Opinion

Purpose and Profit – unlocking the potential of Tech for Good

Tech For Good

Nathaniel JowittNathaniel Jowitt, July 25, 2018

Since the invention of money, people have invested with the aim of making cash returns. Now, investors are increasingly asking for more: they would like to see their money bring social and environmental benefits alongside financial returns.

To encapsulate this idea of blended value, the term “Impact Investing” was first coined in 2007 at The Rockefeller Foundation’s Bellagio Center. Overall Impact Investments now total $228bn, according to the Global Impact Investing Network.

Current investors seem to find it beneficial, with Barclays’ The Value of Being Human: A Behavioural Framework for Impact Investing and Philanthropy revealing 90% of those who invest in impact investments are likely to do so again. And it is expected that a new generation of investors will continue to fuel the growth, with the 2017 Deloitte Millennial Survey revealing that 47% of Generation Y believe that the purpose of business is to improve society or protect the environment.

In November 2017 the UK Government released a report on Growing A Culture Of Social Impact Investing In The UK which stated: “Having looked into the reasons why the UK is not fulfilling its potential for social impact investing, the advisory group has concluded that none are insurmountable. In fact, there is a real opportunity to build on a history of social impact innovations in the UK and contribute actively to global sector leadership”.

Growth of Tech For Good

Impact Investments in global tech are on the rise, demonstrated by a 50% compound annual growth rate in ICT Impact Investment from 2013-2015. Tech for Good has captured the imagination of entrepreneurs and investors alike, with the UN’s 2015 Sustainable Development Goals serving as a framework for mission-driven initiatives, and allowing better communication and awareness of the sector.

Crucially, the idea of purpose-driven innovation, or ‘Double Bottom Line’, has reached the mainstream too. Over 50% of Europeans believe that tech entrepreneurs will have a bigger impact towards solving global issues than their governments. Fortunately the UK is ahead of the curve; according to Nesta nearly a quarter of all European ‘Tech For Good’ organisations are based here.

To discuss how to grow the sector, unlock appropriate capital and reinforce the UK’s position as a world-leader in Tech For Good, at the end of last year we held a roundtable with sub-sector investors and entrepreneurs, with the aim to agreeing some tangible take aways.

Badge the willing and establish a sector definition

Establishing a sector definition would help with governance, and many entrepreneurs would welcome being ‘badged’ as part of a reputable collective working for alternative outputs. A sector definition would also help smaller companies engage with the larger corporations and would add legitimacy to the sector. It is generally agreed that the definition and communication of the sector currently lacks clarity. Any definition would have to be accessible globally, to attract investment from abroad.

Some believe that any language relating to the sector should be as open and inclusive as possible, to maximise access. Paul Miller, Partner at Bethnal Green Ventures, said that “too tight a definition could be constraining”.

Connect to established sectors

Purpose-and-profit businesses target large sectors like Health or Education, which are difficult to navigate. Growth and adoption in these markets are slower, and although there exists significant network effects, the cost of customer acquisition is high.

One way to encourage the link to these sectors is to define buckets within established sectors. “Tech For Good”  is viewed as one of the most common names emerging for the sector, so these buckets could be: ‘Healthtech For Good’, ‘Edtech For Good’, etc.

Alternatively, the “for good” label is often seen as representing the Third Sector, with lower perceived returns, which turns off a lot of investors. Another possibility is to segment the market by expected rate of returns: not-for-profits, below market and at or above risk adjusted market-rate returns. ‘Impact’ and ‘Purpose-and-profit’ are also viewed as established labels that might be accessible to a wider audience.

Highlight challenges that face entrepreneurs

It is often difficult for businesses to understand and find their place in the ‘tech for good’ ecosystem, unlike more established ecosystems like Fintech, where companies are able to ‘slot in’ and receive appropriate support.

It remains a challenge to simultaneously explain the stories of both purpose and profit to investors. Teddy Kim from Mustard Seed proposes using a ‘lockstep’ model, with purpose and profit inherently locked into the business model, to describe scalable and sustainable solutions. This terminology seems to resonate well with investors and entrepreneurs alike.

Companies that go through the funding cycle gain access to the networks that investors offer, however, this often comes with the additional challenge posed by traditional investors who might attempt to redirect the business away from mission-driven impact and towards more extractive profit.

Showcase pioneers with stories of success

The UK is viewed by other governments and investors as the global leader of purpose-and-profit in tech. To boost the sector and bring in much needed talent requires pioneers with stories to build the right narrative of business proposition, value and understandable, measured success. It is thought that showcasing these stories would inspire entrepreneurs in disadvantaged areas to come up with new solutions. A programme focussing on peer-to-peer cohort learning could help to shine a light on these companies and help them to grow.

Alexander Goodenough, Investment Director at Big Society Captial says “we need to showcase and celebrate the pioneers, and share their stories of how they combined a sound business proposition & clear customer value and an understandable, measurable impact.” Goodenough believes this would “inspire even more entrepreneurs from different walks of life to develop innovative solutions to the world’s greatest challenges.”

Tight networks and communication between founders

It is important to build tight networks and allow collaboration and communication between ‘tech for good’ companies. Entrepreneurs accessing early-stage investment would find it beneficial to be surrounded by companies in the general purpose-and-profit space where there is more infrastructure for finding investment, talent and ‘role model’ companies with pioneer stories of growth.

Entrepreneurs at a later stage, or those accessing paths to growth, would find it more useful to be in a sector specific cohort to better understand the intricacies and potential barriers of the traditional sectors (health, education etc.).

Unlocking capital

Although there are possibilities for great returns, Gi Fernando, CEO and Founder at Freeformers, added “there is a definite lack of patient capital in the sector”. There is also a need for increased support alongside investment at various stages of the business lifecycle. Various, small interventions along the path need combining. In particular, there is a need to coordinate the large but disorganised network of angel investors and there appears to be a gap in investment at the SEIS equivalent level.

Being in a group with access to investors and partners who are seeking solutions would be a useful marketing tool for startups and scaleups. This would act as a shop window in the form of tech platforms so that investors know where to buy. It would be useful to have a catalogue of companies and solutions for government to see in the public sector.

Conclusion

There is an exciting shift in tech, as well as the wider investment industry, towards an approach that combines both purpose and profit.

As the numbers show, impact investing has increased significantly in recent years and businesses are still discovering news ways in which to continue to grow and shape this sector to drive financial, social and/or environmental returns for entrepreneurs, investors and consumers.

The roundtable we hosted helped to explore experiences of entrepreneurs and investors in the ‘Tech For Good’ sector and we welcome your thoughts on what more can be done to overcome challenges to both benefit businesses and help them to achieve their philanthropic goals.