence during a discussion with john, Business Angel called out to us. Certainly, thinking about impact is becoming essential in the world of French startups. However, many remain skeptical about the performance of impact businesses, because they seem to oppose the search for impact with the search for profits.

By scratching a hair, we realize that this mistrust often hides a misunderstanding, an “artistic vagueness” behind the concept of impact startups that few people in our ecosystem know how to define well.

What does that mean concretely ? What is marketing vs real in impact? Is it a hindrance or a benefit for the business? These are the most recurrent questions to which we have tried to provide answers.

Are impact businesses necessarily less competitive?

Analysis and learnings by the team at Venture Design @321founded for our Briefing the Chief newsletter.
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What does impact startup mean in concrete terms?

Definition: A company with a (positive) impact

1. places an environmental or social cause at the heart of its activity.
2. Responds to one or more Sustainable Development Goals (ODD) through its core-business.

If we go a step further, we identify 4 business-impact mix :

⇒ No impact: you got the idea.

⇒ Business Then impact: we limit the negative impact of core business by compensating with beneficial actions.
e.g.: donate x% of sales profits to associations.
We're not really talking about an impact company, rather about the efforts that are being made. Beware of over-communication around this type of actions, the backlash of greenwashing can be powerful.

⇒ Business With impact: the value proposition is not focused on impact but core-business generates positive externalities. These companies participate in the transformation of society or the environment, while remaining in a logic of pure growth-renta.
ex: Chango is a marketplace that sells bikes, scooters and electric scooters. It is not a “mission” company, but it indirectly participates in the transition to more sustainable mobility (and that's cool).

⇒ Business For impact: there is an almost linear link between business and impact. The entire organization and actions of the company are at the service of a response to an SDG. 1 unit of turnover ⇒ 1 unit of impact.
ex: Phenix is on a mission against food waste. To meet this objective, the team has developed an innovative model for buying unsold products at low prices.

The impact is difficult to calculate

But 3 criteria make it possible to make it: No Bullshit

⇒ Committed and aligned governance
How can we be sure that the social mission will not deviate in the long term?

• At the origin of a business For impact, there are founders driven by a strong cause. All company choices are an arbitration between business imperatives, the end customer, and impact. The more “committed” the founders are, the more the impact will be a priority and constant driver.
  ”To materialize it, our founders retained a right of veto in the face of investors. We know that they will protect our mission, even if the situation changes.” Head of Growth, startup with impact.

• The choice of financial partners, aligned with the mission, is a prerequisite for maintaining the intentionality of the business over time. ex: Ring Capital aligns with the impact by linking 50% of the team's Carried Interest to the achievement of the impact objectives of the startups in the portfolio.

⇒ The implementation of extra-financial KPIs
A “Return On Impact” ratio does not yet exist that allows companies to be compared to each other. On the other hand, each company is able to quantify its impact by identifying and following specific impact KPIs adapted to its activity.
ex: The Fabulous Canteen Consider the tons of unsold food saved, O'Clock the number of participants who found a job in connection with the training received within 6 months, Café Joyeux the number of inclusive jobs created...

⇒ Join an ecosystem
A real positive impact is evaluated in an ecosystem and over time, not in isolation. On some activities, the question arises of a possible:

• Rebound effect: paradox observed between the impact of the product/service generated during its design and that generated by its consumption.
  e.g.: deploying 5G, which consumes 2x less energy than 4G, can lead to a multiplication of uses and an increase in traffic that cancels out the energy savings achieved at the beginning.
• Substitution effect: risk when an impact is dependent on a change in habit over which the company has no control. ex: a healthy drink brand says to replace coca, the intention is good but its impact is cancelled out if it does not really succeed in substituting it on the market.

Food for thought to balance the business/impact opposition

• Impact businesses are still businesses
  They must (1) respond to a strong need (2) address it with a differentiating solution and (3) with a solid economic model.
  Businesses For Impact who succeed have managed to find differentiators that go much further than “the same thing but in green”.
  ex: Toopi Organics markets fertilizers derived from the recycling of urine. They are highly competitive, not because they are “green”, but because this smart solution is cheaper on their market. Or how impact serves competitiveness.

• The Time to Scale is not necessarily slower
  The objective of impact by volume VS impact by unity guides the duration of Time to Scale. Let's take the example of a green laundry brand that offers eco-designed pods rather than bottled detergent. If the objective is to change habits on a large scale with an alternative with a positive impact, the Time to Scale will be reached more quickly. If the objective is to maximize the unit impact with a more purist product (e.g. detergent with 0% plastic), the Time to Scale will be slower.

• In times of war for talent, impact is a real HR differentiator
  The corporate culture that stems from the mission set by the founders tends to attract and retain talent more. Beyond recruitment, companies with a positive impact on their business must also ensure that they are responsible companies with respect to their operations and employees.
  “On a Product Manager position, we can observe more than 20% more applications for an impact company compared to a traditional company” mentions an HR manager.

• In a period of downturn in investments, impact startups remain attractive
  There is an increase in demand for investments in impact companies that allow them access to capital at a lower cost. At the time of the exit “the valuation is thus increased by the ability of the business to provide additional value driven by the impact” according to an investor in an impact VC fund.

In the end

We do not yet have all the answers but we now have some keys to analysis to understand the concrete relationship that a company has between its business and the positive impact it wants to generate, without falling into the trap of marketing speeches.

Let's keep in mind that having a positive impact is a process that is part of an ecosystem and is sustainable. And that while it is not possible to be perfect from the start, building an impact business over time meets lasting challenges in markets that are not likely to turn around (vs surfing on trends, Hello Quick-Commerce covered in our last newsletter).

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Want to dig?

Here are some additional resources

• Overview What is the status of France on the 17 Sustainable Development Goals (SDGs) in 2022
• The Impact France Movement built the tool “Impact score” to allow companies to assess their impact around 5 dimensions (social impact, ecological impact, impact strategy, value sharing, power sharing)
• Carenews released the 2022 version of the Top50 actors in impact entrepreneurship
• BCorp tells us more about impact business models
• Have a positive impact at your level? The Dift launched by Captain Cause makes it possible to redirect corporate gift or marketing budgets towards environmental and societal challenges