Impact risk assessment is a critical part of the process, especially in venture investing, where there is a lot of uncertainty about how a business model evolves over time. It's important to note that many investors also include ESG risk assessments as part of this process. While important, we do not cover this here, as there are other resources that do an excellent job of this already.
There are largely three buckets of impact risk that need to be considered:
The likelihood of the targeted positive impact materialising
The degree to which expected/known negative impacts could be mitigated
The nature of and likelihood that unknown/unintended negative impacts could materialise and the startup's ability to avoid/mitigate these
These are unpacked below, alongside some thoughts on how best to think about this in the context of an investment process.
Whether the targeted positive impact will materialise
Risk here is largely a function of:
Execution risk – Can the startup overcome any scientific/technical/business risks in getting to its vision? In early-stage venture context this is by far the biggest risk.
Alignment risk – Are the founders likely to stay on their impact course? This is a combination of their impact intent, and whether they can turn that into a workable business model without having to pivot to more commercial applications of their product.
External risk – Will stakeholders, including customers, users and regulators, prevent impact occurring in some way?
The expected/known negative impacts and how they could be mitigated
It is difficult to imagine a business with no negative impacts (eg anything heavy on logistics will have implications for the environment), and so here the question is around how startups can mitigate those impacts (eg in the example above, by using zero/low emissions forms of transport). The risk frameworks linked below are a useful starting point for understanding the risk profile of a business model. ESG-related risk typologies can also help to unpack operational related risks.
What the unknown/unintended negative impacts could be and how they can be avoided/mitigated
In many cases, the most damaging risks are the unforeseeable ones, because they go unmanaged for so long. While the following aren't impact businesses, they help to make the point. Think of the challenges that Uber had with working conditions and driver safety; that Airbnb has had with discrimination and housing prices; that Facebook had with fake news, hate speech and distortion of the democratic process.
The founders probably never would have imagined these outcomes being associated with their businesses, and yet they are.
The question here is less about whether it's possible to predict these consequences, and more about what processes the startup sets up to regularly scan for these, so that if they were to materialise, they could be managed effectively. For example, BGV supports its portfolio to conduct 'horizon scanning' exercises, where it proactively considers what risks may arise and how to monitor them. See section 12 of their 2021 impact report for more information.
