Why Nesta is investing in ed-tech for higher education

Nesta Impact Investments recently led the £7million Series A investment round to support the growth of edtech company, BibliU.  Nesta invested £1million alongside other investors, Guinness Asset Management, Oxford Sciences Innovation and several family offices managed by Stonehage Fleming

Investment in edtech across Europe has grown fast over the past five years and passed the $1bn mark last year. Nesta has been a prominent edtech investor in the venture market, building a portfolio of ten companies across the sector. We see the transformative impact that technology can bring for students, educators and education managers, in enabling more effective learning, improving access to high quality education, reducing teacher workload and providing data-driven decision making tools. 

BibliU is a great example of this. It is a digital learning platform used by universities and higher education institutions to provide students with online access to learning materials. The platform gives educators, academics and university libraries detailed information about content usage patterns and learner engagement that helps them better assess the needs of students. BibliU already has partnerships with over 2000 educational publishers worldwide and offers incredibly comprehensive content coverage. 

We were drawn to support BibliU for several reasons. At its core, BibliU is playing a leading role in the digital transformation of higher education and seeks to support inclusive access to educational content. BibliU offers all students more cost effective access to their course materials and in formats that are inclusive and accessible. There are further environmental benefits of a reduction in print textbooks. 

Closing the access gap

The cost of print textbooks has skyrocketed in recent years. Since 1977, in the UK, textbooks have increased in price at four times the rate of inflation, over 1000%.   87% of students think it is too expensive to buy new textbooks. This leaves more disadvantaged students with poor quality materials such as second hand books that are out of date, or sometimes without course materials at all. In turn, this leaves students worrying they will not achieve the grades they are capable of, simply because they lack access to learning content. In one study, 94% of students who had foregone buying textbooks because of the cost, were concerned that doing so would hurt their grades. During COVID-19, this issue is heightened as social distancing means further lack of access. Ensuring students continue to learn is crucial, particularly for those from disadvantaged backgrounds with no alternatives. 

BibliU provides a solution to this affordability gap. UK universities who sign up to BibliU offer it at zero cost to their students providing equal access to course materials for all. But beyond affordability, the digital format also improves access for students with learning needs such as large text or audio formats. BibliU’s technology offers inclusive access in a personalised way that helps students break down content into components and allows students to be more efficient in searching for definitions, explanations, and figures. BibliU helps students accelerate their learning and enables their teachers and professors to better support them. 

Why investing now matters more than ever

Under current circumstances, the digital technology provided by BibliU also provides a much-needed lifeline for universities adapting to remote learning. There is huge variation across the university sector in terms of tech-readiness. Some universities are at the forefront in applying technology to their learning methodologies, whereas, until recently, many others are still delivering degree education in the same way they have done for decades with face-to-face lectures, classes and tutorials. BibliU is playing a key role in the current Covid-19 crisis, helping universities to shift swiftly to digital learning as students face staying at home for the summer term. Nesta’s investment is supporting BibliU to continue to offer free access to their content during the lockdown, which has seen uptake quadruple. 

Educational content is a $65bn market which dwarfs even music and movies. BibliU has ambitions to reach 60% of the higher education students in the UK and US – 13 million students. The opportunity to deliver innovation at scale is there.  

A Nesta investee, Emerge Education, introduced us to BibliU and we are delighted to build on their early investment and look to scale innovation in higher education through BibliU. It reflects our commitment to the strand of Nesta’s education strategy which seeks to promote a smarter education system to empower learners, teachers and learning institutions to make more effective use of technology and data. Our investment in BibliU sits within Nesta’s broader portfolio of edtech activity which spans schools, higher education and workplace learning and we look to share the insights and experience we draw from this. 

Nesta Impact Investments is excited to be further building on our work in the edtech sector and supporting the BibliU team to transform access to learning in higher education.

The Doctor Will Video Call You Now

Nesta Impact Investments recently led a £1.5 million investment into Q doctor, a platform that allows video consultations between patients and their healthcare providers. Below, Manish Miglani explains why now more than ever these digital technologies are helping the NHS to keep seeing patients across the UK. 

Due to COVID-19, video calling or conferencing has become an essential part of our day to day lives. Many healthcare providers have also had to shift to remote working, seeing more patients across video calls or via the telephone. 

