How VCs can make a positive impact on diversity

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Impact X Capital is investing in underrepresented startups to create value and drive social change.

Impact X Capital is a black-owned London-based venture capital (VC) company that focuses on investing in unrepresented entrepreneurs across Europe, aiming to make positive societal change as well as profit.

With less than 1% of global venture capital investment going to black entrepreneurs and that number less than 0.5% in the UK, Eric Collins, chief executive of Impact X, and his fellow founders, saw a market inefficiency. The firm now is seeking to invest £100m in underrepresented entrepreneurs across Europe.

Here Collins discusses the long-term aims of Impact X, why underrepresentation is a pipeline issue, and what he needs to see in an entrepreneur before investing.

What is the aim of Impact X Capital?

We’re a venture capital company that focusses on unrepresented entrepreneurs in Europe. So our focus is actually finding extraordinary companies in places where others haven’t overrun the market place.

My background before starting Impact X has always been as a serial entrepreneur. Although this is my first venture capital company, I have been in the VC world for decades and had any number of exits as a serial entrepreneur. Now I'm on the opposite side. I meet people looking for capital from us, looking for us to invest in their hopes, dreams and aspirations that are going to make the world a better place. It gives me a slightly different appreciation of the entrepreneur fundraising challenge.

At what point did you know it was a viable proposition?

We saw a market inefficiency. Less than 4% of venture capital goes to women-led teams. Less than 1%, and this is around the world not just in the UK, goes to black entrepreneurs. Using market fundamentals, the idea is to go where people are not rushing into overheated markets, to avoid areas where the valuations have become too high and it is very hard for those founding teams to deliver returns to investors. We constantly ask, can we get good valuations and then get results?

The people who invested with us are individuals who could put their money anywhere. They're not just looking for financial return, they're actually interested in using their resources to fund change. In other words, impact. It is one of the reasons why we have the name Impact X and why we have a double bottom line. We are not only measuring a significant financial return, but also significant positive social impact.

How do you target these entrepreneurs and startups?

We go through our network. We are always surprised when we hear people say that they don't see a lot of entrepreneurs who are from underrepresented groups.

We started in 2018 with fundraising. We've been able to find a pipeline of around 800 companies. We've met as an investment team about 250 of those. We've committed to 22 and we've closed on 18. So it’s ridiculous for someone to even ask whether underrepresented entrepreneurs exist. To ask if they are highly qualified is another ridiculous question. To have the local investment portfolio that we do is a pipeline deficiency that needs to be solved by other investors too. We are willing to help others address this deficiency.

Is this a long-term strategy?

We will continue to look at the portfolios of other venture capital companies in Europe, and we are going to use a hedging approach. We will do a bit of the opposite of what they are investing in. We look at the other underrepresented pools and categories and pursue them aggressively.

We believe that for the foreseeable future there will remain an opportunity for significant financial and social returns coming from an approach of investing in underrepresented companies in certain categories - health, education, lifestyle, technology, media and entertainment.

What has been the biggest surprise since launching?

In the Silicon Valley there seems to be an infinite amount of resource and attention for certain opportunities, and the business models are venture supported that accumulate huge consumer bases before actually getting to sustainable monetisation. Here in Europe we're very concerned with making sure that there is a viable business model and product market fit.

We’ve found that of the 18 companies that we’ve closed on, all have been very competitive in terms of funding rounds because of other interest from VCs and angels. Impact X has to be appealing to participate. It hasn't been a surprise, but it continues to be a challenge to make sure that Impact X is the money that people want to go with.

Quite frankly, we bring something that most others don't bring to this dynamic because our investment team, as well as the funders behind us, are also all 100% under represented and have been very successful. They are able to advise, counsel and help our entrepreneurs to make sure that they can deal with the particular opportunities and challenges which face underrepresented founders.

What needs to be done to increase diversity in startups?

Get on with it and make underrepresented people part of the most critical parts of the business. If you build a company where the best isn’t a diverse group of people around the table, then I think you need to check yourself and consider what are your actual beliefs.

In order to get the best possible outcomes, that should just be part of your DNA. Diversity should not be an add-on or secondary. How do you plan to be competitive in an increasingly complex and diverse world? Well, you better have some people on your team, the decision makers around the table, that are diverse. That's the best way I have found to remain effective and relevant.

What do you need to see in an entrepreneur before investing?

We look for individuals who have the ability to execute, period. You can prove that by past entrepreneurial success or by have a well-structured plan to make your idea a success. Secondarily, we also look for individuals who have overcome. Those individuals might not know how to handle reversals, to rethink and pivot quickly. My entrepreneurial journey has seen many reversals. It is helpful to be able to articulate a challenge you faced, how you executed in that scenario, what you learned and how you overcame the situation (if you did). Be insightful.

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