The article written by Peter Vandor, Fabian Dober, Michael Meyer and Reinhard Millner on impact investor decision-making was published in the latest issue of the Journal of Business Venturing Insights. Their research shows that impact investors do not evaluate ‘impact’ in the way that theory suggests.

As part of the study, 20 professional impact investors were asked to review real investment proposals while thinking out loud. This method, known as verbal protocol analysis, reveals the cognitive processes involved in decision-making and goes beyond what investors typically report.

Not Measurement, But Mental Shortcuts: How Impact Gets Evaluated

We analyzed 58 investment screenings and over 10,000 thought segments. The findings are striking: rather than using structured frameworks or metrics, most investors rely on a range of 18  mental processes. These include, among others:

• Imagining the problem or solution to judge its relevance or feasibility

• Referencing prior knowledge, such as past deals, personal experience, or any other knowledge accessible in the moment of reading

• Matching problems and solutions to see if they “fit”

• Sketching impromptu theories of change, usually informally and on the spot

• Evaluating the position of information of impact in the material as a proxy for its importance to founders

Investors rarely apply the structured models or indicators promoted in the impact measurement literature. Instead, decisions are often based on fast heuristics, such as how information is positioned in a pitch deck or whether an issue feels personally relatable.

Want to Learn More?

The full article, Evaluating Impact Potential in Early-Stage Impact Investing: Investment Criteria and Cognitive Processes of Investors, is available here. It was published in the Journal of Business Venturing Insights.

Authors
Peter Vandor, Fabian Dober and Reinhard Millner are researchers at Center for Social Entrepreneurship and Social Innovation, Vienna University of Economics and Business.

Michal Meyer is professor at the Institute for Nonprofit Management and Governance, Vienna University of Economics and Business.

Many thanks go to the funding partner, FFG Austria, to the 20 participating investors and to FASE for providing the cases.