Why early-stage capital matters most

Early-stage capital may be the least glamorous corner of impact investing, but it’s where impact is decided.

 

“Why don’t you move upmarket?”

 

It’s a question our team at SustainVC hears often — sometimes as curiosity, sometimes as advice, sometimes as a warning. Given our long tenure in impact investing and our prior experience managing hundreds of millions of dollars, many assume the next step is to raise larger funds, write bigger checks and invest later.

 

In both conventional and impact investing, size is often conflated with success. Larger funds are presumed to mean larger impact. Later-stage companies feel safer, more visible and more “institutional.” In a market where capital is becoming more cautious and concentrated, those forces are intensifying.

 

Yet for nearly 20 years, our answer has remained the same: We stay early-stage because that’s where the need is greatest and where impact capital matters most.

 

Choosing the hardest segment — on purpose

When SustainVC was founded in 2007, impact investing was far from mainstream. There were no billion-dollar climate funds, no widespread ESG mandates and little institutional attention to social or environmental outcomes. If we were going to raise capital explicitly for impact, we believed we should deploy it where it could do the most good, not where it would be most comfortable.

 

That led us to a conclusion that remains controversial: Investing between Seed and Series A is not only the most overlooked, but also the most important segment of the impact capital market. It’s not the most visible. It’s not the easiest to scale from a fund economics perspective. But it is the most consequential.

 

Importance here isn’t about prestige or assets under management. It’s about leverage: whether capital changes a company’s trajectory rather than simply changing who owns it. It’s about influence over governance, culture, strategy and impact when those elements are still being formed.

 

Inside the impact “Valley of Death”

Companies seeking less than a typical Series A round of $10–$20 million operate in what is commonly known as the “Valley of Death.” They have a product, early customers and proof that something works. But the next inflection point — scaling operations, professionalizing the team and reaching cash-flow sustainability — requires more capital and sophistication than friends, family or angels can usually provide.

 

At the same time, the needed checks — often only $2–$5 million — are too small for venture funds managing $100 million or more. Professional capital at this stage is scarce. GIIN data suggests venture-stage allocations are only about 7% of total impact assets by stage of business. Some larger funds may invest earlier if they expect to deploy much more later, but most companies at this stage are effectively shut out of traditional venture funding. Too often, entrepreneurs have nowhere to go.

 

This gap has become more acute for two reasons:

1. Fewer impact funds are getting funded; according to Pitchbook, the amount of capital raised by private impact funds in 2024 was down nearly 50% from the peak in 2022; and

2. Recent activity has shifted toward later stages. For example, Carta data shows that while Seed and Series A investments declined in 2024, deal counts increased at Series B and beyond.

 

And the challenge isn’t only financial. Early-stage companies also face a capability gap. They need help recruiting management, refining go-to-market strategy, formalizing impact measurement and navigating trade-offs between growth and mission. When this isn’t filled,companies stall — not  because their ideas lack merit, but because capital arrives too late, too slowly or in fragmented pieces that distract company leadership.

 

Early capital creates outsized impact

Impact investors often emphasize additionality: whether capital enables outcomes that wouldn’t otherwise occur. By that standard, early-stage investing offers some of the highest additionality available.

 

Consider buying shares in a large public company versus investing in a young private one. Public-market investing (including in ESG-screened companies) typically means buying existing shares from other shareholders. Ownership changes hands, but the company often sees little direct benefit.

 

Early-stage investing is different. Capital flows directly into the business, funding hiring, product development, distribution and infrastructure. It helps companies grow revenue, reach customers and expand the social or environmental value embedded in their models.

 

Just as important, this is when impact strategies are malleable. Governance is forming. Measurement frameworks are being built. Decisions about culture, incentives and accountability are still open. Mission-aligned investors can shape those choices in ways that are far harder once a company has scaled.

 

Dollar for dollar, early-stage capital can generate disproportionate impact — not because outcomes are guaranteed, but because the leverage is real.

 

Feeding the funnel for larger impact funds

Early-stage investors also play a less visible role: feeding the rest of the ecosystem.

 

Later-stage funds depend on a pipeline of companies that are large, stable and operationally mature enough to absorb significant capital. But someone has to get companies there.

 

With fewer than 40% of seed-funded startups successfully raising a Series A in recent years, that work is critical. Early-stage investors help companies survive the Valley of Death and reach a point where options expand — larger rounds, mainstream venture capital or strategic acquisitions.

 

Why so few investors stay here

If this segment is so important, why do so few professional investors operate in it long-term?

 

The answer is economics. Larger funds tend to bring higher compensation, more prestige and greater operational leverage for general partners. That choice is rational, but it leaves early-stage impact investing chronically underserved.

 

Incentives reward scale, not impact leverage. So capital gravitates upward, away from where it is most needed.

 

The cost of neglect

Neglecting early-stage impact investing has systemic consequences. Fewer companies survive to scale. Founder diversity narrows as entrepreneurs without wealthy networks struggle to bridge funding gaps. Later-stage investors face thinner pipelines and may stretch the definition of “impact” to justify investments.

 

In today’s tighter capital environment, these risks are intensifying. Capital is concentrating. Emerging managers are under pressure. The ecosystem risks becoming top-heavy — well capitalized at the top, but brittle at the base. And an ecosystem without a strong early-stage foundation cannot reliably produce the next generation of companies capable of delivering durable impact at scale.

 

Rethinking what we reward

This raises uncomfortable questions for limited partners seeking impact, such as:

● Are we prioritizing assets under management over impact leverage?

● Are we confusing the scale of funds with the scale of change?

 

Supporting early-stage impact investing doesn’t mean abandoning later-stage strategies. It means recognizing that different parts of the market serve different purposes and that some of the most critical work happens where returns are harder earned and visibility is lower. Investors seeking to be catalytic should diversify across stages and fund sizes, including backing early stage managers.

 

Staying where impact is made

We haven’t moved upmarket because the Valley of Death is where companies — and impact — are made or lost. Because early-stage capital, deployed patiently and thoughtfully, can change trajectories in ways that later capital often cannot.

 

Staying small isn’t a limitation. It’s a strategic choice.