Over the last half decade in the trenches of impact investing, I have collected a few lessons learned: the opportunities, what’s going well, and what needs improvement. What I have learned is that marginal impact is better than not doing anything at all.
We can’t underestimate the cost of inaction given the size and immediacy of the world’s problems.
When people stop talking and “decide to do,” they often suffer from analysis paralysis. Many would-be impact investors are letting the drive for perfect be the enemy of good.
Progress towards impact is better than no impact at all, as long as all parties involved are honest with each other, always learning and sharing their findings. A better way forward depends on a lot of at-bats, and to extend the analogy, we need a functional system in place for people to swing more times.
We need funding mechanisms and support systems to allow a wide variety of learning to take place and be shared. Current fund structures prevent true iterative learning for both social enterprises as well as impact investors.
Many would-be impact investors are letting the drive for perfect be the enemy of good.
Yet we can’t underestimate the opportunity cost of inaction, given the size, speed, and immediacy of the world’s problems. The risk of no action is infinitely bigger than acting on only things that are cookie cutter, which impact investing is becoming defined by.
So what should we do? Here are four changes I’d like to see take place in impact investment:
1. Define the problem
Figure out what problem—specifically—each individual or organization is trying to solve. Spend lots of time exploring the problem.
2. Figure out the risk tolerance of the individual
If they aren’t somewhat risk-tolerant, they are in the wrong place.
3. Figure out the game plan for learning-by-doing
How can you test your hypotheses? How would you know if you are right? How would you know if you are wrong? How do you share what you learned?
4. Explore the use of risk capital for funding risk
Program-related investments are by definition risk capital for which only less than 1% of foundation assets are used (0.05 of which is put into equity). If you don’t know about program-related investments, you should.
Progress towards impact is better than no impact at all, as long as all parties are always sharing findings.
So, it seems we’re willing to take risks. But to what end? How can impact investing go mainstream?
Ross Baird
Ross is the Executive Director of Village Capital and has worked with over 350 entrepreneurs in Village Capital cohorts using a pioneering peer investment model. Before launching Village Capital, he was at First Light Ventures and as an entrepreneur with four start-up ventures.
Original article
It is no secret, I’m a firm believer that impact investing is a movement that is taking off and here to stay. In the U.S. and around the world we’ve seen segments of the market start to move from informed, to educated, to activated. We’ve seen private capital unleashed with a focus on impact across sectors, geographies and asset classes. As an investor and a philanthropist, I’m encouraged by the good news I’ve seen, highlighting growth in the number of successful social enterprises. But even as we celebrate the major milestones we’ve achieved in impact investing, it’s important to remember that these are still the early days of impact investing and we have to pay attention to the critiques from skeptics.
But first, let’s be clear on what is meant by impact investing. The definition we use at the Case Foundation is the one developed by the Global Impact Investing Network (GIIN) — the closest thing the field has to a trade association.
“Impact investments are investments made into companies, organizations and funds with the intention to generate measurable social and environmental impact alongside a financial return.”
At the Case Foundation, we work hard at being active listeners in order to be better advocates for change. And as we continue efforts to take the impact investing movement into the mainstream, I want to review some of the myths and skeptical perceptions that we’re hearing, which may be posing barriers to taking impact investing to the next level.
Myth #1: You need to sacrifice profit for purpose
“It’s great to invest in companies that want to create social impact, but by taking away a sole focus on making a profit, aren’t you always making some concessions when it comes to returns?”
It’s a common refrain I hear from skeptics who believe that impact investing can’t deliver strong financial returns, but increasingly reports are proving otherwise. For example, in 2015 the GIIN and Cambridge Associates released “The Impact Investing Benchmark,” which reveals that for the 51 private equity impact funds it was possible to perform not only at but above market rate returns. Also in 2015, the Wharton School at the University of Pennsylvania released “Great Expectations,” demonstrating that among 53 global private equity impact funds, concessionary returns weren’t necessary in order to preserve their social or environmental purpose.
