Put your Money where your Impact is
Put your money where your impact is…
“I believe that only if you link 100% of your carried interest to both impact AND financial targets will you take them both equally seriously.”
– Willemijn Verloop with Rubio Impact Ventures ties 100% of their carry to impact and returns. If they reach the financial targets but not the impact ones, their carry is donated to charity.
“I think most in venture are scared to do this because they don’t think they’ll hit their impact targets and won’t get their carry.”
Are you willing to put your money where your impact is?
If not, what is standing in the way?
Podcast Transcript
Jacob: [00:00:00] Welcome to Impact Stories. I’m here with Willemijn. We had met recently at the Impact Summit Europe. Would love to have you introduce yourself.
Willemijn: Thank you very much and thanks for inviting me here. I run an impact investing venture fund based in Amsterdam called Rubio Impact Ventures and I’ve been doing that for almost 10 years. I come from an impact background, not from a venture background.
And we really, for us, it was the biggest reason to want to do this, to really prove we can create scalable impact solutions and market-rate returns and actually measure both our financial and our impact returns. At all levels and incentivize ourselves in a way that both are equally important. Often, it’s even if we call something impact or green, it tends to be about risk and return and not really about quantifiable impact.
I believe that only if you link 100% of your carried interest, which is how you incentivize a team and venture if you link it 100% to both impact and financial [00:01:00] targets, this is when you take them both equally seriously. And only then is your team incentivized to reach both goals fully.
Something we’ve been doing for nine years and it’s something that unfortunately doesn’t have a high pickup in the market yet so the funds that do link their impact to carry off and do it for 10 or 20%. And then I think it’s bogus because then I think financial returns always trump impact returns and I think you really need to make them equally important.
Jacob: What’s been your journey to get here?
Willemijn: I started at 23, I founded an NGO called War Child, and I was working in war zones. So I come from a very different background. Straight out of university from a short stint at the UN in New York, I ended up in the lobby group for peace in the Balkans because I would, this is one of my passions. I built that for 15 years from the kitchen table to 900 people in 13 countries, reaching out to almost a million kids. So for me, impact was always the core, but then after 15 years, I stepped away because I’m not a manager for a larger company and I really [00:02:00] wanted to look at the entrepreneurial side of impact, not the charity side. But how do we create models that if they are successful, if they can scale to the sky, and especially that the beneficiary has a voice and pays for the solution? And that sense has also ignited innovation because you’re actually in a marketplace creating building solutions.
So I built a national network for social entrepreneurs in the Netherlands helping social entrepreneurs to become more successful. And then I found out capital is just such a strong influence on the success of that target group, and I had no finance background whatsoever. I’ve never had any huge talent for finance either, but I know how to scale a company with impact.
So I found people to go on a mission with me to try and change VC. And if we want innovation, if we want impact, we need to make sure capital goes that way and we need to not cannibalize philanthropic kinds of capital. We need to make sure that we prove that the best solution for the future is one that will be both very impactful and also commercially successful.
If [00:03:00] we can change how money flows towards impact, I think we can have a systemic influence on how we build companies. And we’re proving our model and that’s hugely exciting.
Jacob: What are the hurdles?
Willemijn: I think it is complex, let’s be honest, it’s not an easy feat to choose the right targets, to set the right targets so it takes time. In the investment process, you actually do need extra time to set the right targets, especially if you set them bottom up, starting with the entrepreneur you’re investing in, looking at his or her theory of change and linking that to targets.
Some entrepreneurs have that very clear, but most they don’t. So it takes time in your investment process. And if you want to do it right, you should also validate those targets. Otherwise, if you only validate your own targets, then you could always achieve them. So external validation in the process, I think is crucial.
So we have an external impact advisory board that actually validates everything we do pre-deal. So before we invest, they validate whether we choose the right targets and whether they’re ambitious enough. And then post [00:04:00] deal, our LPAC, the biggest investors in our fund, validate them again and link them to our carry.
So it’s a double verification process and takes time and effort. So I don’t think it necessarily slows us down as a fund, but you do need to be willing to put in the time and the exercise to really find the right targets and that is a relatively new field.
And I think another reason that a lot of funds don’t want to do that is, I think they’re a bit scared and I think the venture community would like to receive their carry and it’s a risk that you won’t get it, because if you don’t hit your impact targets, you won’t get a carry. So it’s also an additional financial risk, not just linking it to finance, but linking it to a dual hurdle of both finance and impact.
