The best way to consider impact is through three core characteristics: intentional, tangible, and measurable - Mikael Hietala, Feelsgood VC

Mikael Hietala is an Impact Associate at Feelsgood, a Croatian impact-focused venture fund supporting startups in Croatia and Slovenia that address one or more of the 17 UN Sustainable Development Goals (SDGs). He is also a mentor at ZICER and Bird Incubator and has previously helped Earthbound Sneakers become Croatia's 1st B Corp.

Looking at the state of the impact-driven startup ecosystem in CEE, although it hasn’t really reached a mature stage, he sees significant evolution in the last five years.

“A positive fact is that there are multiple impact VC funds covering the region, and many of these are aligned with either the “light green” or “dark green” models of SFDR. 

In any ecosystem that involves start-ups, development is influenced by strong intention from institutional players. The fact that the European Investment Fund has allocated funds to supporting CEE impact VC funds sends a strong signal that impact investing is not just a trend but an important part of the capital markets landscape. 

Another positive is that there is a regional organization of impact investors (CEE4Impact) that involves VC funds, angel investors, and accelerators. This is critical to ensuring that purpose-driven founders realize that there are funding opportunities for services and products which focus on a specific environmental or social problem. 

I consider this motivation among impact investors to come together for the greater good as a tremendous opportunity, as anyone interested in the field can easily find a wealth of experience and insight from members. 

Regarding gaps, there are still far less impact-aligned founders in the region as compared to founders of more traditional ventures (with B2B software still dominating). I do believe that this is changing, however, as the younger generations are more attuned to societal problems and environmental negligence. 

The next founders will predominantly come from this group of changemakers.“ he adds.

‍

As the ecosystem evolves, access to capital is also expanding. Mikael points out that there are more and more impact VC funds across Europe ready to support startups, many of them specializing in specific sectors.

“This means that founders tackling diverse problems can find an audience as well as access to capital. At Feelsgood, we focus on the verticals of education & social inclusion, health & well-being, food systems, and culture & creativity, for example. 

For impact funds, the same holds true. Each year that passes brings further data that backs up the claim that scaling impact does not have to come at the expense of excellent financial performance. For this reason, various financial institutions of the EU are backing impact funds in the coming years, and private banks are also designing their own programs that aim to provide financial returns along with tangible benefits to society.”

As an SFDR Article 9 “Deep Green” fund, Feelsgood has sustainable investment as its core objective. To make sure measurable impact and the need for their startups to generate ROI, Mikael explains their screening and reporting process:

“Our screening process has been set up in a way that allows the early identification of companies that have a strong emphasis on social impact. For instance, we ask founders to highlight which UN Sustainable Development Goals (SDGs) they are working towards at the first meeting. 

This helps us gauge commitment to social issues before looking deeper at financial performance and/or potential. 

A company that can demonstrate both tangible social impact and the potential for tremendous growth may well receive a term sheet and subsequent investment. Upon the investment decision, each portfolio company sets distinct impact KPIs for a five-year period, and then reports progress on a quarterly basis. Thus, we have a clear view on how our portfolio is creating impact, as well as the rates of return for limited partners.”

‍

When it comes to pitching to Article 9 funds such as Feelsgood, Mikael explains, many founders are still unclear about how impact is defined in practice.

“A simplistic example would be that any entertainment company is positively impacting people because the consumers enjoy the content or game that they experience. 

The best way to consider impact is through three core characteristics: intentional, tangible, and measurable. 

• The characteristic of intentionality means that the impact is tied to the business model, it is part of the company’s DNA. For example, one of our portfolio companies wants to decrease the CO₂ emissions created by agriculture as well as decrease the health burden of a diet that includes copious amounts of meat. The end result? A vegetable-based meat alternative that has a similar texture to meat, but that includes various important micronutrients and has a CO₂ footprint 10% of what traditional beef burgers. 
• A tangible impact is an effect that can immediately be felt by members of society (not in ten years time, but now). In the example above, the physical meat alternative is healthier for humans than processed beef patties, as it includes certain important micronutrients which will improve health on a short time-scale. 
• Finally, in terms of being measurable, the start-up is able to measure how many kilograms of the product is created, and thus provide a clear figure of the CO₂ emissions avoided by switching from beef to their product. Using these three characteristics to go through a potential final effect of a product or service will give a good picture if it can be considered a strong positive impact.”

Beyond the impact model itself, Mikael also looks closely at the founders behind the companies. He says that what makes a startup stand out to him is ”a noticeable obsession with the problem at hand. 

This is usually driven by an experience from earlier years, either as a child or as a student. This is a great indication that the founder will be resilient, and keep going even when facing difficulties as they have a strong desire to fix the problem.”

On top of that, multidisciplinarity is also highly appreciated, along with at least some of the team members having previous experience in entrepreneurship.

‍

However, as impact investing gains traction, concerns about “impact washing” are also becoming more prominent, and there are some red flags he keeps an eye out for.

“The main thing I think about is whether the impact will scale at the same rate as revenue. If a company is making a donation to a local NGO to look better to customers, and continues to make similar donations even though revenue increases ten-fold, then this is not real impact. In this case, a donation is also an indirect impact, as it is not tied to the business model of the company. 

Another red flag is start-ups that use ESG and impact interchangeably. This is a definite no-no, as impact is proactive whereas ESG is reactive. I could talk about this issue in length, but the proactive-reactive distinction is clear enough. When talking with purpose-driven founders, they should have answers ready to questions about impact. Any longer delays or uncertainty means that they are not fully committed to the problem at hand, or do not understand impact completely.” 

‍

Returning to the broader regional ecosystem, Mikael sees significant opportunities emerging across several industries:

“Concerning environmental impact, I see huge potential across the agricultural sector. From alternative proteins to smart, IoT-based farming and bio-based pesticides, I think there are many segments in which small changes could translate to large impact, whether GHG emission savings or less harmful chemicals in agriculture. 

Regarding social impact, the educational sector is ready for some disruption. Some of the CEE countries have rather out-dated educational systems, so the rapidly decreasing cost of software development allows new opportunities for founders to build innovative educational services and products. 

Also, I notice a strong shift towards individualised learning, especially when considering neurodivergence. It has become clear that different children learn through different approaches, so I expect to see various companies focusing on highly individualized learning solutions in the coming years.”

‍

Looking ahead, Mikael shared his hopes for how the CEE impact startup ecosystem could evolve over the next decade:

“I really hope to see more young people get excited by the prospect of entrepreneurship, especially the opportunities in solving some of society’s most pressing problems. At the same time, I hope to see more investors enter the impact investing space so that this topic finally switches from a niche field to a strongly performing financial instrument.”

Thank you, Mikael Hietala!