Companies in Nesta’s impact investing portfolio include Arbor Education, which provides schools with management information systems that help them to track the performance of their students and staff. In the health sector, Nesta has backed Skin Analytics, which uses artificial intelligence to provide early diagnosis of skin cancer. To help fulfill Nesta’s decarbonization goal, it has invested in Mixergy, which sells a smart hot water tank that predicts when a household uses hot water so that they only heat up the water they need.
What level of financial return on investment is Barclay looking for from these kinds of investments? Is impact investing necessarily less profitable than straightforward commercial investing? Impact investors’ return on investment policies cover a spectrum, she says. There are some impact investors on the philanthropic end who are happy just to get their money back, or even a portion of it.
“The other end of the spectrum is the fully kind of market-returns commercial end. My team, and what I’m doing, currently sits much closer to that end of the spectrum,” she says. Nesta funds its impact investments from its endowment fund alongside conventional venture capital and industry investors. Its fellow-investors in Mixergy, for example, include EDP Ventures, the investment arm of the Portuguese energy utility, and UK energy giant Centrica.
Finding the right founders
What does Barclay look for in the companies she invests in? As well as falling within one of Nesta’s three missions, “we’re looking at founders who are committed and driven and have some track record typically,” she says. “But also founders who care about the impact and understand where we’re coming from in terms of that integral relationship between impact and profit.”
Increasingly, younger startup founders, millennials, or Generation Z care about their impact on society. “Not always, but often. They really care about creating a company that’s going to have a social purpose or an environmental purpose, as well as making a lot of money. So, just to put some kind of meat on the bones of that, we will always co-develop an impact plan with a founder who we’re going to back.”
She adds: “That is a really good process to flush out: what do you want your company to achieve ultimately? So we define the aspirational impact outcome, then we look at what the company actually does. And then we look at how do you get from A to B. What are the assumptions you need to make? What’s the data that you need to collect? So that’s how we define the impact KPIs with the founders.”