Most teams would prefer to stick to what they know, which is financial targets and I think those links to carry are exactly what I call the ultimate capitalist carrot. It creates outsized returns for teams in venture and it’s also what’s giving venture a bad name but it does align the team towards a common goal. So if you can get that team alignment [00:05:00] really towards an impact goal and a financial goal. I also think you need to do the double, the dual hurdle.
I think then we can prove our point as an impact investor community.
Jacob: So give me a practical example.
Willemijn: One is actually a US company called SAMA, creating jobs for young people, 18 to 28 in Kenya and Uganda, working in automation and artificial intelligence. And so they’re trying to bring these people from an informal position to a formal job, having health insurance, getting a fixed income, bringing them from poverty into a decent living wage. So that’s the impact target.
The organization already had a very clear view of how they would want to measure the amount of young people moving from informal to formal and actually staying with the job and increasing their salary by a fixed percentage. We look at the ambition of the company, how we can help them grow, how we can help this impact scale, and then we bring these targets to our impact advisory board, which is comprised of two [00:06:00] scientists, one from a climate perspective, one from a people’s perspective from very renowned universities. And there’s also an impact consultant on the board, and there’s just a regular impact VC person on the board. And they look at these targets and they scrutinize.
Yeah, this is really right. Have you taken into account all the risks? Are you ambitious enough? Is the validation in the right place? If you have the wrong validation, you might prove your target, but you’re not actually achieving the impact you want to achieve, et cetera, and only if we get them to agree, do we bring it to our investment committee for final approval, and then we decide to invest.
And then again, we bring those targets to our member council to approve them again. In the case of SAMA they are for me the golden example of impact because they actually went as far as to work with MIT on a randomized control trial to prove what the influence is that they have on the lives of the young people they employ.
Jacob: At what point do you say, okay, we crossed the finish line, we earned our carry and what was the end result?
Willemijn: So you link [00:07:00] the target three years ahead and then the company either starts growing and hits their targets or doesn’t grow and doesn’t hit their targets. It’s just a venture. It’s a very early stage of impact investing. So we have a lot of companies that will never hit their target. And this one actually did because they grew quite fast and they hit their targets even early.
Sometimes they are so early stage when we invest that they pivot once or twice. And that the targets no longer make sense. That has happened as well. It’s a minority of deals, but if we would have to change the targets. So if for instance, a company starts to target a totally different group of beneficiaries than the one they originally were aiming for, and the beneficiaries are part of the impact target, then we score zero or we have to adapt the targets. And then we have to go back to our impact advisory board and our LPAC to get approval for new targets and we’ve only done that twice. So we only do that when it’s really a big change. And otherwise, we take our loss or our gain, depending on how the company has pivoted, [00:08:00] because you really want these things to be as solid as possible. So you don’t want to be changing them around all the time, because then you could change them around to being successful again.
There is a sliding skill in our targets as well. So if we hit 80 % of the target, we get part of our carry and only if we get a 100% we get all. If we don’t hit our financial targets, there is no carry, to share, right? There’s nothing. If we don’t hit our impact targets our carry goes to a charity. So the check that carry is there and the pot will then just be donated to a charity does not go to the team. So that’s how we align the dual hurdle that we need to hit them both to be able to get it.
Jacob: Have you ever had your carry donated to charity?
Willemijn: No, our fund was initiated in 2015, so we’re now exiting a lot of companies from our first fund, but not all yet. So it’s like a 10-year life cycle for funds plus one, depending on where the market is. The market is not amazing now for exits. I expect the front one will look good.
This is always the criticism you hear in the market. [00:09:00] Like it’s too complex, can’t be done and I think this is exactly the right incentive to tie these two elements together. Funds that want to go this way and I think I haven’t seen a lot in the U S do this yet. There are at least 10 or 15 in Europe that I know of that do it, but that’s really a minority and those are funds that have been around all of them for like between five and eight or nine years. So it’s early days still to show the results of that, before that, I don’t think anyone was doing it.
Jacob: So nine years in is this a viable business model? Can you run a fund this way? I
Willemijn: Yes. We built a second fund, which was triple the size of the first doing exactly the same. We’re now fundraising for our third fund and we’re going to keep this exactly the same. Because we really believe this is the way the whole sector should operate and because we believe it creates the right incentives for our team.