Historically, the NHS has struggled with digitisation, however, COVID-19 has brought with it the need to rapidly digitise like no one could’ve imagined. The recent fast track approval of 11 online video tools as part of the emergency framework (Dynamic Purchase framework) alongside the GP IT Futures framework exemplifies this well. As the chair of the Royal College of GPs Martin Marshall noted to the Times, it has taken “two and a bit weeks to achieve more than we have achieved in 20 years” in adopting new technology into the healthcare system. 

Investing in tech that works

That’s why it comes at an opportune time that Nesta Impact Investments has led a £1.5 million investment into Q doctor, a platform that enables those in the NHS ecosystem to deliver health services directly to patients via video consultation. Q doctor is rapidly expanding at pace to meet the demand caused by COVID-19 and is currently available to 25 million patients across the UK. The platform not only enables patients to continue to have access to their healthcare professionals but it also allows workers to stay safe at home, delivering consultations without needing to be physically in a GP practice. 

When we were evaluating investing in Q doctor last year, we were struck by the impact they were already having across care pathways including specialist and outpatient care, such as enabling Lewisham and Greenwich NHS Trust (LGT) to offer specialist cardiology consultations through video. They had managed to put into practice what the NHS Long Term Plan set out a few years ago – using technology to make it easier for patients to access healthcare and reducing long wait times. Furthermore, unlike many other virtual healthcare platforms that work to replace healthcare infrastructure, Q doctor works alongside existing NHS systems so that patients can stick with their doctor who knows their healthcare needs and also benefit from video consultations. 

Q doctor’s work for COVID-19 and beyond

Our investment is already helping support Q doctor in their response to COVID-19. As the platform is now NHS Digital and NHS England approved and centrally funded, NHS services can now access the platform for free. This has allowed Q doctor to help clinicians securely access their clinical system without any additional hardware and in working with one of the largest providers of NHS urgent care services to support setup of London’s first COVID-19 isolation centre at Heathrow airport. The largest urgent care providers nationally are now working over the Q doctor platform to deliver care to care homes, hospitals and patients in their own homes. It is heartening to see the platform help deliver the softer emotional aspect too, with isolated patients in hospitals and care homes being able to use it to speak to their families and loved ones.

Beyond the current health crisis, we believe Q doctor’s platform will make a truly positive difference for clinicians and patients alike, influencing healthcare in the long term whether it’s improving access to healthcare or simply freeing up clinician time to be used more effectively for those who need it the most. In having to innovate during a time of crisis, this may just be the push the NHS and wider care system needed to fully embrace digital technologies. 

 

The story of my life

What does a good board pack look like?

Over the next couple of months I will post a couple of blogs about corporate governance with some thoughts on roles, compositions and effective processes at boards.  As a big Simon Sinek fan, I would normally kick things off at the top level thinking about purpose, but in this case I’m going to break the rule. I’m going to start by diving into a detail, what I think a good board pack looks like.  I’m doing this partly because of an immediate need to cover this elsewhere and secondly because it’s probably an easier topic to nail down!

Having said that, the Why, What How runs deep so let’s start with purpose, at least at a micro level, the purpose of the board pack.  

Why do we prepare board packs – which I think are frequently seen by executive managers in investee companies as an unnecessary burden, distraction and cost of receiving capital?  Interestingly, as a side note, in my experience there is a high correlation between deep embracing of board data and company performance in the long run and the way founders and managers respond to board process and reporting is an indicator to me of their capability and quality.  

Fundamentally I believe that a board pack has one purpose with a few direct and indirect outcomes.  The purpose is to enable all board participants to be deeply informed about the critical performance matters in the company in an efficient, consistent and comprehensive way.  The outcomes of achieving a high level of knowledge from having creat board reporting are:

  1. Significantly more efficient board meetings where it is possible to project forwards and problem solve rather than play catch up on what has already happened and therefore can’t be changed. 
  2. Better decision making through comprehensive background data.  Making choices with partial information is always less effective.  Gaps can be temporal meaning trends are not easy to spot, or thematic meaning it is not possible to reflect on interconnections (for example platform performance and customer service, or sales and marketing).
  3. Increased confidence by non-executive board members in the executive likely leading to greater trust and executive freedom.
  4. Increased implicit responsibility of board members to engage.  It’s easy for me not to spend time preparing for board meetings where there is little support to help me, conversely I feel embarrassed and guilty if I have not respected the effort that a team has put into creation of a great board pack.
  5. The creation of a ready made data room to support fund raising or corporate M&A and accelerated confidence and trust building of incoming stakeholders.
  6. Improved organisational culture resulting from transparency, consistency and discipline that is required to have good board reporting in place.  

