Interview Preparation

the world is witness an exciting and necessary rise in climate tech startups, with the impact tech sector increased 64% since the end of 2020. And with that increased supply, a new breed of investor has emerged: the impact VC.

As an impact specialist working within a VC, I am committed to supporting founders in reaching their ambitious goals and invoking positive change. To help drive more trackable impact investing, here are five key questions all founders should consider asking impact investors competing for space on their cap table.

Are you really an impact investing fund?

First things first, you need to learn the lingo. The recent implementation of the Sustainable Finance Disclosure Regulation (SFDR) in the EU has brought clarity to fund categorizations. It is important to discern whether the investor is an Article 6, 8 or 9 fund; understand the difference and know what this means to you, as a founder.

Article 9 funds, like us, focus exclusively on sustainable investing, with impact as the investment objective. They are also called “dark green backgrounds”. One level down, we have Article 8 funds, which aim to promote environmental and social characteristics without an exclusive commitment to sustainability. That’s a “light green background”. Finally, there is Article 6, also known as “gray funds”. They make no impact or sustainability claims, although they could dedicate some aspect of their funds to sustainable investments.

In addition to regulating funds under SFDR, the EU has provided guidance on what economic activities it considers environmentally and socially sustainable, and especially impactful. This is what is called the EU Taxonomy, a classification of business areas that warrants more capital, innovation and attention as they will really move the needle for our planet and humanity.

Choose between items 8 and 9

Most of the VCs operating today will fall into the Article 6 category, as generalists, so we will exclude them outright here. For climate tech founders, who opt for specialized impact investors (Article 8 or 9 funds), it is advisable to stay aligned with impact. Currently, there are around 50-50 in Europe for impact VCs that are Article 8 or 9 compliant.

When it comes to Article 8 funds, you are likely to be asked to show that you align with various environmental or social criteria that they have defined as especially important, such as Lead Adverse Impact Indicators (PAIs), which assess the negative sustainability impacts of decisions or investment advice. They will also show you how to identify and work to mitigate risks related to sustainability.

Article 9 funds do this and more, asking you to do what you say. They will demand more tangible proof of your company’s environmental or social impact and how you can measure it over time. They stress the need to avoid causing significant harm and to operate the business responsibly, both with internal operations and along the value chain.

It sounds like hard work, but opting for an Article 9 fund offers several advantages. In many ways, Article 9 funds are often perceived as the “real deal” in the marketplace, providing an impactful stamp of approval within the investment syndicate that builds brand credibility at their inception. As your company grows, this status should give you access to more diverse pools of capital that no-impact companies cannot obtain.

What impact key performance indicators (KPIs) do you prioritize?

Given the nuance of SFDR regulation, it’s important for founders to challenge investors to define what they call “impact” and how they measure it. This is not a perfect science and is especially challenging when measuring the potential impact of early-stage companies that could be both pre-product and customer.