The heightened focus on ESG has sparked the growth of impact venture funds, providing a fresh capital avenue for social enterprises.
Usually managed by large organizations and nonprofits, they differ from standard VCs in numerous ways, optimizing for social and environmental goals as well as financial returns chief among them.
However, navigating venture is challenging, a reality that’s dawning on many impact venture funds.
According to Cambridge Associates, over the 21 years to 2020, the typical impact venture fund generated a return of 10.22%, a little better than the S&P500, but with a lot more risk and a lot less liquidity.
It gets worse.
Bottom quartile funds returned just 2.43%.
Venture is hard.
And that’s because most startups are bound to fail — no matter how good their idea, business model, product, or team is.
In fact, according to the US Bureau of Labor Statistics, 90% of startups fail.
75% of startups, lucky or good enough to raise seed capital, don’t get to Series A.
And in the growth stages, only 25% of Series G companies successfully exit — Series G typically being the final round of venture funding and usually in the hundreds of millions of dollars.
These failure rates come with the territory of boldly going where no man or woman has gone before, of sailing unknown seas, and ultimately building in the face of uncertainty — where more can go wrong than right.
Startups fail because they take insurmountable risks.
While most are likely to fail, it’s a high-risk high-reward game with winners generating 100 or even 1,000X returns — something no other asset class can claim to do over comparable time periods.
Even at Y-Combinator, heralded as the pre-eminent startup incubator that spawned Airbnb, Dropbox, Stripe, Instacart, Reddit, and Twitch, only 4.5% of their 4,000 strong alumni have become billion dollar unicorns — that’s less than one in twenty.