When a management team weighs up the cost benefit analysis of taking time to prepare high quality board packs, as they must given the limited resources in any start up, they should reflect on all these matters.  The decision may still be that resources are better deployed elsewhere but that should be a comprehensive and intentional decision rather than a passive choice resulting from failing to consider the implications.  

So what does a good board pack look like?  Well first of all a negative response – it doesn’t need to be long, although it might be.  It does not look the same for every company, the depth of contents will vary by company depending on scope of activities, maturity and availability of data.  It does needs to be pragmatic and be designed to meet the needs of and the capability of the company and team. 

What is important is:

  1. Consistency – the pack should pretty much look and feel the same month to month allowing both rapid familiarity helping readers consume data more efficiently, but also lead to easy comparison month to month to help identify trends and patterns.  
  2. Data richness and efficiency.  Subjective views are important and relevant, but backing them up with data leads to more effective analysis and decisions.  Easy visualisation (graphs help) makes this better. However the data needs to be relevant and focussed. There is a pareto of data significance that you should take into account when designing a pack that depends on deep understanding of how your business functions to identify.  What your workers eat for lunch will be irrelevant for most organisations, but for a PT instructor business it might be one of the most critical factors in success. Work out what matters and find ways to measure and report it.  
  3. Comparability – how is performance compared to plan, prior periods and maybe some other relevant benchmark like competitor performance.
  4. Timeliness – if you can’t get a pack to me 10 working days after period end you’re doing something wrong.  
  5. Comprehensiveness.  Your pack should cover all of the following areas.  The amount to report in each category will vary significantly company to company but it is unlikely that every one of the following matters is not relevant to an extent that warrants at least minimal commentary: 
    1. Your market place – insight into customers and competitors
    2. Product/service delivery performance – including both internal (platform downtime) and external (NPS) metrics 
    3. Product/service development plans and delivery – new products, product enhancements, product improvements, remedial fixes.
    4. Marketing – how well are you getting your message out
    5. Sales – what does your pipeline and process performance look like
    6. Customer service performance
    7. Staff – performance, wellbeing, capability gaps and recruitment, issues
    8. Operational resources, space, kit.
    9. Financial resources and performance
    10. Compliance matters, have you done the stuff you should and has anything happened that shouldn’t have from a legal, cultural, safety, environmental, financial (etc.) perspective
    11. Board performance, at least a rolling action list plus minutes – did you record and do the things that you said you would do in past meetings.  

Every pack will look and feel different, and board members will appreciate brevity as long as it is efficient rather than resulting from lack of completeness.  The data you include should be stuff that the leadership team in a business are thinking about all the time, so it should not be difficult to pull together if you have capable people, strong processes and good discipline.  Creating good board reports should be a beneficial exercise for executives as well as non-executives.  

On reflection I now realise that I need to do a huge amount of work on my own board process to meet the standards I’m expecting of my investee companies, but at least that means you know I am speaking from a position of empathy at how hard this stuff is!

Growing the Impact Investment Market: Some Reflections

The global movement for investment to be used as a tool for social and environmental benefit is growing, as is public demand for sustainable investment opportunities; a good time for some healthy personal reflections. 

When I joined Nesta 6 months ago, I was asked to reflect on my previous two years working on the Department for International Development’s Impact Programme. Over five years, as of December 2017, the Impact Programme through CDC Group had committed nearly £130m in investments and helped to mobilise nearly £300m of third-party capital into ‘impactful investments’. Moreover, the products and services of investee companies had reached over 12 million low income individuals and families. 

Reflections:

Despite these considerable achievements, what I soon realised, was that the scale of capital that is needed to achieve both the SDGs and the transition towards a green economy is of another order of magnitude in scale. Impact investors and Development Finance Institutions (DFIs) can play a role in this push to re-direct the flows of capital markets, however, it seems inevitable that policy changes, led by national and supra-national government bodies will be necessary to move capital in the speed that is needed. Despite this fact, actors such as DFID and CDC Group can play a vital role in the development of impact investing, as they are able to set the standards in terms of best practice around impact measurement and management (IMM); and have a demonstration affect in illustrating the methods through which value can be created in local economies beyond simply the transfer of capital. First movers in the space, are therefore the best guardians of avoiding what many now refer to as the risk of ‘green washing’ in the broader impact investing movement.

