Impact Investing

Why Measuring Social Impact Matters to Investors

Why Measuring Social Impact Matters to Investors
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The impact investing sector has grown substantially since the term was first coined in 2007. The practice refers to investing in companies -- directly or indirectly through funds -- with the intent to generate a measurable, social impact alongside a financial return. Measurability is a key component, because it can be hard to differentiate impact investments from other investments without proper data.

As impact investors, we at City Light Capital measure both the financial performance and the social impact of all of our portfolio companies. We identify and partner with entrepreneurs who build companies designed to have an impact, are committed to measuring that impact and are willing to hold themselves and their respective companies accountable if the data suggests their solutions are not positively moving the needle.

When we began capturing impact data 10 years ago, many of our portfolio companies agreed to quantify, monitor and measure their impact. We have since learned that the practice of consistently measuring a companies’ social impact can meaningfully contribute to its value.

Related: This Woman Might Be the Most Successful Impact Investor You've Never Heard Of

Whether you’re a startup looking to integrate an impact agenda into your business or an established company looking for new ways to measure impact, here are five areas to keep in mind when developing a successful impact investing plan. 

1. Stakeholder alignment

It’s important to articulate your company’s social-impact goals and evaluate potential partners to make sure they are dedicated and invested in achieving the same meaningful and measurable social impact.

When we first invested in 2U (then 2tor) in June of 2009, the company had 24 students in one program, USC’s online Master of Arts in Teaching. As a leader in technology-enabled education, 2U had the discipline to track not only student performance, but also engagement, retention rates and, eventually, ways to evaluate the impact of these graduates as teachers in the marketplace. Having a focus on metrics, such as the quality of the education and outcomes of the program, rather than solely on the financials, creates a unique dynamic where the company and its partners are closely aligned on social impact.

2. Faster feedback loops

A successful company must always be looking for ways to evolve, refine and enhance its operations. Feedback can be a critical data-collection method that gives a company actionable ways to improve processes. By capturing more data, patterns emerge significantly and sooner in the process. 

Through our initial investment with gunfire detection and location technology company SST, Inc., we spent a great deal of time speaking with local law enforcement who served areas with higher incidents of gunshot-related crime. These agencies relied mainly on 911 calls, anecdotal evidence and annually published reports for data.

As a result of SST’s Shotspotter, law enforcement agencies now have the ability to respond to gunshots more frequently and accurately, as well as access and analyze the data surrounding these incidents. This information uncovered specific blocks that were having gunshot-related issues, showing patterns on particular days and during specific times. This faster feedback has led to more efficient staffing and resource allocation and better decision-making, resulting in safer neighborhoods. 

Related: How Revolution Foods Made a Business of Healthy Food for Healthier Students

3. Proving your value proposition

When an organization is looking to make a social impact, it’s essential to provide metrics and data that prove positive gains are being achieved. Tracking and promoting impact data helps keep your target audiences informed and engaged, while allowing a business to improve core functions such as sales and marketing for continued success.

Another portfolio company, Senet, Inc. (formerly known as EnerTrac), helps fuel and propane delivery companies optimize distribution, resulting in reduced fuel usage and emissions for delivery trucks. In order to successfully market the solution, Senet needed to demonstrate the actual cost savings and environmental benefits of the efficiencies provided by its technology for both existing and prospective clients. The data, which is captured through the company's wireless network and technology solution, is now core to the value proposition of the company. 

4. Talent recruiting and retention

It’s equally imperative to measure employee satisfaction and realign business goals to meet the growing popularity of corporate social responsibility (CSR). Not only do CSR efforts align with an impact agenda, it cultivates talent who are dedicated to your mission as a company. 

According to Nielsen’s June 2014 Doing Well by Doing Good report, 67 percent of millennials would prefer to work for a socially responsible company, and Deloitte’s 2015 Millennial Survey shows 75 percent of millennials believe businesses are too fixated on their own agendas and not focused enough on helping to improve society. A great way to position your company as socially responsible is by measuring your social impact. It makes it clear that the intended impact is not only a desire, but also a concrete goal against which the company will judge itself.  

5. Surviving changes in capital structure

Imbedding social impact into the DNA of an organization will allow for a company to thrive and maintain its mission during times of change. It creates a culture where positive social or environmental impact is at the core of every business process and decision, despite any major cap table changes, including a follow-up round of investment, merger / acquisition or public offering.

At 2U, the proceeds and visibility of its public offering were used to enhance its commitment to impact. The company publicly released a 2014 impact report and hired a leader in education, Jim Shelton, to serve as 2U’s chief impact officer. 2U’s actions emphasized its core social-impact mission was stronger than ever, reconfirming its commitment to impact to multiple stakeholders and providing a great blueprint for other impact-oriented companies.

At a time where investors, consumers and employees are holding businesses to a higher standard, there is no better time to integrate a social-impact agenda into your company’s mission. By focusing on these five areas when developing an impact agenda or improving an existing one, it will allow a company to thrive in the impact-investing sector.

Related: Do Good or Make Money? Why It's Not Even a Question.