Earlier this year, a report from the EU showed that 42% of companies exaggerate their level of sustainability. This "greenwashing" is now so prevalent that one organization has launched a platform to calculate businesses' true environmental impact and avoid misleading marketing.
Today’s global impact investment market is valued at $715 billion and growing. But as VCs, angels and celebrities rush to put their dollars in businesses that do good, they're not doing sufficient due diligence.
For some founders, tying themselves to impact is a way to play into trends and get noticed by investors. It's why some people identify themselves as an "impactpreneur."
There's a fine line between impact and pushing a narrative for marketing purposes, and misjudging a startup's genuineness can cost investors money as well as their reputation. During my time working with thousands of startups, I’ve picked up on these three signs that a startup is using impact to gain traction on the public stage -- not make real change.
They aren't recording and tracking impact metrics
If a company isn't measuring the impact they claim to focus on, that's a red flag. Startups that are really striving for impact will have a clear definition of what their goals are, how they're getting there and what metrics are monitored along the way.
At Founder Institute, we have defined several “impact KPIs” that help startups track their incremental impact steps.
For example, a women-led accelerator program that hopes to increase the number of successful female founders could have metrics around the number of female attendees per month and year, the number of attendees that launch a business and how much funding those businesses received. No impact is created overnight, but by breaking the journey into granular chunks, businesses demonstrate that they're committed to building and refining their path to impact.
Tracking metrics also forces companies to be fully accountable for the impact they advertise. The companies that publish their metrics even when they aren't positive tend to conduct deep dives into what went wrong and put in place plans to remedy the situation.
A great example is Duke Energy, which shared a report acknowledging that it fell short on team diversity goals last year. To improve the metrics, the company hired a new chief diversity and inclusion officer and committed $4 million to advocate for equality in the communities it serves.
We investors also have to ensure that metrics are present throughout a company -- that startups practice what they preach. If a business has stated that it wants to improve access to education for more people, the founder should be able to provide metrics around in-house training programs, course offerings, development plans and promotions.
If they don't have this information, that could be a sign that the company's impact only targets lateral goals and isn't built into internal operations.
The CMO is responsible for the impact strategy
Impact should ultimately fall on the shoulders of the CEO. It may sound obvious, but if the chief marketing officer is the go-to person for conversations and reporting about impact, that's a problem.
When impact exists solely in the marketing realm, it can be easy for people to have accidental or convenient impact -- where they retrospectively look at data and celebrate successes that weren't the direct result of an impact strategy. For example: A startup claims that it reduced its carbon footprint by 10% in 2020, when really the drop was due to operations being shut down during the pandemic.
Likewise, if a startup's impact objectives seem too good to be true, they usually are. Marketing departments go big when they want to make a splash (see: Theranos), but with impact, companies need to be acting at the ground level before they shoot for the moon.
Take ExxonMobil, which advertised its experimental algae biofuels as a means to reduce transport emissions. Consumers were quick to point out that the company had made no pledge to net zero carbon emissions before shooting for "sexier" impact alternatives.
They're about projections, not progress
It's natural that when founders are fundraising, they emphasize their most disruptive edge. That they can end poverty, close inequality gaps or reduce the effects of climate change. These promises can raise investor eyebrows, but they have to be rooted in the how.
Every investor knows the feeling of glossing over the financial projections in a startup pitch deck. It's not so much the figures that matter, but the process behind them. It's exactly the same with impact.
If a startup's whole identity is the future numbers of their impact goals, investors should be wary. The methodology is far more telling than the statistics.
For example, GSK has announced ambitious plans to be net zero carbon by 2030, but its breakdown of key activities like switching to renewable electricity, electric cars and green chemistry is what confirms that the company is actually moving toward that impact. If the company doesn't reach total net zero status, the intent is still clearly there, and progress will be made -- but perhaps at a slower pace.
If Theranos has taught us anything, it's that companies are wise to the allure of impact when raising funds. For investors, being able to distinguish real impact from marketing ploys not only protects them, it helps their capital go to places that can really make a difference.