Another key take-away was around the thinking developed by Matt Ripley and Sarah Forster at The Good Economy (and others) around the Business Value of Impact Measurement. The premise was a simple but compelling one – that IMM practices should produce meaningful insights that generate evidence that is meaningful from an impact and business point of view. By re-framing IMM as a strategic value add, rather than a reporting burden – they helped to further embed IMM into everyday business practices – for example through the deep dives conducted with investee companies. 

A final take-away was around the power of integrating impact throughout the investment process, from deal origination and due diligence through to negotiating terms and portfolio management. By making impact an integral part of each stage of the investment strategy, investors are able to develop, what the EVPA call the ‘lock-step’ model, where business and impact value are created in tandem. I am happy to say this is what we do on the investments team at Nesta.

The Future…..

Some reflections, and thoughts for the future of impact investing: in a recent conversation I had with a friend, for some asset managers, they are still nervous about investing their clients money in true ‘impact investments’, due to a perception that the available products don’t offer the type of impact, financial return and liquidity that they desire. However, there are some interesting players in the space which I assume would disagree.  Nevertheless, until the market reaches a more mature state, and performance data on both financial and impact returns from across the continuum of impact capital appear – there will still be an evidence gap between those with extremely high hopes and those with deep seated scepticism. 

As the impact market grows, proper transparency on financial performance, and meaningful impact measurement data will be needed to build the evidence base to demonstrate impact investments track record across different financing needs. There is an opportunity for DFIs to publish performance data, to enable other investors to understand regions that may be underfunded due to a lack of understanding on the financial performance and risk/return characteristics of investment opportunities in certain markets.

Despite impact investing having a more intentional and ethical approach, trends from traditional investing seem to persist – specifically around a lack of diversity on those who are able to access impact capital. As the market grows, impact investors will need to be more proactive and innovative in their deal sourcing efforts to ensure that the networks of old, don’t continue to capture the vast majority of the capital. The data on the performance of female founders, is one example of many as to why this is so important. 

In line with much of the work we do at Nesta, my final thought for the future, is that I suspect there will be a continued growth of interest into the tech for good movement, as increasing amounts of investors, entrepreneurs and consumers look to products and services which harness the power of technology to enhance, add-value and enrich people’s lives – rather than just stealing more and more milliseconds of people’s attention for ever-increasingly accurate advertisements………

 

A brief history of everything (relating to Nesta Investments)

Nesta has always taken a fundamental interest in how innovation can improve people’s choices and lives for the better. This interest manifests itself through our research and policy work, our grant programmes and the investments we have made. This short series of blog posts aims to capture some of the findings and lessons from this last activity…. investing in innovation to help it demonstrate market efficacy and to reach a scale that enables commercial self-sufficiency.

Since our foundation, over 20 years ago, Nesta has consistently deployed a portion of its capital directly to start-up and early stage businesses. Through an in-house investment team, Nesta has invested in over 250 companies across the fields of health innovation, industrial processes, education, arts, science and culture, supporting cutting edge technologies and novel ideas to reach the next stage in their development towards commercial solutions. 

Our investment history can be broken into three main phases, each governed by different strategies and outcome objectives: 

1/ Seed investing (2000-2006)

2/ Technology venture investing (2007-2012)

3/ Impact investing (2012-current)

This first post, covers the ‘Seed investment’ years from 2000-2006.

Nesta was founded in 1998 as a non-departmental public body (a ‘quango’), with a mission to foster innovation in science, technology and the arts. A £250m endowment was established (from National Lottery funding) to enable Nesta to operate independently. With such a broad remit around innovation, Nesta had to make some decisions about where and how it wanted to operate to create the advancements in innovation it sought. As part of our approach, Nesta decided to use a portion of the endowment capital to invest directly into businesses and ideas that had potential to create notable impact across the sciences, technology and the arts. 

