Impact Carry: Aligning Financial Returns with Measurable Social and Environmental Goals in Venture Capital

Impact Carry combines financial goals with measurable impact objectives, transforming the compensation structure in venture capital (VC). The idea: VC teams receive their share of profits (carried interest) only if both financial and social or environmental targets are met. This approach strengthens the focus on sustainable investments and creates clear incentives for long-term societal benefit. By directly linking compensation to impact, Impact Carry addresses a growing demand for accountability and transparency in the VC industry, aligning with global trends toward responsible investing and stakeholder capitalism. Recent research shows that investors increasingly expect their capital to drive positive change, not just financial returns.

Key Takeaways:

• What is Impact Carry?
  A compensation structure that combines financial performance with impact KPIs (Key Performance Indicators), ensuring that value creation is measured both in profit and in positive social or environmental outcomes.
• How does it work?
  Carried interest is only paid out if defined impact goals are achieved. Example: Ananda Impact Ventures ties payouts to at least 60% achievement of impact targets, setting a clear threshold for both financial and impact performance. This dual hurdle ensures that teams are incentivized to deliver on their mission, not just their bottom line.
• Why is it gaining importance?
  ESG criteria and sustainable investments are increasingly in the spotlight. Impact Carry resolves the conflict between returns and mission, responding to the rise in investor demand for funds that deliver measurable, real-world results alongside financial performance. According to the Global Impact Investing Network (GIIN), the global impact investing market surpassed $1.16 trillion in assets under management in 2022, reflecting this shift.
• Real-world examples:
  Funds like Ananda, Norrsken VC, and Rubio Impact Ventures successfully use Impact Carry, demonstrating that financial and societal goals can be achieved simultaneously. For instance, Norrsken VC has integrated Impact Carry since 2017, aligning every investment with at least one UN Sustainable Development Goal (Norrsken VC).
• Challenges:
  Defining realistic KPIs, ensuring transparent processes, and integrating them into existing fund structures require careful planning. The complexity of measuring impact and aligning diverse stakeholder interests can be significant hurdles, as highlighted by Harvard Business Review.

This approach could have a lasting impact on the VC industry and set new standards for combining returns with societal value. As more funds adopt Impact Carry, it may become a benchmark for responsible investing, influencing capital flows and entrepreneurial priorities worldwide.

How Impact Carry Works

Core Components of Impact Carry

Now that the models have been introduced, let’s take a look at how Impact Carry works in practice. Two performance levels are evaluated: financial and impact-related. The process starts with defining specific impact KPIs (Key Performance Indicators) for each portfolio company. Based on this, a payout structure is defined that links both dimensions. This dual approach ensures that teams are not only rewarded for financial exits but also for delivering on their stated impact objectives.

For early-stage companies, such as those in the pre-seed or seed phase, impact goals are set for the period up to Series A funding. For companies in later stages (from Series A onwards), these targets are either adjusted or redefined to cover the entire investment period. This tiered approach aligns with the specific development phases of the companies, allowing for flexibility as business models mature and data becomes more robust.

An independent Impact Advisory Committee reviews and approves all KPIs. Once a KPI is formally set, it is documented in writing and disclosed to Limited Partners. This transparency is crucial for building trust and enabling objective assessment of goal achievement. According to the Impact Investing Institute, independent verification and transparent reporting are essential for maintaining credibility in impact investing.

"In simple terms, this means we help companies to set up impact KPIs and related targets. If they don't make their targets, we don't see our carry. This mechanism avoids conflicts of interest between mission-based impact and financial performance because the VC's return is tied to both."
– Ananda Impact Ventures

Impact and financial performance are usually assessed together at exit. The Impact Advisory Committee decides whether the established KPIs have been met and can engage an independent third party for verification if needed. This double-check ensures the credibility of the results and aligns with best practices in the industry, as recommended by the Global Steering Group for Impact Investment.

Despite the importance of Impact Carry, achieving financial targets remains a fundamental prerequisite for carried interest. Impact Carry does not replace financial performance—it adds an additional condition, ensuring that impact is not an afterthought but a core driver of value creation.

In the next section, we’ll take a closer look at concrete impact metrics and their application.

Impact Metrics and KPIs

The selection of suitable impact KPIs depends heavily on the fund’s investment focus and the individual goals of the portfolio companies. German VC funds are developing tailored approaches that are both measurable and relevant to the intended impact. Internationally, frameworks such as IRIS+ and the Impact Management Project are widely used to standardize and benchmark impact metrics (IRIS+).

