Traditional investing is laser-focused on maximizing and diversifying profits. But there’s another way: impact investing. It’s about making money work for a good cause. While profits are still a consideration, impact investing seeks to drive positive change. The change can take many shapes, but mostly it’s social or environmental. It makes capital work toward sustainability, taking into consideration the needs of society at large.
In the context of Software as a Service (SaaS), it’s a holistic approach to investing in a rapidly growing industry that has the potential for scalable solutions to environmental and social issues. SaaS companies can contribute to education, healthcare, and more. They can deliver accessible, sustainable, and innovative software platforms.
But to make the right purpose-driven impact investments, the investors need accurate assessments of the company’s financial health and its viability for positive social impact. The assessments can be based on metrics that estimate a company’s performance (related to social impact and financial performance). Annual Contract Value (ACV) is one such metric. It describes the value of a contract, usually for a period of one year. ACV = (total contract value / number of years) – one-time fees.
When paired with impact investing, stakeholders and investors can predict the positive social and environmental change that could come from the company’s financial success. It adds an extra dimension to your investment strategy, namely “impact”. This blog will explore how Annual Contract Value (ACV) can be integrated into impact investing to make clear evaluations of a company’s potential beyond just monetary returns.
What is Impact Investing?
On the surface, the concepts of ACV and impact investing may not seem more than buzzwords, contributing to the ever-growing word salad of SaaS terms. In their marriage, the two concepts are raising new possibilities for sustainable and responsible ways to generate wealth. ACV and impact investing meet to create a wave that could potentially define the future of investing.
But what exactly is impact investing? If you can picture a vein diagram of financial returns and positive impact on the world, the overlap is where impact investment stands. Instead of keeping the investment strategy limited to harm reduction, impact investing goes a step beyond and embraces social responsibility as a deciding factor. Instead of an overshadowing focus on either social good or monetary profit, impact investing meets them both on the same footing. The intertwining of social responsibility with capital results in a more holistic investment pathway.
Although impact investing has only been gaining traction in the last decade or two, you can trace its origins back to the 60s. It was a time of heightened social responsibility and investment firms moved in a similar direction too. But the term “impact investing” only popped up in the mid 2000s.
Back then, the international Rockefeller published a report coining the term and raising awareness about it. It proposed a more thoughtful approach to investing that goes above and beyond reducing risk and harm to contribute positive change with capital. Even though it is the new kid on the investment block, it’s backed by substantial research. In the long term, it can even outperform traditional investment models. That makes impact investing a powerful strategy with the potential to address pressing social and environmental concerns, including but not limited to, renewable clean energy, sustainable agriculture, education, healthcare, and microfinance for low-income families. Impact investing seeks for capital to reach firms dedicated to these positive causes.
On the technical level, it’s built on three principles — intentionality, return, and impact measurement. The positive social or environmental impact of a given sector can be measured. And it’s this measure that attracts impact investors. They intentionally seek innovative firms committed to making the world better. That’s the intentionality element.
Investors are also responsible for the impact they’re promising to create with their capital when investing in these firms. The firms, on the other hand, are responsible for collecting and reporting their performance using clear measurable metrics. That’s the impact measurement part. Lastly, much like any other successful financial strategy, financial returns are also expected.
Together, the elements transform impact investing into more than just a strategy. It’s a three-pronged tool powerful enough to enact social good to address societal issues and improve sustainability, all while delivering on financial returns. There’s the potential for building and leaving a lasting legacy using capital.
Understanding Annual Contract value (ACV)
Subscriptions are the backbone of a Software as a Service company. And the subscriptions come with a contract. ACV refers to the average revenue generated from a contract over a year. It reflects what you get by dividing the total contract value by the total years it spans. For example, a customer contract worth $3000 for three years will have an ACV of $1000.
In addition to monthly recurring revenue, Annual Contract Value (ACV) is a more accurate metric to describe a SaaS company’s revenue. It can be used to snapshot a company’s revenue growth and contrast it with the competition in the same industry because ACV can be calculated independently of a company’s size or its customer base numbers. That kind of universal predictability is invaluable in the SaaS landscape because it provides a clear lens to plan cash flow, operations, and strategy more effectively.
More than just a snapshot of the firm’s current performance, Annual Contract Value (ACV) also describes how well a company is gaining traction in its target market. A rising ACV reflects a SaaS company’s ability to consistently upsell its services. To an investor, it suggests that the company is successful in adding more value to its services and raising profits.
The usability of ACV doesn’t end at reporting and forecasting. It is a tool to understand the company’s customer base. You can tell, based on Annual Contract Value (ACV) alone, whether a SaaS company is catering to enterprises or small businesses. A higher ACV suggests enterprise clients who need enterprise solutions.
