“The startup ecosystem is currently like a house party with alcohol flowing freely.”
Those are words of one founder referring to the recent VC deal rush, where in the race to expand their portfolios, investors risk diving into commitments with ill-matched companies.
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Whereas investors have traditionally focused on company traction, the past year has spurred attention toward social challenges. In fact, global investor support for diversity-related solutions in the first six months of 2021 reached 42.4 percent, compared to 23.9 percent across all of 2020.
In their quest for the best bets and greatest impact, investors need to ensure they collaborate with startups that are doing things right from Day One, and that they can maintain their commitments. These are the four questions every VC should put to their startups before signing on the dotted line.
How are you creating sustainable social impact?
Around 85 percent of investment professionals in Europe and the United States say that environmental, social and governance (ESG) efforts are a high priority for them. Yet, 56 percent of those same individuals say they struggle to keep up with guidelines that could steer capital into ESG assets.
The sustainable element of ESG is often the most troublesome for investors. Startups can demonstrate how their concept generates impact, but they’re not often pushed to prove how they will nurture and grow those goals over time.
As they start discussions, investors need to ask founders for data that backs up their social strategies and seeds long-term projections. That means assessing their methods for tracking both qualitative and quantitative data over time. Impact-focused KPIs are particularly useful to get teams planning and tracking social and environmental progress incrementally. For example, a food delivery platform could have an impact KPI tracking the revenue of organic farmers on its supply chain every quarter.
How are you actioning accessibility?
The mass digital shift has meant startups need to cater to larger audiences with a range of capabilities if they want to reach their potential and stay relevant over the next few years. More than 1 billion people worldwide have a disability, and excluding them from online products means shutting out a significant user group.
Investors need to make sure their startups have normalized accessibility in their product offering. Ask what tools they’re using to check, iterate and integrate accessibility–and whether they’re gathering feedback from a diverse range of users. Does the startup have a budget for accessibility, and are any employees undergoing accessibility training programs?
Accessibility isn’t only an ethical decision, it has a direct effect on startups’ bottom lines: It leads to better product testing, goes hand in hand with a more diverse, empathetic team, and by making their products usable to more people, it boosts profits.
What does employee wellness look like for you?
Startups that don’t cater to the evolving needs of employees risk sleepwalking into a talent exodus–especially when 95 percent of workers are currently considering changing jobs.
Ask the founder what the action plan is for wellness. Are they offering programs for mental, financial and behavioral health in the workplace? How are they accommodating employees’ needs? Are there wellness-centered roles like head of people or head of learning and development?
If the startup is moving forward with an all remote team, what tools do they need to support employees, and how do they plan on nurturing a healthy work culture? If they’re adopting performance-tracking tools, ask what kind of information they’re collecting and who’s in charge of managing it–a data breach would be disastrous for both the startup and investor.
What are your core values?
The modern VC landscape needs to be led by investors with strong values that enable them to reach the most people and the most pressing causes. But VCs also need a clear stress test to ensure their startups share those values.
Question why the founder is building the company. If it’s purely for money or fame purposes, there’ll be a disconnect in terms of creating value. Ask what mark the startup wants to leave on society, and whether it has already drawn up a list of core values. Are these available to the public or kept internal–if so, why?
No startup should be neglecting to implement a diversity and inclusion policy either. Corporate diversity is now the most common type of sustainability metric being used to set executive pay, so confirm if the startup follows suit. A weak set of internal values could be a sign that the founder doesn’t put their money where their mouth is.
In the flood of new investments, VCs have to go further than conducting basic due diligence. These four questions can help investors pinpoint which companies have devised their business model with a moral compass, and more poignantly, which ones are actually following it.
Illustration: Dom Guzman
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