Example: The Masawa Impact Fund I measures success in the field of mental health using standardized scales such as PHQ-9 and GAD-7. Other indicators include the number of users reporting improved mental health, reduction in time spent on problematic smartphone apps, and progress in mental health biomarkers in the microbiome. This approach ensures that impact is tracked using scientifically validated tools, increasing the reliability of reported outcomes.

Climate-tech funds like the World Fund use different metrics. Here, specific targets are set for each portfolio company based on the fund’s impact methodology. These values feed into the calculation of an overarching impact goal, which in turn influences the carried interest mechanism. For example, World Fund requires portfolio companies to demonstrate a credible pathway to saving at least 100 megatons of CO2 emissions per year (World Fund).

A key principle in developing KPIs is the focus on outcome rather than output KPIs. AENU, for example, doesn’t just measure the number of people reached but emphasizes the actual changes in their lives. This outcome-oriented approach closely links financial performance and impact, ensuring that incentives drive meaningful, lasting change rather than superficial activity.

Investors receive quarterly updates on progress toward impact KPIs. This regular reporting enables early adjustments and ensures that set goals are achieved. According to GIIN’s 2022 survey, frequent and transparent reporting is a key driver of investor confidence in impact funds.

The credibility of the metrics depends largely on precise data collection. Only then can it be proven whether the intended impact goals have actually been met. The metrics must accurately reflect the impact achieved through the investment, and the financial incentives should be strong enough to influence company behavior. Third-party audits and standardized methodologies are increasingly used to validate results (Harvard Business Review).

Legal Framework in Germany

The implementation of Impact Carry in Germany takes place within a clearly defined legal framework. The basis for this is the Capital Investment Code (KAGB), which governs the structuring and regulation of investment funds.

VC funds in Germany are set up as special AIFs (Alternative Investment Funds). These closed-end funds are only accessible to professional and semi-professional investors, while retail investors are excluded.

For fund structures such as the GmbH & Co. KG, the separation of management and fund is required. The managing limited partner (LP), usually a capital management company (KVG), needs approval from the Federal Financial Supervisory Authority (BaFin).

The KAGB offers simplified regulation for “small” AIF-KVGs that stay below certain asset thresholds. These “small” KVGs manage special AIFs with a maximum of €100 million (including leverage) or €500 million without leverage, provided there are no redemption rights within five years of the fund’s first investment. They are only subject to registration, reporting, and audit requirements, which significantly reduces regulatory effort.

Only AIFs structured as corporations or partnerships—such as GmbH, AG, or GmbH & Co. KG—where the general partner has limited liability, are suitable for this framework. These legal requirements form the foundation for successfully implementing Impact Carry in Germany. More details will follow in the next chapters.

Webinar: Raising Venture Capital with Impact – Introduction by Wladimir Nikoluk

Developing and Measuring Impact KPIs

This section highlights how to define, measure, and strategically use impact KPIs to achieve social and environmental goals. The process is informed by global standards and best practices, ensuring that KPIs are both meaningful and actionable.

Developing Effective KPIs

To develop effective impact KPIs, established frameworks such as the Impact Management Norms and the IRIS+ system from the Global Impact Investing Network (GIIN) provide clear guidance. It is crucial that KPIs are directly linked to the original investment strategy. Each metric should directly reflect the intended social or environmental impact, ensuring alignment between the fund’s mission and its measurement approach.

A key point is differentiating between output and outcome KPIs. While output metrics might measure the number of products sold, outcome KPIs go a step further and capture the actual effects, such as avoided greenhouse gas emissions. The OECD recommends prioritizing outcome-based metrics to ensure that impact is real and lasting.

Already in the due diligence phase, a company’s business model should be checked for alignment with the intended goals. This analysis should be updated regularly. Especially for young companies that often lack mature data systems, proxy metrics or evidence-based estimates can help develop meaningful KPIs. As data maturity increases, KPIs can be refined for greater precision and relevance.

Methods for Measurement and Reporting

Once KPIs are set, precise measurement and transparent reporting are the focus. Robust processes for data collection and verification are essential. The concept of Impact Measurement & Management (IMM) forms the basis for identifying and tracking both positive and negative impacts of a company. The Global Steering Group for Impact Investment highlights IMM as a cornerstone of credible impact investing.

A practical example: A company developing energy-efficient technologies for industry may not be able to measure avoided greenhouse gas emissions directly. Instead, estimates can be made based on energy savings and typical customer usage data. These can then be extrapolated to total sales to quantify emissions reductions. This approach is widely accepted in the sector and recommended by the Greenhouse Gas Protocol.

