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Recent Research: Paper challenges value of impact VC investors

January 25, 2024
By: Jason Rittenberg

A working paper by a team of Harvard-affiliated researchers presents challenging findings for growth equity impact investors. Given the potential alignment between this sector of the market and publicly funded capital access programs (including many venture development organizations and the State Small Business Credit Initiative), this research may find its way into public policy debates. The paper, which has not yet been published in an academic journal, also contains several shortcomings in its approach that should caution any stakeholders from acting on its findings alone.

The research contains findings that seem to speak for and against the value of impact investing, but the authors land on a negative overall evaluation of impact investors. On the one hand, the authors provide clear evidence that these investors have portfolios that are different from traditional investors, but on the other hand, they find that these deals generally would have occurred without the impact investors’ involvement. These apparently contradictory findings can be reconciled because the number of impact investments is much lower than the number of traditional investments—i.e., impact investors are likelier to invest differently than their counterparts despite rarely investing without participation from the traditional market.

Proponents of publicly-backed investments should—as always—be prepared to demonstrate their unique and important contributions to society. While some actors will believe that this paper aligns with arguments that publicly funded impact investments merely duplicate private sector activity, SSTI’s analysis of the article demonstrates several shortcomings for its use in addressing policy debates.

How the authors built their dataset

Despite the impact focus of most publicly supported investment funds, the set of growth equity impact investors included in the study is not broadly inclusive of organizations in the tech-based economic development field.

The funds included in the authors’ analysis appear unrepresentative even of the broader class of impact investors. After identifying 2,747 impact investors from third-party platforms, the authors analyzed firm websites to identify 445 that suitably defined their interests as socially focused. From these, approximately two-thirds had a matching profile in PitchBook. Further exclusions resulted in a set of 277 funds[1] that form the focus of the study.

This set of impact investors does include several SSTI members, funds active in the State Small Business Credit Initiative (SSBCI), organizations funded by EDA’s Build to Scale program, and community development financial institutions (CDFIs), although these are only a small portion of the 277 firms. It is not apparent why many other similar organizations are not included.

Key results in this paper are derived from 6,066 companies that received funding from one or more impact investors—of which 2,949 only received impact investments and 3,117 had both impact and traditional investments—compared to 204,640 companies that received investments only from traditional investors.

Companies with impact investments are different than their peers…

The paper reports that the portfolios of impact investors are generally different from those of traditional investors and in ways that align logically with the intent of impact-focused work.

Companies with impact investments operate in areas that are less densely populated and have less income than companies with traditional investments only (these companies are, however, also more likely to be located in areas that are less diverse). Each of these effects is stronger for companies with only impact investments than for those with both impact and traditional investments.

Proponents of publicly backed impact investments might be led to argue these findings suggest impact investors are addressing market failures or gaps, answering, in many cases, the “if not but for these public investments…” question. However, given the intense geographic concentration of the venture capital market, it seems plausible that impact investment companies being less likely to be located in Silicon Valley (as well as New York City and Boston) alone could account for these differences, and it is disappointing that the paper does not address this possibility.

The study also finds impact investors are more likely to be active in different industries than traditional investors. Specifically, impact investors are generally more active in consumer staples, financials, and real estate and less active in information technology and health care. This finding indicates that many impact investors are deliberately working in sectors that have tended to attract less profit-motivated capital. Of course, not all impact investors are operating in under-represented sectors, and the portfolios of impact investors with geographic or demographic goals might be particularly inclined to reflect the sector strengths of their target regional economies.

Companies with impact investments are also more likely to be within the first 10-40 businesses in their field than those with traditional investments only.[2] In other words, impact investors are more likely than their counterparts to provide capital to industry-defining companies. Early-entry firms in emerging technologies and sectors are commonly considered likely to carry more risk, suggesting impact investors are addressing an important but under-addressed role in equity markets.  

The authors find sizeable differences in the exit activity of companies by investor class. Of course, many impact investors are less concerned with securing the highest financial return possible than with their ability to create jobs or introduce meaningful technologies to society. Companies receiving only impact investments are about 40% less likely—or 6.6 percentage points—to have a “successful” exit than companies with traditional investments only. Notably, the paper defines these exits based on what is likely (but not guaranteed) to be financially successful: initial public offerings, mergers, and acquisitions. Certain acquisitions or mergers may be particularly concerning to investors that would like the production of the company’s technology or the likelihood of continued employment to occur in a specific geography. Exits for companies with only impact investments take 25% longer—or 16 months—than companies with only investments from traditional investors. Again, this longer timeline may be consistent with impact investors having concerns that take precedence to provide patient capital over securing a quick return on investment.

Companies with both impact and traditional investors have rates of a successful exit on par with those experienced by companies in the traditional-only group but have a runway length that is equal to those in the impact-only group.

