The Parting Shot | Making life harder for VCs, or better for everyone - should VC investment prioritize social impact?

At Vertex Ventures Southeast Asia and India, we are proud of our interns' contribution, their creative ideas and more importantly, their growth journey. The Parting shot series showcases reflective articles written by our interns at the end of their internship. We hope you enjoy the piece.

I recently started my internship at Vertex Ventures Southeast Asia and India, an early stage Venture Capital (VC) firm, and had the pleasure of attending an interesting debate, hosted by Oasis by KrAsia in November 2021.

The motion was “This house believes that all VC investments should prioritize social impact.” I had the very exciting opportunity of helping one of the speakers, my Executive Director at Vertex Ventures SEA&I, Pui Yan Leung, prepare for the debate.

As I began my research, I felt intrigued by the motion as it challenged my initial perception of VC firms. Whilst I was aware of the growing relevance and importance of responsible investing globally, never had it occurred to me that social impact could be, or should be the priority for VC investments. What would compel a VC to put social impact above all else?

Due to my prior work experience in the Venture Ecosystem (and further supplemented by my binge-watching of the show Shark Tank), I had formed the impression that VCs were mostly concerned with earning multiples on their investments, and growing the wealth of their Limited Partners. Hence, I was curious to find out how prioritizing social impact investments would fit in among the larger operational objectives of a VC.

The Debate

The Oxford-style debate randomly allocated the speakers into ‘For’ and ‘Against’. Wen Li Lim (Chief Impact Officer at FlourishDx) and Beau Seil (Partner and Co-Founder at Patamar Capital) were selected to debate for the motion, whilst Pui Yan and Ban Shen Ho (Associate at Protege Ventures) were given the daunting task of arguing against the motion. I say daunting because nobody wants to come across as if they don’t care about social issues, so the first step for us was to distinguish between arguing against VCs prioritizing social issues, as opposed to negating social issues entirely.

I find it fascinating that Wen started by sharing the origins of the word ‘priority’ in the English language. I never knew the word entered the language as a singular term, meaning that the word “priorities” did not exist initially. Hence, to prioritize, means to focus on a single, specific task. The word in its plural sense only entered the language in more recent times. Wen also suggested that we interpret the motion in the former sense of the word for the debate. As such, prioritizing positive social impact in VC investments means putting it above all else, be it returns or the Limited Partners’ interests. Wen also brought up that for this to be effective,  impact must be built into the business model as opposed to an add-on, otherwise businesses’ net social impact could end up being negative.

My colleague, Pui Yan argued that the business’ institutional needs such as cash flow, market size and go to market strategy need to be addressed first. Prioritizing anything other than business fundamentals and growth may result in the business remaining sub-scale or unable to survive, which in turn would minimise the realisation of any intended positive impact. She also shared that VCs’ aim is to beat market returns through the growth of startups to sustain their access to capital.

She also suggested that businesses that do not expect to deliver market rate returns to investors can potentially consider other funding instruments, such as grants and loans.

Ban Shen also raised the valid point that VCs play an important role (in fact, the buyer role) in the venture ecosystem; through their funding, they signal to founders (the sellers) the types of businesses that attract funding. This acts as the magnet for certain types of businesses into the ecosystem, alienating the less profitable or ‘un-fundable’ models. Prioritising social impact may disrupt these signals, diverting founders and resources to creating businesses that bring about social impact but not necessarily economic profit. Consequently, these ventures may fail and due to the losses, VCs will avoid investing into such businesses. This ironically creates a vicious cycle for the social impact companies.

Beau suggested that in order to be able to prioritize social impact, companies should be “built to last”. They should focus on sustainability, scalability and viability in the long term in order to be able to make the most impact for the most people.

One of Beau’s points really resonated with me, and even added some colour to my understanding of VCs’ role in society. He shared that VCs are the risk takers who see a different future, and drive value for society by identifying market gaps. They help build up solutions which eventually change how we all live and behave in the future. He gave the prominent example of Grab (for which Vertex Ventures was the first institutional investor), and how they disrupted the transport sector in Asia.

My Takeaways

Whilst I do believe that positive social impact is a crucial outcome of any business’ activity, I think it’s tough for VCs to prioritize social impact in their investments. It is my understanding that the most successful businesses and the ones that are able to scale are those which have good knowledge of their consumer base, solve a relevant problem for their customers, and are able to monetize their solution. In this sense, businesses already create positive social impact by solving problems for their consumers. Once they scale, they will be able to further extend their reach to tackle the more complex social issues faced by society today, which even governments and dedicated organizations are struggling to solve.

Hence, it is my personal belief that instead of driving social impact as the main objective of their investments, VCs could encourage their portfolio companies to find creative ways to make that impact through their business models. One example of Vertex’s portfolio company that makes an impact is Grab (see their 2019/2020 Social impact report here).

As the bare minimum, VCs should still be cognizant of negative social impact when investing in startups, and adopt a ‘do no harm’ approach to avoid investment in businesses that harm people, the environment or engage in illicit activities. These to me are the basic social impact criteria of VC investment, and has always been the stance of Vertex Ventures as well.

The discussion instigated by this debate is not only very interesting, but also important. There is still so much left to be said, so let’s carry on the discussion in the comments - I would really love to hear your thoughts and opinions, and which side of the motion you lean towards!

Edited by Elise Tan, Director, Vertex Ventures Southeast Asia & India.

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