Regular data collection—such as quarterly—is essential for identifying trends and making adjustments as needed. This creates feedback loops that optimize the entire investment cycle. Benchmarking and time series analysis also help objectively assess progress, allowing funds to compare their results against industry standards and peers.

If direct measurement is not possible, proxy metrics or existing data can be used. It is important to clearly document the methods and assumptions applied, ensuring transparency and facilitating future improvements.

"Impact measurement helps to identify and track both the positive and negative social or environmental impacts of a company's products and services. Impact management uses this information to try to maximise positive outcomes for people and the planet."
– Oyin Oduya, CFA, Impact Measurement & Management Practice Leader, Wellington Denmark Institutional

Setting Ambitious and Achievable Goals

The art lies in formulating goals that are both challenging and realistic. Climate VC funds, for example, aim to achieve high internal rates of return (IRR) for investors while also delivering positive environmental and climate effects. According to Climate Policy Initiative, ambitious yet achievable targets are critical for mobilizing capital at scale.

For early-stage companies, transparently presenting their carbon avoidance potential (Scope 4) is especially important. Forecasts should be clearly labeled to set realistic expectations. Comparing projected and actual values allows fund managers to assess and adjust their performance as needed, fostering a culture of continuous improvement.

Annual public impact reports offer a structured way to document both financial returns and impact KPIs. These reports include data on operational results (Scope 1-2-3), avoided emissions (Scope 4), and potential future effects. Such transparency is increasingly expected by Limited Partners and regulators alike (Eurosif).

For funds aligned with the EU taxonomy and seeking Article 9 classification, seamless traceability is crucial. Both climate and social targets must be demonstrably met. These regulatory requirements significantly influence KPI design and reporting processes.

Open communication about successes and challenges builds investor trust and supports continuous improvement in impact measurement. Sharing data also fosters transparency and enables better learning across the sector, as advocated by GIIN.

These approaches to goal setting and measurement form the foundation for the Impact Carry model, which will be explained in more detail later in the article.

Common Pitfalls When Setting Impact Goals

Introducing Impact Carry brings several challenges that venture capital teams often underestimate. Fundamental mistakes can occur as early as the planning phase, leading to bigger problems later on. According to Harvard Business Review, the most common pitfalls include poorly defined metrics, lack of alignment among stakeholders, and insufficient data infrastructure.

Mistakes in KPI Design

A common issue is choosing so-called vanity metrics—impressive numbers that offer little real insight or value. Instead, KPIs should be selected that are directly linked to conversions, customer retention, or measurable societal effects. Problems also arise when responsibilities for these KPIs are unclear, there is no concrete action plan, or the investment team’s goals do not align with portfolio management.

Another stumbling block is tracking too many or too narrowly defined KPIs. This often leads to confusion, inefficiency, and tunnel vision that can overlook other important business goals. An excessive focus on CO₂ reduction, for example, can result in other societal objectives being neglected. Faulty or incomplete data can also create discrepancies between actual and measured impact. Unrealistic targets can quickly become demotivating.

These challenges in KPI design are frequently discussed in the literature and are echoed by industry leaders such as the Impact Investing Institute.

Team and Process Challenges

Beyond the technical aspects of KPI design, internal team and process factors also pose major challenges. Implementing Impact Carry requires a cultural shift that is not always immediately embraced by all team members. Securing buy-in from the entire team is crucial—especially if experienced partners remain committed to traditional return models.

In internationally operating VC funds, cultural differences can influence the interpretation of KPIs. It is important to consider regional differences in impact understanding. Lack of context for metrics can lead to an incomplete understanding of the underlying causes of business performance. Integrating impact thinking into existing investment processes is also a challenge, as rigid KPI models often overlook important business aspects. A balanced mix of quantitative and qualitative success measurements provides a broader perspective. Finally, lack of transparency in KPI communication can lead to misunderstandings among stakeholders.

These process challenges are also discussed in the literature. They show why a step-by-step approach to implementing Impact Carry is crucial (GSG Impact Investment).

Avoiding Common Mistakes

Introducing a small number of clearly defined impact KPIs step by step can significantly reduce the risk of poor decisions. These KPIs should be tested over several quarters before expanding the system. This phased approach allows teams to learn, iterate, and build confidence in their measurement systems.