After analysing the UK investment landscape at the time, recognising the quality of (fundamental and applied) research coming out of UK universities, research bodies and even individual inventors, Nesta concluded that there was a shortage of investment capital available for new / start-up ideas and sought to redress this by making small seed investments into a large number of spin-outs, start-ups and raw ideas. Over the course of 6 years between 2000-2006, Nesta invested £17m into 212 businesses operating in the arts (50), health (42), sports/leisure (18) and industry/engineering (102). 

The objective of these investments was to encourage entrepreneurial activity at a time when there was very little seed funding available in the UK market, and specifically to support individual inventors to develop their ideas into investable propositions, (either spinning out of a research lab, a corporate R&D department or even their garden shed!). As such, there were no financial return expectations when this seed activity commenced, although this changed towards the end of the period.

Nesta experimented with different funding models, which became increasingly commercial over time. Of the 212 investees, 32 received grants (with very soft repayment clauses in case of success), 84 were ‘royalty’ deals (i.e. taking a share of future revenues related to the innovation), 17 were convertible loans (debt funding that converts into equity ownership on certain conditions) and the remainder, 79 were equity investments.

This pace of investing (c.30 deals per annum) was pretty relentless for the investment team and left little time for post-investment support and management, meaning that the team were often reacting to news and developments from the portfolio.  

Additionally, due to the breadth of innovations covered (from a ghost train in Blackpool to livestock monitoring software to tofu-based bio materials!), Nesta often used expert external assessors to pass judgement on the viability of the applicants’ submissions, further disconnecting the in-house investment team from effectively monitoring progress of the portfolio companies.  

As the size of this seed stage portfolio grew, so did the follow-on capital needs of these companies, such that by 2006 Nesta realised that it was unsustainable to maintain the pace of investment. 

The financial returns of this phase of our investment history are pretty abysmal by any financial benchmark. Of the 212 investments, 41 were transferred at cost (£6.7m) into the ongoing ‘Venture’ portfolio – the second phase of Nesta’s investment history, which will be the focus for the second blog in this series – leaving 171 investments (£10.3m) to be managed to a conclusion (i.e. end of the royalty arrangement, wind-up, share sale, etc). As of October 2019, there are 5 companies still active in this portfolio, albeit where our value is close to zero, with a further 28 deemed as ‘zombies’. The remaining 138 have either been wound-up or exited. Of the £10.3m of funding provided to these businesses, only £0.3m has been returned to-date… 

…but that was not the measure of success that was originally envisaged for this programme of investments, which was conceived to address a funding gap in the UK innovation ecosystem and to encourage entrepreneurial activity amongst researchers, scientists, inventors and artists.  

The key lessons from this phase of our investment history were:

to narrow the investment focus and in so doing;

to build in-house knowledge of target sectors;

to be more closely involved with the progress of portfolio companies;

construct a smaller portfolio with deeper engagement and;

reserve greater financial capacity to provide follow-on funding.

These learnings were applied to the second phase of Nesta’s direct investment history: early stage technology venture investing, which I will write about in an upcoming blog.

 

Direct and indirect impact

What do we mean when we say we are looking for investments with impact? Here at Nesta we have been investing for impact for almost a decade. Over this time we have developed and adapted our thinking about what counts as impact when we are looking at investment opportunities.

Back in 2011, when we first started making investments from our fund, our starting point was to look for scalable business models that created what we might call direct impact. That is, there is a direct point of contact between the product or service in question (the intervention) and the people it is intended to benefit (the beneficiaries, to use an imperfect but useful term). From our portfolio, Sumdog is a great example of direct impact: Sumdog provides a gamified online maths platform (the intervention), which is used by school children, whose maths skills hopefully improve as a result. 

Having started with this approach, one thing that we have learned is that opportunities to make a difference don’t always fall easily into this basket, and that models with direct impact only make up a portion of the range of possible impact investment opportunities. There are plenty of other inspiring and exciting businesses that arguably create a positive impact, but it is indirect impact. We have made some investments that move in this direction. Arbor, one of our investees, provides a management information system (MIS) for schools. The MIS is used by teachers and administrators, which ultimately allows them to do a better job than they were before, which leads to a better education for the students at the school. This is an example of indirect impact – the ultimate beneficiaries, the students, only experience the impact because their teachers, thanks to Arbor, can change aspects of the way they do their jobs.

