Return on investment, myth or reality in impact startups?

“When we talk about return on investment (ROI), we still hear the myth that investors who choose Impact companies do so for charity! ” underlines Meir Rabkin, founder of Blue Vision Capital, an investor and entrepreneur with 18 years of experience in institutional asset management, international investment and venture capital. However, this false belief no longer has any place if we are used to the trends observed on the current market.

The myth of lower return on investment (ROI) for an Impact startup

“What we do at Alvéole is beekeeping. We take care of several hives. Often, after presenting my organization, the question people ask me often sounds like, “is it a full-time job or not?” When I reply by saying that I have a successful business with 200 employees and a lot of income, I am surprised,” says Alex Mclean, the co-founder ofAlvéole, an impact startup that works from urban beekeeping to help businesses achieve their commitment and sustainable development goals.

The ways to measure impact are still very disparate in Quebec. And the biggest myth that persists about ROI for impact startups is that it's lower than for other businesses. This is even though a large number of investors now incorporate ESG indicators into their decision-making. They are therefore looking for profitable businesses that generate a positive impact. One no longer really goes without the other.

Impact at the center of startup development

“Impact is an element that transcends several organizational spheres. It is felt in the hearts of organizations starting out today. It is therefore wrong to say that a company that wants to take the traditional route is not obliged to have a certain positive impact socially, environmentally and in terms of governance (ESG). Even if she herself does not care, it will still be a criterion that will be used for her evaluation with current or future investors and customers. There is now a need for transparency on ESG indicators for all companies,” explains Alex McLean.

Calculating the return on investment (ROI) with Impact Analysis

In the sense of this entrepreneur, today's businesses have a double challenge: on the one hand, growth and profit margins must follow the impact, on the other hand, it must be quantifiable and very real.

To ensure that they have a fair and clear vision of the projects supported, the Blue Vision Capital team systematically sends a questionnaire to do an impact analysis including, for example, questions about the carbon footprint (environment) to the companies they choose. “This is how we arrive at an exact mathematical formula on the impact of today and that of the future of this company. By standardizing this practice, it is the best way to confirm that the impact is real,” explains Meir Rabkin. This is the way that this firm has found to filter as best as possible companies that would do greenwashing.

The impact report is read in conjunction with the financial projections. It is with this approach that investors estimate where the business will be in the next 2 to 5 years. In light of ESG data, they are able to estimate what the impact is on reducing the carbon footprint, for example, for every dollar of growth.

Impact startups occupy a great place in the current big player market.

If we look at the number of “unicorns” today, companies with a valuation of more than $1 billion in the world, about a third of them come from the cleantech sector, points out Meir Rabkin.

In addition, in 2022, the market observed a 40% drop in venture capital dedicated to so-called traditional companies, in all sectors combined. However, if we look at the cleantech sector instead, we notice an increase in investments of around 89%.

Impact startups are therefore taking a major place in the portfolios of investors. They are therefore able to demonstrate that their return on investment is as good as, if not better, than that of traditional businesses and that, in addition, they have a positive impact on society.

This article is developed as part of the Startups campaign, the impact reflex, presented by Startup Montreal in collaboration with the Government of Quebec.