There’s no doubt that closed deals are made from the right relationships. But creating a steady deal flow becomes even more critical when it comes to sourcing socially responsible investment opportunities. Just ask Founding Partner of Shaping Impact Group, Pieter Oostlander.
In a recent webinar, Oostlander shared how relationship-driven deal sourcing has helped him find—and close—high-quality deals and why lessons learned in socially responsible investing (SRI) are relevant to the broader investment landscape.
Watch the full conversation here or keep reading to dive into the highlights, complete with time stamps so you can easily navigate through key insights.
The unique challenges in impact investing
Investing can—and should—go beyond purely a financial return. The rise of impact investing is proof of just that.
Oostlander, who has more than 20 years of experience in impact investing, summed it up by saying, “Our shareholders value the societal impact made by the portfolio companies equally to, or sometimes even more, than the financial return.”
While the mechanisms for closing a deal are often similar to other forms of Venture Capital (VC), there are complexities and risks that make deal sourcing even more challenging in impact investing. Oostlander outlined three notable challenges when it comes to sourcing deals in the impact space:
- Balancing business drive and impact drive: Successful impact investing needs the company to truly believe in its mission. Oostlander looks for companies with a lockstep model, which he describes as “where societal impact is completely integrated into the business model.”
- Mission drift: As an impact investor, the goal is for the societal mission to survive your exit but there’s always the risk that it drifts away. “Otherwise, you've been working [on the mission] for no reason,” cautioned Oostlander.
- Reputational risks: The risks to reputation also tend to be higher with impact investing. “The bar goes up in expectations on ethical dealings,” explains Oostlander. “ So the risk of reputation being damaged is larger if the expectations are higher.”
Turning relationships into impactful opportunities
For Shaping Impact Group, networking relationships are key to building deal flow that fits their societal impact vision: “Our networks know better than the average outsider what we are looking for.”
Affinity’s relationship intelligence tools provide the structure Oostlander and his team needs to find better leads and manage deal flow. “I think our deal sourcing and deal flow management has significantly improved since we implemented Affinity last year,” he said. The transparency is critical for not missing out on relationships and for using the firm’s network to source deals.
But sometimes the best leads can come from unexpected places. While Oostlander values his contact with co-investors in the impact space, he often finds relationships with regular VC funds even more interesting. VCs regularly come across leads that may not fit their own financial return strategies, but these opportunities can be passed along to impact funds that can tolerate lower financial returns if they’re offset by social impact.
Managing risk and expectations in the deal process
Oostlander recognizes that impact investing comes with higher expectations, placing greater weight on risk assessment and management when it comes to deal sourcing. “We are accountable to what is achieved there,” he said.
So what’s the best strategy when you’re aiming to ensure high returns on both financial prosperity and impact?
Oostlander highlights three ways his team mitigates risk while sourcing deals:
- A dual focus on financial return and impact return: Each benefits the other. Shaping Impact Group uses a methodology called social return on investment to understand the ratio between impact generated and input required.
- Extensive due diligence: With companies often overselling environmental and societal impacts, extensive screening limits greenwashing and social washing in Shaping Impact Group’s deal flow, helping to, “distinguish between the [companies] that make a true impact and ones that have a wannabe impact.”
- Transparent and effective communication: Oostlander uses Affinity to build press lists to keep investors and shareholders informed. But it goes beyond managing deal pipelines and news of positive dividends. While he’s never experienced significant reputational risk himself, Oostlander also sees an opportunity to use Affinity for crisis communications in case something goes wrong. It enables teams to find the right links in the event of negative press.
Understanding the third dimension of investing
“Every dollar or euro that you invest has three dimensions,” explainedOostlander. “It doesn't only generate a financial return or a financial loss; it can create a positive impact or a negative impact.”
For example, oil companies create a negative impact when it comes to the climate, but they also make a positive impact by supporting mobility.
Prioritizing impact is best practice in SRI, but Oostlander believes that this is a learning that should be applied across the board to all investments. Every deal is exposed to risk on the financial side and the impact side, but the impact risks are often overlooked. “Realizing that there is this third dimension, and that it can be a positive or negative impact will disclose other risks,” he added. “Negative impacts can then also create risks to the business performance of a company.”
To learn more about how Oostlander uses relationships to source high-quality impact deals, watch the full webinar. You’ll walk away with insights around:
- What relationships matter most for impact investing
- Ways to manage risk and risk-averse networking
- How you can use Affinity to manage day-to-day deal flow in one place.