However, there are plenty of investment opportunities that are appealing to us where the impact is even more indirect or difficult to define. This blog puts forward some ideas for moving this conversation on a step.

Why does this matter?

For our team and for Nesta, we want to ensure we are making the most of the capital we have. We do not want to be too restrictive in our criteria for impact, such that we miss opportunities to make a huge, but less easily evidenced difference, but we also do not want to open the criteria so wide that anything counts. 

The implications go far beyond Nesta: this is about the risk of ‘impact washing’. The broader impact investing industry is very aware of this risk. If we are not clear and precise about what we mean by ‘impact’ then this growing market will simply be bloated by people using the language but not putting anything substantial behind their claims.

The target diagram

We have come up with a simple way of visualising the difference between direct and indirect impact.

The centre of the diagram is the company’s activities. The first ring out represents group A – the people who interact directly with the company’s product or service, and do something differently as a result. The second ring out represents group B – the people who are affected by the change in behaviour of group A. 

Sumdog’s impact, therefore, as an example of direct impact, is represented just with the first ring out. 

Crucially, this diagram tells us something about impact measurement: the further from the centre a metric is being collected, the more noisy and less reliable it will be.

This is not to say that Sumdog has an easy task generating evidence that its product is effective – this is always challenging. But it is more straightforward for Sumdog to investigate this question than it is for Arbor to draw connections between the use of its MIS and the attainment of the pupils at the schools. While it is conceivable that Arbor could make so much difference to the quality of teaching at a school that it improves student experience, there are so many other factors that feed into student experience that it is incredibly difficult to isolate the effect of improving the MIS. But our reason for investing – the ‘impact return’ we hope to achieve through this investment – is ultimately about improved education for students. It is worth noting that existing research, where it is robust and conducted by reputable organisations, is a valid source of information when thinking about these issues. In the case of Arbor we reviewed evidence around the problem of teacher workload, and the effectiveness of giving teachers access to better quality data, to help us understand the likelihood of their achieving the intended impact.

The target diagram therefore helps us to represent differences in types of impact within our portfolio. But it also helps us to be specific about the challenges that come with understanding indirect impact. In other words, it gives us a way of structuring our thinking about impact when there is no clear line through to a beneficiary group. 

The challenges of going beyond group A

Using the target diagram, we can see that the problem of defining indirect impact largely stems from the lack of information about the groups beyond group A. 

Challenge 1: putting boundaries on group B

In the Arbor example, it was very clear who is in group B: it is the students in the school that has implemented Arbor’s MIS. In this case, we do at least know who is in this group, and can find out a bit about them. 

Sometimes, it is much more difficult to define group B. Consider a company that uses artificial intelligence to improve the quality of content online. Their product is paid for and used by websites, who are better able to monitor the content on their sites. In this case, group A is the people running the websites, who use the product to do their jobs more effectively. Group B are the people who use the website. This group is much harder to define than a list of pupils at a school. This scenario can be visualised like this:

In this case, measurement is made very challenging by the unmanageability of group B. If we do not know who the people in group B are then it is very difficult to find out what impact they are experiencing. If some data is available, it is difficult to know whether it is representative of group B as a wider population. 

Challenge 2: the impact is even more indirect

Another possibility we have encountered is where a venture does something that requires several ‘rings’ or layers of people to change their behaviour before the ultimate impact is eventually achieved. Consider, for example, a company that develops a platform which brings together large pharmaceutical companies with the smaller start-ups that specialise in drug discovery. Ultimately, this venture could contribute to the more rapid and efficient development of drugs, which in turn would save people’s lives. 

In this case, there is a very long ‘chain’ of behaviour change – the startups use the platform to find the pharmaceutical companies, the drugs get taken through multiple further stages of development before finally being approved and made available to patients, for whom they may or may not work, depending in part on the behaviour of the patients themselves. A situation like this can be represented as follows:

Though we might be excited about the possibility of improving the success rate of drug development, and ultimately saving lives, we have little hope of really being able to connect such changes to the venture we are investing in. Any metrics collected with group D will reflect a situation that has been affected by so many other things they will be virtually meaningless in telling us anything about the effectiveness of the venture’s activities. 

Is impact just about impact measurement?

These diagrams help to lay out our options more clearly.

