Measuring what matters: Happiness Return and sustainable value creation

The Happiness Return framework, developed by Happiness Capital in collaboration with industry experts, offers a comprehensive approach to evaluating investments beyond traditional financial metrics. This innovative framework integrates social and environmental effects with financial goals, providing a holistic view of an investment’s potential to create sustainable, long-term value.

At its core, the Happiness Return framework assesses both quantitative and qualitative aspects of an investment’s impact. It methodically balances the positive and negative outcomes of an enterprise’s operations, considering factors such as social equity, environmental sustainability, and stakeholder well being.

The framework’s scoring system ranges from 0 to 2.0, designed to provide a comparable metric to traditional venture financial returns. This range was chosen to align with the early-stage investment focus of Happiness Capital, where extreme highs or lows are less common. The scoring system is interpreted as follows:

– Scores below 1.0 indicate a reduction in happiness among stakeholders, potentially due to a weak impact thesis, significant negative effects on certain groups, or limited scalability in a competitive market.

– Scores above 1.5 suggest exceptionally high happiness returns, often resulting from ventures with scalable positive impacts on well-being, social equity, and environmental sustainability, with minimal negative impact.

The calculation of the Happiness Return involves several key steps:

1. Stakeholder Identification and Assessment:

– Identify different groups affected by the investment.
– Determine the number of people in each group.
– Assess the importance of each group relative to the venture’s purpose.
– Evaluate the depth and duration of changes experienced by each group.
– Consider the venture’s role in bringing about these changes.

2. Impact Evaluation:

– Identify the high-level effects of the venture on planetary and societal boundaries.
– Identify specific conditions and experiences impacted for each stakeholder group.
– Determine the relative importance of these conditions and experiences.
– Balance the significance of these changes to get a clear picture of overall impact.

3. Stakeholder Perception Measurement:

– Evaluate whether stakeholders view the changes as positive or negative.
– Estimate the value stakeholders place on these changes to gauge the overall happiness impact.

At the highest level, the framework considers a venture’s effects on the nine planetary boundaries for sustainable consumption of the planet’s life support systems and minimum thresholds for shared prosperity as defined by the United Nations Sustainable Development Goals.

The framework then turns to the way particular groups of people are affected by a venture, and incorporates various dimensions of well-being, including:

– Conditions: Income & Wealth, Environment, Education, Jobs & Earnings, Health, Civic engagement
– Experiences: Accomplishment, Meaning, Positive emotion, Relationships, Engagement
– Happiness factors: Community, Life satisfaction

Each of these dimensions is weighted according to its relevance and importance to the overall impact of the investment for each stakeholder group.

To ensure accuracy and comprehensiveness, the Happiness Return framework employs detailed surveys of management teams and customers for a subset of the portfolio. These surveys also help develop a more nuanced understanding of stakeholders’ experiences, and identify potential risks or negative outcomes that might not be immediately apparent in the overall score and that present opportunities to improve happiness.

The Happiness Return approach offers several key benefits to venture capitalist:

1. Simple, Relevant Goal: Well-being is a near-universal value, and the framework answers the essential question of how a venture affects people’s well-being.

2. Holistic Impact Measurement: It provides a fuller picture of both financial returns and stakeholder well-being.

3. Enhanced Stakeholder Understanding: The detailed insights into stakeholder impacts enable better understanding of the social and environmental value created or lost for people.

4. Informed Decision Making: The framework allows for more informed portfolio decisions, from company selection to hold and exit strategies.

5. Strategic Alignment: It helps investors align their strategies with broader social and environmental sustainability goals and risks.

6. Forward-Looking Analysis: The approach provides anticipatory assessments of a venture’s future financial value relative to its broader impact on happiness.

7. Value-add for founders: The assessment provides insight into how a venture can optimize their impact across multiple stakeholder groups.

By applying the Happiness Return framework, investors can make more nuanced and impactful investment decisions. As the investment landscape evolves, frameworks like the Happiness Return are poised to play a crucial role in shaping a future where financial returns and positive societal impact are intrinsically linked.

Read more:
Harvard Business Review –
https://hbsp.harvard.edu/product/ST146-PDF-ENG

Stanford Social Innovation Report –
https://ssir.org/articles/entry/venture-capital-happiness

Introduction to the Happiness Return (Part 1) –
https://happinesscapital.com/introducing-the-happiness-return-part-1/

Introduction to the Happiness Return (Part 3) –
https://happinesscapital.com/introducing-the-happiness-return-part-3/