In its early days, Nesta was not an independent charity, but a non-departmental public body (a ‘quango’), with a mission to foster innovation in science, technology and the arts. At this time there was a small team making investments directly from Nesta’s balance sheet. The team made around 25-30 new investments a year, investing without seeking direct involvement in the running of the companies. Overall, between 2000 and 2006 – a point where start up capital was very difficult to find, following the bursting of the tech bubble – we invested £17million in 210 businesses, across a wide range of industries.

Around 2006-7, the investments team shifted to a new strategy, as the general availability of start up capital was beginning to improve following the tech crash of 2000. At this stage Nesta was still a quango rather than a charity, and the focus shifted from general start up support to fostering new technologies to power the next generation of the UK tech sector. Doing this well required us to make fewer, larger investments and to build more active relationships with those investees, in line with venture capital investing models. Of the 210 investments already made, around 41 received ongoing support under the new strategy. The rest of the angel investments were managed towards whatever exit opportunities were available. Over the period until 2012 an additional 19 technology companies were added to the portfolio, with Nesta investing £26million in new and follow-on funding.

As of 2019, six angel investments remain active from the Angel portfolio, 27 are classed as “zombies” (technically still in the portfolio, but written off), and we continue to hold 16 Venture investments.

A lot changed around 2011-2. Nesta was officially set up as a new independent charity, supported by an endowment of £250million. This led to a further evolution of our investment strategy. From this point on, and to this day, fulfilment of our charitable objects and our public benefit mission became the focal point for our investment activity. As a result we focus on using investment to achieve specified forms of impact aligned to our charitable objects, that we work to measure and evidence. We have three strands of investment activity:

• the Impact Investing team (which runs Nesta Impact Investments Fund 1 (NIIF1), its successor program Nesta Impact Ventures and our Program Related Investment activity)
• the Arts and Culture Finance (ACF) team (which runs the Arts Impact Fund and the Cultural Impact Development Fund (CIDF)
• the Trust Investment Committee (TIC), which manages investments held under the Nesta Trust

These three strands of activity developed at a time of significant change in the broader UK social sector. Big Society Capital was created in 2012 with £400million of capital dedicated to building a new market for social investment. Nesta played an important role in these changes. From 2010-11, we were in conversation with government ministers looking to build the social investment market. We ran the (mostly internally funded) Big Society Finance Fund from 2011-2, which we used to fund a series of research reports (Investing for the Good of Society, Understanding the demand for and supply of social finance, and Twenty catalytic investments to grow the social investment market). We also used the BSF Fund to explore the potential of this new market, making a series of programme related investments (PRI) in intermediaries such as Resonance, ClearlySo, Abundance, and Bethnal Green Ventures. Since 2011, Nesta has committed £3.5million of PRI into 12 organisations. The investments were made to help test and prototype the idea of a market for social investment. It was also hoped that some of these institutions would support and develop ventures that would become a pipeline of investment opportunities for Nesta. Ultimately things did not turn out this way, but these experiences helped to shape our understanding of this emerging market.

This activity and the growing awareness that there was a supply gap in the market for investment capital for Profit with Purpose businesses, especially those exploiting technology for social good, formed the backdrop for raising a £17.6million fund from Big Society Capital, Omidyar Network and Nesta itself. We set up a separate legal entity, Nesta Impact Investments 1 Limited Partnership (which was managed by Nesta Investment Management an FCA regulated fund management business wholly owned by Nesta). This Fund was set up to test the idea that it is possible to invest for both financial return and positive social impact.

Given that the arts and the creative economy have been a longstanding area of work for Nesta, we also began to explore how impact investment could benefit social enterprises in these fields. People in the sector were starting to ask what it would mean to build a market for repayable finance suitable for arts and culture sector organisations and what business models could sustain investment. In 2014 Nesta published its own research: The new art of finance: making money work harder for the arts, which encouraged a fresh perspective on arts funding in the context of austerity. We argued that the sector should be open to exploring venture funding as a new source of capital, and that it should build on the changes taking place in the wider social sector, adopting new business models and opening up communication with the growing range of social investors. In 2015 we put these ideas into practice, and launched the £7million Arts Impact Fund. The ACF team built on the early successes of the AIF, launching a second fund, the £3.7million Cultural Impact Development Fund, in 2018, providing smaller scale finance and specialist social impact support to arts and culture organisations.

Ultimately, we want all of our investment activities to make a positive difference in the world. We want each investment to be a positive step forward for the investee. And we want to have a wider impact on the growth and development of the market for impact investing. So how do we know whether we have achieved what we set out to achieve?

Social change is complex, and we only have a hope of answering this question if we are very clear in setting out our goals. This is why we have a theory of change for both NIIF1 and AIF. Our theories of change help us to connect our work to the wider picture. In summary:

• We want to demonstrate that it is possible to successfully manage portfolios that combine financial returns with impact, and then change the minds of others in the sector about the potential for this kind of finance
• We want these investments to help maximise the impact created by these organisations
• We want this success to help leverage in additional finance from other funders

So, how far have we got? We will explore this question in more detail in our upcoming blogs.