As an investor, the first option is to see the feasibility of impact measurement as central to the definition of impact. That is, if impact is so indirect that it is hard to even imagine how it would be measured, then we say that this does not really count as an impact investment, This would be the most rigorous way of defining what counts as impact, and also one of the most restrictive. This would mean sticking to investment opportunities like Sumdog.

The second option is to say that we want to look at indirect impact opportunities, and that we should do what we can to identify metrics, even though they are imperfect. We might frame this in terms of ‘impact risk’ – the difficulty of measuring indirect impact makes it a higher risk option, but we accept this risk because we believe in what the company is trying to do. This would mean expanding our scope to companies like the drug development platform, even though we know it will be very difficult to tell whether the ultimate impact is being achieved.

Both of these options tie the idea of impact together with the idea of measurement

There is a third option: we can pull these ideas apart and think of impact separately from measurement.

Focusing in

While metrics collected in the outer rings of the target diagram are noisy and less meaningful, metrics collected near to the centre will be clearer and more meaningful. In other words, the closer to the company’s activities we get, the more metrics will tell us. This is because the centre of the target diagram is where the company has control, influence and the ability to change things. Further out, where we are looking at changes in people’s behaviour several steps removed from the company’s activities, they have far less control and influence.

We can therefore turn the question of impact around. Instead of focusing only on the outcomes the company is trying to achieve, how about looking at whether their intended impact is informing the way they are running their business?

For example, the company that provides software that helps clients monitor online content will find it difficult to know whether internet users ultimately have a better experience of using the internet. If we focus only on impact measurement, we might end up trying to collect a few metrics that don’t tell us very much. 

If we turn the question of impact around, we start asking: what are the things the company can do to run its business in a way that maximises the chances of creating the biggest impact? This might include things like 

  • Ensuring they are clear about communicating what their intended impact is to clients, so that their clients are on board with these efforts. 
  • Asking clients to share data that helps them understand their impact, where possible
  • Hiring people who have the skills needed to understand impact, even if there are no external demands for this information
  • Bulking up the customer support function to ensure customers are really using the product to its maximum potential – even if this means going beyond what is necessary to keep customers happy

Some of these might be tracked through metrics, but they are more likely to be points of discussion, or changes that we would expect to see in their business plan. 

The point here is not to give up on the importance or worth of measuring impact. We will always push our companies to work to generate whatever insight they can. The point is to say that there is much more that can be done beyond focusing on measuring impact among (sometimes very far removed) beneficiaries. 

The companies we are working with are balancing commercial and impact imperatives. We work with them to understand how their plans for growth and commercial success tie together with their plans to create impact. We look for alignment between these things, but there is always more that can be done to make sure the company’s decisions are focused on impact as a part of the process, not just as an outcome. 

 

Breaking up is the hardest part – thoughts on leaver provisions for venture backed managers

One of the things that we always find challenging during deal legals is agreeing leaver terms with managers and founders.  In essence these are the rules that determine what happens to manager and founder shares if a manager leaves the company they work for or founded.   

Many founders are not even aware at the outset that almost any institutional investor will require some form of leaver provisions to be in place.  This blog aims to set out why we think these terms are important, why we think founders and managers should also think they are important and it describes our “ideal” set of leaver provisions.  

Why do we need leaver provisions?

The fundamental driver behind these principles is that in the absence of leaver and vesting provisions equity has a perpetual and irrevocable share of value.  This causes an issue if equity is used as an incentive to reward non-financial personal contribution. In the event that a manager or founder leaves and keeps any equity they have they share in both the value created to date, but also future value, which they might not contribute to in any way.  

This is an issue in that it essentially taxes the people who contribute to ongoing growth by diluting their share of any future value creation.  This situation is exacerbated when a company needs to provide an equity incentive to a new recruit coming in to replace a departing manager or founder which would dilute all existing shareholders.  

As institutional investors we think that it is important to put in place a fair set of leaver provisions so that the investors who are backing the team as a whole don’t suffer if one of that team is no longer contributing to the business because we have to issue additional dilutive equity to new joiners.  

As well as being important for us we think that well drafted leaver terms are something that founders and managers should also welcome.  Very often managers and founders are resistant to leaver provisions, thinking about the risk of value loss if they become a leaver. This is sensible, but it is equally important to reflect on the consequences of being a “stayer” and essentially picking up the bill in a situation when colleagues leave.  

