Impact Flock gathering: reflecting on incentive structures for impact

Photography source: Sincerely Media on Unsplash

Maze has been a member of Impact Europe (formerly known as European Venture Philanthropy) since 2013, and I have been honoured to serve as a Board Member since June 2021. Over these years, our team regularly attended the annual conference of Impact Europe and witnessed the steady growth of the European community of impact investors, policymakers, asset managers and founders.

As the community grows, the depth and quality of discussions have also grown among segments that face similar challenges and share the same questions. As a result of this, several targeted initiatives have emerged.

The Impact Flock Gathering

The Impact Flock is one of them, emerging from a partnership between Impact VC – a community nurtured and convened by Better Society Capital, the International Climate Finance Accelerator, and Impact Europe. The latest edition of this initiative took place in Luxembourg, on October 21st and 22nd, on the back of a major event for the European VC ecosystem: Ugly Duck, the annual conference of the European Investment Fund.

The Impact Flock gathered around 40 impact venture capital fund managers from all over Europe, most of which have been investing for over a decade. As I reflect on the insightful discussions and debates that were held during the event, here are my four main takeaways.

1. The early stages in the venture lifecycle, namely pre-seed and seed, are where impact-oriented capital is needed the most

At the early stages, impact capital continues to be scarce, hindering the exponential rise in the volume of innovative solutions that tackle social and environmental challenges. If we take the Affordable and Clean Energy UN SDG (SDG 7) as the reference (i.e. 100 points), other impact areas such as SDG 3 – Health and Well Being, SDG 14 – Life Below Water, and SDG 4 – Quality Education, are funded at 30%, 2% and 1%, respectively, of that threshold. This creates an especially difficult environment for science-based solutions with impact potential, whose perceived longer solution-to-market cycles scare impact investors away.

2. For LPs wanting to allocate capital into impact, look no further than the incentive structure of the GPs that you are funding

The sector has advanced from the non-productive discussions of defining what impact is. Impact is not binary, but rather a myriad of different strategies that cater to the interests of a specific group of investors, just like any other investment strategy. What becomes crucial is to keep GPs aligned with the impact mandate that they have committed to. The European Investment Fund pioneered the adoption of impact-linked carry for its fund managers. We, at maze, adopt this mechanism and we have written about it at length here. To date, this is most adopted mechanism to keep GPs aligned and focused on implementing their impact thesis, as their remuneration is tied to the impact performance agreed with their LP Advisory Committee. An impact-linked carry structure differentiates funds that see impact as optionality from those where impact is the strategy that they live up to.

3. Founders’ intentionality is a key (yet hard to assess) driver of impact performance for ventures

There are various examples of impact venture capital funds that are including, as part of their value proposition to founders (and LPs), a structured approach to supporting founders on their venture journey. This entails executive coaching, in-depth mentoring sessions, and a focus on impact stewardship through leadership support. This realisation made me think that our early experiences with founder coaching at maze can be strengthened as part of the platform support that we provide to founders (a summary here). A question that remains unanswered in my mind is how to define the outcome metric of success for this support – should it be linked to financial performance? Or rather to impact performance? Or perhaps it should rely on self-reported data from the founder based on how it contributed to their overall journey? As a data-driven firm, defining attribution is something we embrace with the beauty of ambiguity.

4. AI-based products hold some of the most promising solutions to tackle structural social and environmental challenges that our society faces

The VC world has embraced AI as the main target for its investments over the recent years (as shown in slide 148 of the State of AI Report brilliantly produced annually by Nathan Benaich at Air Street Capital, available here). Venture capital funds have also embraced AI as the lever through which it can scale and automate inefficiencies in their internal operations. At Impact Flock, we had a productive discussion about the promise that it holds for impact-directional opportunities. AI won two 2024 Nobel Prizes, of Chemistry and Physics, with real-life applications that can affect healthcare and climate outcomes. There is a growing number of AI-based solutions on materials science, energy, healthcare, food and agriculture, all of which with huge positive impact potential.

Drivers of impact

Pulling these insights together, impact fund managers play a crucial role. When incentivised to fulfil their impact mandates at earlier stages, and in accordance with their remuneration, they can be a driving force for founders and AI-based solutions with huge impact upside.

On my end, I find peace of mind knowing the amazing group of people that are leading impact funds and their respective capital allocation across Europe, with ambitious impact mandates and a clear understanding that in order to reach good answers, we must first ask even better questions.

If you are thinking about these topics and, as me, have more questions than answers, would love to hear from you at antonio@maze-impact.com.