Balancing Profit and Purpose: Venture Capital Risk in Impact Investing

Abstract

Venture capital plays a vital role in financing innovative companies, especially in the early phases that are characterised by uncertainty. In line with the increased amount of impact investments the investment processes have become even more complex as they combine both financial returns with societal and environmental aims. The purpose with the study is to examine how venture capital firms assess and deal with different types of risk within the impact investment process. The study is built upon a qualitative method with semi structured interviews with actors within the Swedish venture capital market that are active within impact investments. The findings present three main risks. The technological, regulatory and team risk. The technological risk is seen as a major risk but often manageable through evaluating the technologies maturity and the entrepreneurial teams competence. Regulatory risk is on the other hand perceived as primarily external and difficult to control where changes in regulations can be very impactful. Furthermore it emerges that venture capital firms combine both internal and external expertise in their assessment and do often avoid investments that are strongly dependent on future regulatory changes. The study contributes to an increased understanding for how different types of risk are integrated into investment processes within impact investing and emphasises the importance of experience and flexibility when dealing with uncertainty.