… but impact investors are not adding to the market?

Despite the statistically significant differences between the portfolio companies of impact and traditional investors, the authors also conclude that few—roughly 12% of all impact investors—are making investments that would not otherwise be covered by traditional investors.

The first cut taken by the Harvard researchers removes investors involved in the 60% of all impact funding rounds that included at least one traditional investment. The authors assume that if a traditional investor would participate in a round, then there was no real need for the impact investor (as opposed to just another traditional investor). Only about 7% of impact investors never co-invest with traditional investors (while 15% always do so). The authors then conduct a network analysis to suggest that some occasional co-investors typically behave differently than traditional investors, bumping the share of impact investors that add to the venture market up to 12%.

The authors attempt to address a couple of apparent criticisms—that impact investors are leading traditional investors to important deals and that impact investors provide additional benefits post-investment. Their approach in both cases is extremely limited and supports their initial hypotheses.

In brief, the analysis about whether impact companies lead traditional investors to new deals finds that traditional investors that have previously co-invested with an impact investor do not significantly change where they invest after that impact investor raises its next fund. This finding is very limited:

  1. The result does not clarify if the traditional investor changes its own behavior absent its co-investor’s additional fundraise.
  2. This approach measures the value of leading a traditional investor to a deal only in terms of long-term change and ignores any value of repeated short-term actions.
  3. The analysis only measures traditional investment behavior becoming more impact-oriented to the extent that the investor makes more investments into less-dense and less-affluent regions—not whether they invest in different sectors, into more pioneering companies, or are more patient with their companies.

Implications for venture capital policy

This paper finds that growth equity impact investors are more likely to invest in companies that have newer technologies and operate in less affluent regions. Such activity seems inherently worthwhile to many economic development strategies. Further, the findings show impact investors tend to be more patient, allowing their portfolio companies more than an additional year of runway before an exit.

However, the authors challenge the significance of such behavior if impact investors are typically joined by their profit-motivated counterparts. This consideration is similar to questions that have been raised by opponents of publicly supported, economic development-focused funds in several states, some of which further claim that states would be better served by replacing investments into nonprofit funds with investor tax credits.

Specific to this paper, proponents of publicly supported risk capital funds can reasonably argue that the set of impact funds considered here are not representative of publicly funded entities and that the paper’s analysis of impact-traditional co-investment is insufficient to define if or how this activity provides value to individual companies or the market as a whole.

Proponents of state investments should further consider how to demonstrate their unique value to the state’s economy. The authors provide several important examples—the location of companies receiving investments, whether the companies operate in technology sectors that receive less attention from the private market, and how potentially groundbreaking the company’s technology may be.

The paper raises two other important areas of impact investing’s potential value that may be harder to demonstrate but should receive no less attention.

The first area is the benefit of patience for the company, its employees, and society’s ability to benefit from the technology. As noted above, the paper finds that companies with impact only investments take longer to exit and are less likely to have an exit that may be financially successful. To the extent that a publicly supported fund has similar exit-related outcomes, being able to show how a longer runway led to better economic or technological outcomes for the region would be a powerful counter to any concerns raised about sub-optimal financial performance.

The second area is the value impact investors provide if they invest alongside traditional investors. The paper’s assumption is that this behavior is not meaningful, which they attempt to support with an analysis suggesting co-investment with impact investors does not have a long-term effect on the investments of traditional firms. To counter such concern, impact investors should have their own rationale for why and how they work with profit-motivated firms and how this behavior aligns with their unique value proposition for the field. Some may be taking the role of the lead investor in early stage companies, some may be investing to help protect a longer runway for a company, and some may be seeking to demonstrate the viability of companies in a market that is off the beaten path.

Ultimately, despite its shortcomings, this research is a good reminder that a publicly supported fund should have a strong justification for its existence beyond achieving financial returns for itself or its for-profit co-investors.


What do impact investors do differently?” is a working paper by Shawn Cole, Leslie Jeng, Josh Lerner, Natalia Rigol, and Benjamin N. Roth and was published by the National Bureau of Economic Research in November 2023. This paper is a redraft of a September 2022 paper, and there is no disclosure that the paper has been accepted for formal publication.


This article was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.


[1] SSTI’s limited review of the list of 277 firms revealed some entities that do not appear to meet the criteria for inclusion (including one CDFI that PitchBook categorizes as a “company” and not an “investor.” It is not clear if the authors included such firms but none of their deals in the analyses or what explains this discrepancy.

[2] Authors identified businesses based on the earliest “first financing” dates for companies within specific industries tracked by PitchBook. Impact-only companies had significant effects for the first 10, 20, 30, and 40. Companies with impact and traditional investors had significant effects for first 20, 30, and 40 only.

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