Inside the Mind of Investors: How Do Impact Investors Really Assess Impact?

When Impact Can’t Be Measured, What Do Investors Look For?

Impact investors aim to fund ventures that create both social impact and financial return. But how do they judge impact potential when hard evidence is missing? Measuring impact takes time — yet investment decisions are often made in minutes.

In our recent study, published in the Journal of Business Venturing Insights,  we addressed this question by asking 20 professional impact investors to review real-life investment proposals while thinking aloud. This method, known as verbal protocol analysis, reveals the cognitive processes at play during decision-making, 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.

The Bright and Dark side of Heuristic Assessment

Our study highlights that early-stage impact investors operate under conditions of bounded rationality, which often necessitates the use of heuristics. These implicit or explicit decision-making rules reduce information to a degree that can be processed more easily. Many of the processes identified in our study imply the use of heuristics, e.g., searching for quantitative evidence and evaluating high numbers positively or interpreting the sequence of slides in the pitch deck as indication of the team's priorities.

This use of heuristics can be a powerful tool for impact investors. They are usually informed by prior experience and expertise, allow fast decision making and help overcoming ‘analysis paralysis’ in complex situations.

However, they also have a dark side: heuristics can lead to systematic biases and bad decisions. For example, a heuristic favoring more imaginable problems and solutions will likely favor proposals with simple, short-term theories of change, and disadvantage ventures pursuing complex, long-term change. Without necessarily being aware of it, investors using this heuristic will neglect such opportunities.

Our data reveals a few instances in which heuristics may have contributed to such erroneous decisions: for example, investors who took cues from the positioning of information that the material had been compiled by the funding intermediary in a standardized format, and thus could not contain information about founders' priorities in this way. Similarly, investors using prior knowledge at times made such inferences from arbitrary data (e.g., a spouse's volunteering experience with a different organization two decades ago).

Why This Matters for Investors and Entrepreneurs

These findings have practical implications:

For investors: If impact is to be taken seriously in investment decisions, investors must resist the temptation to rely only on heuristics in their first assessment of impact potential. Instead, internal processes must become more systematic and pre-meditated. Tools like inquiry frameworks or simple impact logic models can help reduce bias and have proven to improve decision quality.

For entrepreneurs: Because impact assessments are shaped by heuristics, it's crucial to make the problem and proposed solution immediately graspable. Use concrete numbers, relatable narratives, and clear structure. Even details like terminology or slide order can influence investor perception.

So, when drafting your pitch deck, remember: even impact investors are only human.

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.