SJF’s Impact Diligence: Balancing Flexibility and Rigor to Achieve Effective Partnerships

SJF invests in six different social and environmental impact sectors, which means our ninety-five portfolio companies are a diverse group: one company is reducing fraud and hate speech online (Respondology); another is providing personalized diabetes and weight management coaching (Cecelia Health); another makes automation solutions to build utility-scale solar plants faster (Terabase Energy). This diversified portfolio approach is intentional—the problems we’re focused on solving touch multiple sectors, so we invest accordingly, and we believe our cross-sector expertise makes us better partners to our portfolio companies.

The range of our portfolio also means we can’t apply a scoring system or check-the-box approach to diligence. Some impact funds with sector-specific strategies look at a particular impact metric as a threshold for investment: e.g., if a climate tech company is projected to avoid X tons of GHG emissions, it meets the impact criteria for investment. SJF can’t use a single metric or score to determine impact, because our companies vary so widely: our healthcare companies are working to lower maternal mortality rates while our supply chain companies reduce food waste. We had to design our impact diligence process to be both flexible and rigorous, to consistently assess the impact potential of businesses even as those businesses vary widely. Specifically, we look for signals that founders and management teams are well-aligned with our mission. That alignment yields strong investor-investee partnership, through which SJF leads targeted efforts to help a company’s impact grow.

What We Look at in Impact Diligence
SJF’s impact team evaluates each prospect holistically, taking time to understand the product or service and the management team rather than applying an “impact screen” for prospective investments. Market context, conversations with company leadership, and data room materials help inform our understanding of how companies advance progress toward one (or more) of our impact objectives—and how we can help them do so faster, at a greater scale.

SJF assesses the following aspects of a company during impact diligence (among other factors):

Theory of Change: Through research, document review, and discussions with management, SJF determines what social or environmental problem the company is solving and how. We then leverage external data and third-party research to validate both the severity of the problem and the effectiveness of the company’s intervention. Many companies we diligence (and ultimately invest in) haven’t thought through their own theory of change yet, so this exercise is helpful for both elucidating SJF’s impact thesis and developing a shared understanding of how the business contributes to environmental or social challenges.

Impact objectives: Which of SJF’s impact objectives is the company addressing? One company can touch on multiple objectives, and some companies even address objectives across multiple sectors: for example, Elemeno Health, which delivers just-in-time training content for clinicians, is improving the care experience for patients and providers and improving employee well-being at work, simultaneously touching on objectives in SJF’s Health and Wellness and Education and Employment strategies.

Intentionality: Is company leadership actively managing the business with impact in mind? Is impact inherent to the product or service? SJF’s impact team speaks with management before a deal reaches the term sheet stage to answer these questions. Teams that are intentionally working to solve environmental and social problems as they grow their businesses tend to be well aligned with SJF and eager to bring an impact investor into Board and management conversations. Companies need not be especially savvy in impact investing to meet this requirement; some founders we speak with have never thought of their businesses as impact businesses. But their receptiveness to our strategy and ability to brainstorm on ways to augment impact are strong indicators of a productive partnership to come.

Additionality: Would the positive impacts occur otherwise if it weren’t for this company? We consider the universe of solutions to the specific problem the company is solving, including those presented by competitors, policy and philanthropic efforts. We think about how a company might be broadly pushing a sub-sector or entire market forward to create systems-level change. We also consider SJF’s own additionality: what might SJF bring to the table as an investor and Board member that a traditional VC wouldn’t?

Risks: Are there possible negative externalities of the company’s product or service? These aren’t considered dealbreakers; we proactively, and exhaustively, call out impact risks so that we can work with companies to make plans to address them. Most recently, as we encounter spades of AI-enabled businesses, SJF has had conversations with several prospects’ management teams about adopting safeguards around AI to protect against bias and other negative outcomes. We’ve asked questions like these:

• How are you carrying out responsible AI best practices? We are particularly interested in the following: appropriate human-in-the-loop practices, bias prevention/fairness measures, data privacy.
• Do you have an ethical AI policy?
• Can you touch on your internal data privacy and security practices?
• What kind of sensitive data do you retain?
• In cases where job loss is a potential risk associated with the company’s AI product: does this tool augment human employees or stand to replace them? How is company management thinking about potential job displacement?

Discussions of impact risks are often a good opportunity to assess intentionality: is the management team cognizant of the risk and eager to enact a plan to address it? How does the founder respond to the identification of a possible negative externality of their product or service? If a product or service has potential for negative end use cases, are they willing to implement safeguards?

Bending the Curve: The most exciting part of impact diligence is writing the impact acceleration section of the memo, where we describe ways to partner with the company to deepen impact. During impact diligence, we hope not only to validate impact, but also to identify a path to expand it over time through our engagement and partnership. In the impact acceleration section, we outline projects such as impact measurement surveys and lifecycle assessments (with partners including 60 Decibels, often contributing to impact case studies and data-driven industry reports), job quality improvements (including recent efforts to bolster parental leave across the portfolio), impact-oriented marketing initiatives, B Corp or Public Benefit Corporation certifications, policy advocacy work (including helping portfolio companies secure RHTP funding) and nonprofit partnerships. This step in impact diligence sets forth a blueprint for our post-investment collaboration with portfolio companies, aimed at using SJF’s expertise and resources to help them drive impact at scale.