Annual Contract Value (ACV) serves the internal workings of the company with reliable assessments and forecasts. From the perspective of an investor, all this translates into an indicator of the company’s profitability and scalability. Strong ACV numbers attract investors, especially impact investors since they are looking for a robust strategy and steady revenue.
Combining Impact Investing and Annual Contract Value
Incorporating ACV into impact investing is shaping up to be a game-changer in the industry. Here’s a quick breakdown of the approach. The magic happens when the profit-first, data-driven design of ACV meets with the sustainable and meaningful goals of impact investing. Impact investing, as we’ve seen, seeks to enrich investment strategy with positive social, economic, and environmental outcomes.
Annual Contract Value (ACV) is a powerful tool to measure the profitability and sustainability of any SaaS company. SaaS growth and revenue models are subscription-based, which makes it far more complex to evaluate it clearly than traditional investment opportunities. A healthy ACV ensures impact and return (two of the three pillars of impact investing).
The first advantage of incorporating ACV into impact investing is a sophisticated, quantitative measure for evaluating potential investments. It’s employed by SaaS companies that rely on sustainable, long-term relationships with their clients instead of one-off products. Such a model is attractive for impact investors who wish to drive recurring, sustainable change with their capital.
Imagine an impact investor considering investing in a SaaS cloud company that’s committed to reducing energy usage in enterprise companies. The investor has already assessed the viability of the business model, its scalability, and its potential for positive impact. But the predictability of financial returns remains unclear. That’s where ACV comes in. It helps predicts the company’s future and how its impact may grow with time. It’s not a long leap from a company’s financial success to its positive impact multiplying as the company reaches more customers.
To put it simply, mixing impact investing with ACV creates a unique and innovative solution with the potential for becoming the new standard approach to sustainable investing. It pairs the rigorous, analytical data with the good intent of impact investing, ensuring the capital makes a positive difference.
Impact Investing in Action, Powered by ACV
ACV-backed impact investing isn’t just theoretical. It’s already working successfully in the real world. There are entire investment firms built around impact investing. One such firm is Impact Engine, a company that manages venture capital to drive positive change in economic, environmental, and health sectors.
Founded in 2011 and based in Chicago, Impact Engine evaluates and invests in SaaS companies dedicated to creating economic opportunities (jobs and microfinance), a sustainable environment (clean energy, waste management, and conservation), and healthy equity (improving healthcare access, driving innovation in medical treatments, and researching social factors of health).
Their portfolio includes dozens of SaaS companies working to address these challenges. Kiva, a micro financing platform, gives small loans to prospective entrepreneurs in developing countries. Carbonfund and Cloverly work to offset an enterprise’s carbon footprint. Akili Interactive designs software to treat ADHD and other mental disorders. Array is a SaaS company that serves underprivileged communities, providing access to psychiatrists, psychologists, and other health workers. Full Harvest is a virtual marketplace where manufacturers can connect with farms to reduce food waste.
Impact Engine has a history of successful investments and driving positive change through various startups. So far, they have helped create thousands of jobs, reduce gas emissions, and made healthcare accessible to millions. Several organizations have recognized their success and positive impact.
Impact Engine also uses Annual Contract Value (ACV) to make more informed investments. It helps them estimate a company’s potential impact based on future investments, track the performance of existing investments, and measure the total value a company can generate over a certain period.
Challenges of Impact Investing
As unique and innovative as it is, impact investing comes with its challenges and limitations — like any other successful strategy. When melding ACV with impact investing, one possible risk is over-relying on one data point, instead of focusing on the big picture.
While Annual Contract Value (ACV) is a powerful metric that provides practical insights into a company’s financial health, it doesn’t tell the whole picture. Especially when it comes to impact investments because they have social and environmental dimensions. ACV also fails to account for a company’s customer relations or the real-world impact it could make.
Even if the ACV is healthy, it doesn’t necessarily mean that profits and positive impact will roll in right away. SaaS businesses need time to develop products and grow their customer base. ACV doesn’t have that element of time attached to it, which would have indicated to the investors the duration it would take to see reasonable profits and impact.
ACV can ensure the strength of one of the prongs of impact investing, namely the financial return prong. But it doesn’t predict the intent or impact of a SaaS service. Relying only on ACV as a tool for assessment would lead to an overemphasis on revenue and not enough on the positive impact the company could potentially make.
It’s a pioneering approach in its growing stages. Impact investing has tremendous potential but it still faces many challenges that investors need to acknowledge and address.
Impact investing is all about providing capital to companies seeking to create a positive change in the world — either in society or the environment. The companies also promise financial profitability to potential investors. Impact investors seek to make a positive impact that’s recurring, sustainable, and long-term while accruing financial returns.
SaaS companies are built on the principles of long-term sustainability and recurring returns. SaaS businesses use ACV as a metric for tracking and forecasting, which also helps investors make informed decisions. The innovative approach of combining ACV with impact investing certainly has the potential of making a positive contribution to our world.