"It is essential to have a clear understanding of the overarching objectives and direction of your firm. Start by defining the strategic priorities and key performance indicators (KPIs) that will drive the success of your venture capital activities. Ensure that these goals are specific, measurable, achievable, and relevant."
– Dr. Mohammed Alfaifi, Healthcare Innovation Expert

Regular quarterly reviews help identify trends and make necessary adjustments. Applying the SMART criteria (Specific, Measurable, Achievable, Relevant, Time-bound) provides a proven foundation for effective goal setting and is widely recommended by industry experts.

"Employing the SMART criteria is a game-changer in setting efficacious goals for venture capital teams. This methodology ensures goals are Specific, eliminating ambiguity with clear definitions; Measurable, allowing for quantifiable tracking; Achievable, striking a balance between ambition and realism; Relevant, ensuring alignment with the firm's core objectives; and Time-bound, introducing deadlines to foster urgency and focus."
– David Vogel

Involving employees in the KPI development process not only increases acceptance but also improves the quality of goal setting. Benchmarking with other VC firms can also provide valuable insights for setting realistic targets, as shown in GIIN’s annual survey:

"Understanding how similar VC firms perform can provide valuable context for setting achievable goals. By benchmarking against peers, not in terms of competition but as a market standard, I've been able to set goals that are ambitious yet realistic."
– Anne Ijera

Another important step is documenting assumptions and methods. This creates transparency and makes future adjustments easier, supporting a culture of learning and accountability.

Introducing Impact Carry in VC Funds

After developing and measuring impact KPIs, the question arises of how to integrate them into fund structures. Impact Carry requires a well-thought-out implementation plan, which varies depending on the fund structure. The following explains how both new and existing funds can practically implement Impact Carry, drawing on recent industry handbooks and case studies.

Establishing Impact Carry in New Funds

For new funds, Impact Carry can be planned right from the start. For example, five European VC funds created a handbook based on the Gamma Model from the European Investment Fund (EIF). ETF Partners, SET Ventures, Sofinnova Partners, Astanor, and FoodLabs jointly developed the handbook "Impact Accountability in Venture Capital: A Ready-Reference for Practitioners" (EIF Gamma Model).

“We aim to promote clarity and consistency in how we discuss impact and link it to carried interest, rather than maintaining multiple approaches. While impact funds are naturally considering these issues first, I believe more mainstream funds will increasingly think about the impact of their investment strategies.”
Patrick Sheehan, Managing Partner at ETF Partners.

When structuring new funds, it is crucial to first set strategic priorities. The EIF’s Gamma Model serves as a framework for validating impact goals. In close coordination with Limited Partners, impact indicators are defined that target both financial and impact outcomes.

Early involvement of all stakeholders is a key factor. Sheehan emphasizes:

“If we can explain how to approach impact in a simple and practical way, then it will encourage others to do it. We'd like to see this becoming more mainstream.”

The handbook is considered a dynamic document that is regularly updated with new best practices, reflecting the evolving nature of impact investing.

Integration into Existing Funds

Existing funds face different challenges, as they first need internal alignment to integrate Impact Carry. Building consensus within the organization is especially important, as various priorities must be considered. According to the Impact Investing Institute, change management and stakeholder engagement are critical success factors.

Steven Godeke of Godeke Consulting highlights a key point:

“As the number of impact investing advisors has grown, asset owners have moved from a scarcity of options to abundance—the challenge is now finding an advisor who understands how you want to connect your money and mission.”

Choosing the right advisors plays a crucial role in successful implementation, ensuring that both financial and impact objectives are met.

A proven approach is to achieve quick wins first to boost acceptance. All stakeholders should be included according to their individual values, risk tolerance, and reservations. Advocates and external partners can further strengthen internal buy-in, as shown in GIIN’s research.

Impact investing is presented as a tool to achieve both financial and impact-oriented goals. This often requires linking financial and impact objectives. A possible entry point could be a loan to an existing beneficiary or introducing ESG screening in a familiar sector, gradually building capacity for more ambitious impact strategies.

Impact on Startups and Portfolio Companies

Impact Carry also changes the dynamic between VC funds and their portfolio companies. Startups must prepare for expanded reporting requirements that go beyond purely financial metrics. At the same time, they benefit from a structured approach to impact measurement. This often requires building new data collection systems but can also create new business opportunities and boost employee motivation. According to Bain & Company, startups that embrace impact measurement often see improved stakeholder engagement and access to new markets.

The challenge is to align the goals of funds and portfolio companies. Close collaboration is necessary to define realistic impact targets. For early-stage startups, flexible KPI structures are needed as their business models are often still evolving. Established companies, on the other hand, can implement more precise measurements.

