In the last two editions, we began the conversation on due diligence. I started with sharing important principles about it in part 1 and in part 2, Devashish Taknet shared key things to note and prepare for to ace financial due diligence. In this edition, I aim to arm you with important pointers for impact due diligence, and in a subsequent edition, our friends at Orrick will share about legal due diligence. Remember, in the first edition of this newsletter, I promised that the goal was to be your thought partner on this journey and simplify things. I am still focused on that goal.
As an impact-oriented founder, a conversation around impact measurement might excite you because you know you’ve been doing great work that impacts others positively. But is it really achieving what you think it is? Does the work really elevate the outcomes for your stakeholders? Without your organization’s contributions, would the positive impact have happened anyway? Are you measuring the right indices? Are you measuring outputs or outcomes? This is where many impact-oriented founders get surprised when the feedback from impact investors shows that all the great work was not properly funneled. It could also be confusing to some investors as to what should be included or not. This difficulty is what makes the subject of impact measurement and management seem “messy”. Unfortunately, there is still no particular standard that is mandatory for global use but, there is now more consensus on certain standards, principles, and fundamentals that should guide impact measurement.
All impact-oriented organizations should integrate impact measurement and management in their work. This is very important because, during due diligence, an impact investor will assess the organization’s impact potential through a process that is referred to as impact due diligence. “Impact due diligence (IDD) is a cornerstone in the realm of impact investing. It serves as a meticulous means of analysing and evaluating the social and environmental impact of potential investments. Its aim is not only to identify investments that generate financial returns, but also brings about measurable positive contributions to social and environmental challenges. Through this stringent screening, investments that promote sustainable social transformation can be selected”. (Nyssing, 2024) I emphasized some words in this definition that featured in a position paper by Bertelsmann Stiftung because it helps founders rethink and refocus their impact-driven activities. If you missed the theory of change edition, check it out. It clarifies the difference between outputs, outcomes, and impact, important concepts assessed during due diligence. About this time last year when I worked on a project for a client, it became more evident that to accurately measure impact, one needed to be clear on one's theory of change and logic model. This is because sustainable impact can sometimes feel difficult to measure but it is even harder when there is no premise for measurement.
What should an impact-oriented founder know?
I believe a working knowledge of the five dimensions of impact by the Impact Management Project (IMP) is a great resource for a founder who plans to start measuring impact. It will help you refine your work and move towards clearly defined outcomes that benefit your stakeholders. This is an attempt at a short and simple summary of the dimensions and the implications for founders. The five dimensions are:
WHAT: In this dimension, impact assessors consider the defined outcome to be experienced by the stakeholder in a period, a national or international outcome threshold, the importance of this outcome to stakeholders compared to those who may not be experiencing it, and the affiliated Sustainable Development Goal (SDG).
As a founder, this means you have to do your research for your industry and connect with your stakeholders to choose the right outcome indicators. Just choosing an SDG is no longer enough. Critically assess both intended and unintended outcomes and also the positive and negative outcomes of your work. The goal is to find ways to reduce the negative. If your positive outcome is closely linked to your financial prospects, it is a good sign.
WHO: In this dimension, the impact assessor evaluates the stakeholders that are served by your organization. How underserved are they? What are their characteristics? Where are they located? What was the existing baseline data before your organization delivered its product or service? Are there different segments within your stakeholders?
As a founder, you must be able to demonstrate a clear understanding of the stakeholders you serve and how your product/service makes a difference in their lives. For example, one service can affect the user, the community, and the environment in entirely different ways. Demonstrate your understanding of these interactions in your work.
HOW MUCH: In this dimension, the impact assessor evaluates the extent of impact in terms of scale, depth, and duration. How many stakeholders are impacted? What is the extent or degree of change experienced by stakeholders? How long does it take for the stakeholder to experience this change? Or how long do the effects last?
As a founder, while numbers are great, they are not the only significant metric. It is important to refine how you deliver your products and services in order to extend the impact of your work. Sometimes, a little pivot in service delivery can change the dynamics of your impact-oriented organization.
CONTRIBUTION: In this dimension, the impact assessor evaluates the environment and other actors trying to produce the same outcomes to see if an organization’s outcomes could have been achieved anyway without their products/services. This is important to ensure that the organization plays a key role in achieving the outcomes. Impact assessors use different tools for counterfactual analysis.
As a founder, it is important to examine the depth of your impact on your stakeholders in order to see if your contribution is significant or minimal. Will change still happen for your stakeholders without your products/services? If it is minimal, what other areas might you reallocate resources in the value chain to produce a significant contribution? This information can be derived from direct market research, experimental research, and also feedback from stakeholders. An understanding of the other actors in your terrain could lead to collaborations or other methods to deepen your impact on your stakeholders.
RISK: In this dimension, the impact assessor evaluates all that could probably go wrong, the likelihood of concurrence, and the gravity of occurrence. More importantly, the assessor will be checking to see the organization’s plans to mitigate these risks.
As a founder, you must demonstrate that you are aware of these risks and you have put effective strategies and systems in place to manage them. It is important to state that your risk mitigation plan must be seen to be effective. It cannot just be anything or what is trending. It must suit your unique context. For example, AI is a major feature in many new products and services. It is important to consider all possible risks for your unique context, stakeholder, and desired positive outcomes and then create a risk mitigation strategy with that in mind.
After reviewing an organization around these five dimensions of impact, an impact assessor can to a large extent predict the impact potential of an organization. When great impact potential meets strong financial prospects, it’s a worthy recommendation for impact investment.
What Should I Do as a Next Step?
Identify the top gaps that came to mind as you read through each dimension, probe them, and brainstorm with your team.
Create a plan on how to plug these loopholes over the coming months. No pressure, you are building for the long haul.
Use the impact measurement tools in the highlighted resource section of this newsletter.
Highlighted Resource
The highlighted resources for this edition are Upmetrics and SoPact Sense. These organizations have created the tools to make your impact measurement and management more effective. Check them out.
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Worth Reading
Worth Listening To
End Notes
If you have a product or resource that can be helpful to an impact-oriented organization on its way to becoming investible, fill out this Google form. Who knows, you might be featured in the highlighted resource section.
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PS: Are there topics you would like to see covered? Share them, and I will see how to add them to the existing content schedule.
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