We see more stress amongst staying founders and managers realising how much value they have given and will continue to give to leavers who cease to contribute to value creation than the other way round.  Well drafted leaver provisions protect staying management shareholders as well as institutional investors.  

What are the goals of leaver provisions?

We think that there are some fairly obvious and fair goals of leaver/vesting provisions:

  • To acknowledge historic contribution to value creation of a leaver
  • To minimise the dilutive effect on staying shareholder of incentivising a new joiner
  • To minimise the immediate cash liability for the company or staying shareholders at the point of leaving
  • To use a simple as possible framework to manage leaver situations
  • To recognise that there is sometimes a difference in appropriate treatment between founders and later employed managers

Practical reflections on valuation

  • At the point of an investment round there is a marker of notional value that allows any incumbent founder or manager to calculate the value of their stake in the business.  This valuation typically includes both a value ascribed to the already established business and a value ascribed to potential future growth as seen at the time of the round and so already provides a degree of “look forward” value.   
  • It should be noted that it is not uncommon for a liquidity discount to be applied if someone actually wanted to sell shares as part of a round reflecting the value of certainty over uncertainty.  
  • Between rounds there is value change, but in practical terms it is extremely difficult to establish with any rigour the level of value change.  

How would we ideally achieve these goals?

We set out below our ideal set of leaver provisions to help you understand how we seek to implement these goals in practice.  They may look complicated, but we think that they are the simplest way that we can effectively achieve the goals set out above.  We don’t insist on these terms, very often other investors have a different approach and we sometimes need to compromise to agree a solution that works for everyone.  

“Manager leavers”

  • Someone who is required to leave as a result of poor performance, poor behaviour or who chooses to leave unexpectedly in the context of the investment life cycle should forfeit all equity based compensation.  These are “Bad Leavers”
    • We think of “unexpected” based on the fact that when we invest we have a standard expectation that managers will remain in post for at least 3 years.  If managers make clear other personal plans at the outset we will adjust both vesting time frames and the level of incentive to fairly reflect these plans.  
    • We recognise that sometimes personal circumstances change for a leaver making the unexpected test unfair.  In these circumstances we will retain the ability to apply discretion to allow managers to benefit from some or all of the historic value creation by classing them as partially or wholly Good Leavers.  
    • Poor behaviour includes leaving to work with a direct competitor organisation within a year of leaving.  
  • Other leavers, classed as “Good Leavers” should be permitted to offer to sell their shares at the point of leaving to existing shareholders through a standard pre-emption process.
  • In the event that shares are not sold a Good Leaver should retain rights to historically created value.  
    • In practice to enable this to happen in a way that meets the goals set out above this should be implemented by shares being purchased by the company [or an EBT type vehicle] for Loan Note consideration or swapped for Good Leaver Deferred Shares.  
    • The Loan Notes or Deferred Shares should be redeemed as a “Tag along” when the majority of investor shareholders exit.  
    • The redemption value of the Loan Notes/sale price of the Deferred Shares should be the lower of:
      • The value per Ordinary Share of the surrendered equity at the round preceding leaving plus an annual interest accrual to the date of exit of 5%.
      • If there are future “down rounds” the value per Ordinary Share of the lowest priced subsequent fundraising round plus an annual interest accrual to the date of exit of 5%. 
      • The value per Ordinary Share of the exit
    • Reasonable protections will be put in place to ensure that share splits etc do not exploit this situation.
    • Additional value protection will be offered by giving leaver LN and DS holders pre-emption rights to subscribe for new equity in subsequent investment rounds as if they were shareholders. 
    • Good Leavers will be allowed to offer their Deferred Shares to existing shareholders at any point.  
  • In the event a leaver is a Good Leaver at the point of leaving but starts working with a direct competitor (as an employee or otherwise) the LN/DS redemption value will fall to nil.  

“Founder Leavers”

  • Where, at the point of investment, Founders have equity holdings that reflect their founder status (i.e. are materially higher than would be expected for a “recruited” manager of similar capability) an appropriate proportion of their shareholding will be considered fully vested at the outset and not subject to leaver terms with the balance falling under the manager leaver provisions.
  • The proportion classed as Founder Equity will be a judgement call at the time of the deal but should in no circumstances exceed 50%.