Transparency with founders is essential, especially regarding the impact of Impact Carry on investment decisions. Careful documentation of assumptions and methods builds trust and makes it easier to further develop the shared impact strategy. Regular feedback also helps to continuously optimize KPI definitions and strengthen collaboration between funds and portfolio companies.

Why Impact Carry is Crucial for the Future of VC

Impact Carry brings all stakeholders—fund managers, investors, and portfolio companies—onto the same page by linking financial and sustainable goals. This combination fosters a close partnership that goes beyond traditional return expectations and sets new standards. The growing importance of impact investing is also reflected in current European investment figures and global market trends.

The statistics speak for themselves: In 2023, one third of the €53 billion in VC investments in Europe went to startups actively contributing to one or more of the 17 UN Sustainable Development Goals. This development underscores that impact investing has firmly entered the mainstream. Globally, the impact investing market is projected to reach $1 trillion by 2025, according to GIIN.

A pioneer in this field is Norrsken VC from Sweden. Since 2017, the fund has used Impact Carry and, as an SFDR Article 9 fund (“Dark Green”), is committed to supporting at least one UN Sustainable Development Goal with every investment. The team works closely with its portfolio companies to define, measure, and further develop their impact.

Another example is Rubio Impact Ventures, one of the largest impact funds in Europe with €150 million in assets under management. Rubio has a carry structure fully tied to achieved impact, and thanks to its clear objectives, strict tracking, and an independent Impact Advisory Board, achieves the highest Phenix Impact GEMS Score. These success stories reflect the growing focus on impact in the venture capital landscape (Rubio Impact Ventures).

The financial results are also impressive: Mercy Corps Ventures has supported 43 early-stage ventures since 2015, which have gone on to raise over $396.7 million in follow-on capital. The fund focuses on solutions in areas such as adaptive agriculture, inclusive fintech services, and climate-smart technologies (Mercy Corps Ventures).

Impact Carry could fundamentally change incentive systems in the venture capital industry. Although venture capital accounts for less than 1% of total capital investments, about 9% of VC-backed companies generate 100% of investment gains (NVCA). With Impact Carry, these successes are ensured to be not only financial but also socially tangible, creating a new paradigm for value creation.

Consumer behavior is also showing a clear trend: 73% of millennials are willing to pay more for sustainable products (Nielsen). This attitude is increasingly influencing investment decisions and driving demand for impact-oriented funds.

Bill Gurley of Benchmark aptly sums up the importance of innovation:

“Innovation and disruption are constant and not subject to the whims of the overall economy.”

Impact Carry channels this innovative power toward societal challenges, creating new markets and business models in the process. As more funds adopt this approach, the VC industry is poised to become a major force for positive change, not just financial growth.

The outlook is promising: The impact investing market, estimated at $228 billion in 2017, could grow to $1 trillion by 2025 (GIIN). Impact Carry will play a central role in channeling these capital flows effectively and achieving measurable results.

To ensure this, investors should anchor Impact Carry clauses in fund documents. This transparency ensures that fund managers not only talk about impact goals but also implement them consistently. It builds trust and strengthens accountability within the industry, setting a new gold standard for responsible investing.

FAQs

How do impact KPIs differ from traditional financial KPIs in venture capital?

Impact KPIs focus on measuring social and environmental outcomes, while classic financial KPIs such as IRR, MOIC, or TVPI assess only the financial performance of a fund. Impact KPIs might include metrics like CO₂ emissions avoided, jobs created for underserved populations, or improvements in health outcomes. These metrics provide a clear basis for measuring the success of impact VCs and strengthen investor and partner trust in the funds (IRIS+).

What are the challenges of introducing Impact Carry in existing VC funds?

Introducing Impact Carry in existing VC funds comes with several challenges. One of the main hurdles is adapting the fund structure to accommodate both financial and impact goals. This requires clear, measurable, and verifiable impact KPIs that are accepted and supported by all stakeholders. Organizational change, legal adjustments, and the need for new data systems can also be significant barriers. Open and transparent communication with all stakeholders is crucial to resolve potential conflicts between financial and impact interests early on (Impact Investing Institute).

How does Impact Carry strengthen collaboration between VC funds and their portfolio companies?

Impact Carry strengthens collaboration by linking financial incentives with clearly defined impact KPIs. This enables VC funds and portfolio companies to better align around shared sustainable and impact-oriented goals. The model fosters greater trust and engagement among fund managers and founders, providing a solid foundation for a true partnership. With a clear strategy that unites financial returns and societal impact, both sides benefit equally. This alignment is increasingly seen as a competitive advantage in attracting top entrepreneurs and capital (Bain & Company).