It also aligns us very strongly with the entrepreneurs we’re investing in, we really want to achieve their impact mission as well. So because we get the target’s bottom-up from what they are [00:10:00] trying to prove and achieve with their mission and we link them to our goals and our carry. So no, we would not change this and I think if I look at our third fund that we’re raising today, a lot of our LPs, so the investors in our fund are really happy that we’re doing this, so are really choosing us because we have a good track record, but also because we do this so diligently.
Jacob: What are the objections that potential clients have about that model?
Willemijn: If they are not interested in really defining their impact and quantifying it and not quantifying it into money, right? Quantifying it into quantifiable targets. I don’t believe in linking impact to financial targets. I don’t think the life of a person can be linked to a certain amount of money, but entrepreneurs want to have to want to be like this and do this to want us as an investor. So this is where it starts. And then what we’ve learned is that often it’s something they don’t do yet, but it’s something that actually when we’ve done it together and they have these targets that they really start using as a tool for either just [00:11:00] sales and commerce to bring in new clients and showing exactly the quantification of what they’re trying to achieve, but also to incentivize their teams. Saying, if we hit this target, this is the amount of CO2 we’ve avoided, or this is the amount of water we’ve saved, or this is the amount of people we’ve brought into jobs. So we’ve seen that the help we’ve given them to actually set these targets has actually helped them and that’s the feedback we’re getting. They say, yeah, the process is tough, but in the end, it helps our business, so we’re happy we did it.
Jacob: So how would you describe what an ideal portfolio company would be for you? Not everyone is a match, right?
Willemijn: Yeah, so we’re a generalist impact fund.. So we have a climate team and what we call a people power team that invests in a lot of different thematic areas. It starts with the founder that is really impact-driven, but also highly commercial. So one that really wants to put his societal mission into a really commercial scalable business model and the grit to really push through because It is [00:12:00] like an Olympic sport, right? If you want to achieve a triple bottom line, that actually asks more of an entrepreneur than just creating money, we need to believe in the business model and how that can fly, but the team is crucial for us.
Jacob: Do you get involved after, say you’ve done the due diligence, you’ve aligned targets, you give them the money and then you come back in five years and see what happened in between?
Willemijn: If they only want our money, we wouldn’t invest either. They need to want to work with us. It doesn’t mean we can help them with everything and anything, we have a few elements that we’re really good at. Helping them get the impact as straight and quantified and how to manage that is one of our elements, but the other one is actually the team. So we always do an independent team assessment before we invest as well, looking at whether the team is complementary, whether they have the right skills, whether they’re fit for scale, and what they might be missing.
And then we will develop with them a path in how to make them into a winning team. So how do we support that team in the months and years after we do the deal? And sometimes it’s something we can bring [00:13:00] ourselves. Sometimes we bring in external support on team building. And also after the deal, we’ll do a kickoff with all the investors and the team to see that we’re on the same page.
We bring a huge network of co-investors and follow-on investors as we always try to help entrepreneurs to think ahead. So what would you need for the next round? What kind of expertise do we need?
Jacob: So what does the organization need right now? What is it you’re most looking for?
Willemijn: Always looking for very ambitious entrepreneurs but currently I’m fundraising for our third fund. So we’re again, raising to be able to continue our mission. And I think the urgency of our mission has only increased in recent years since our second fund. We now have 150 million euros under management and we’re raising another hundred to 150 for the third fund.
Jacob: What does an ideal investor look like for you?
Willemijn: An LP in our fund would be somebody that believes in our mission and that is actually, we have two kinds. We have institutional investors, like the European [00:14:00] investment fund or some insurance companies that help us professionalize the backhand of our company, so it’s quite useful. And then we have a large group of entrepreneurs, family offices that bring a lot of knowledge to the table. So which we can call when we’re looking into a certain segment that they, for instance, have been active in and will involve them. So I love having both.
Jacob: If someone wanted to find out more about your firm or more about your approach, what’s the best way for them to find you online?
Willemijn: Our website is rubioimpactventures.vc.
Jacob: Thank you so much for sharing your perspective and would love to see more of this kind of movement take hold and this become more of the norm of aligning impact and returns.
Willemijn: Thank you so much. I really believe this is the way forward. Thank you.
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