The 2016 annual impact investor survey released by the GIIN, JPMorgan and the Impact Programme reveals the positive experience of the investors surveyed — 89% of respondents reported “financial performance in line with or better” than their expectations, and 99% reported impact performance “in line with or better than” expectations. Much like other types of investments, what we’re seeing with impact investing are returns that fall along a spectrum, with investments targeting a variety of financial and social outcomes, and an increasing evidence base showing you do not have to sacrifice profit for purpose.
Additionally, impact companies are increasingly taking a place among the world’s most iconic brands — driven by both their financial performance and social impact. Strong brands have been built in this space, including Patagonia, Warby Parker and SolarCity to name a few. These brands represent a new generation of consumer companies that are demonstrating mission-focused approaches that include care and concern for humanity and/or for the well being of our planet, and in so doing, they are strongly attracting the next generation of consumers. Patagonia’s strong consumer appeal and brand recognition has led to double-digit annual growth, while Warby Parker, an online consumer retailer, has emerged as a next generation company whose valuation is considered to top $1 billion — a significant feat ahead of an “exit” such as an IPO or acquisition.
Myth #2: Impact Investing is cannibalizing philanthropy
With more foundations jumping into the fray, there has been some concern that impact investing will simply replace grantmaking, creating a gap in funding or potentially forcing nonprofits to take on a less than ideal operating structure to be investment- friendly. Some fear that impact investing is being viewed as a “silver bullet” when rather it is a new arrow in our quiver as we seek to champion all paths in our efforts toward social impact. We agree that foundations should be thoughtful and strategic as they incorporate this new tool into their community development, conservation, education or other charitable funding strategies to avoid the potential pitfalls of the “square peg round hole” problem or cannibalizing effects. It is important to recognize that estimates suggest that less than 1% of grant budgets are designated as impact investments — we have a long way to go before this important movement detracts considerably from the grantmaking among foundations.
Our hope for the sector is that through effective integration, impact investments will work as a strong complement to, rather than a replacement for, other philanthropic tools through either mission related or program related investments (MRIs or PRIs). A November 2015 SSIR article, Philanthropy’s New Frontier — Impact Investing, provides examples of the unique role that foundations can play in effectively filling a funding gap for pioneering social enterprises that market-rate-seeking investors can’t meet and how those investments can align with programmatic strategy.
Myth #3:The market is limited to “do gooders” — the serious, savvy players haven’t jumped in
Perhaps the greatest single change that has driven the momentum of impact investing is the “broadening of the tent” in recent years, as world-class investors, respected financial institutions, private equity and venture funds have all jumped into the space. And most recently, significant policy changes pave the way for foundations and pension funds to play an increasing role. Indeed, we are truly seeing deal flow across a broad spectrum of asset classes and an equally broadening array of investor classes emerge.
Add to this some world-class investors and respected institutions that have stepped into the game, including Bill Gates, Reid Hoffman, Vinod Khosla, Marc Andreessen, BlackRock, Bain Capital, Goldman Sachs and more. And Nancy Pfund recently closed a new $400 million impact fund, the second fund for DBL Partners. As these well established investors and firms move in, impact investing is moving away from a niche area to a serious consideration for individuals and institutions alike.
Myth #4: Impact investing will never really go mainstream — it’s only available to the rich
It’s true that impact investing has gained traction for a set of accredited and high net worth investors and institutions, but we see the potential for a wider set of individuals to align their investments with their values. This is a dynamic that is rapidly advancing as a greater number of organizations are creating onramps for investors from a wider range of income levels to get into the impact investing game. One great example is Calvert Foundation that offers different investment options with minimums as low as $20 for community notes, so more individuals can invest in their communities.
And it’s not just an increase in the number of investors who can get involved. There is growing momentum around increasing access to funding for a larger number of entrepreneurs. We are happy to welcome the new rules that have been finalized for Title III of the JOBS Act — now individuals can make direct equity investments in impact companies through crowdfunding platforms. Finally, Village Capital recently announced a partnership with PayPal to democratize access to capital for social entrepreneurs, who they recognize will be more in touch with the needs of communities we are all hoping to serve.
We’ll have a chance to confront these perspectives later this month, when many of the entrepreneurs, investors and other ecosystem players who have been key to driving the impact investing movement forward will gather in Silicon Valley as part of the seventh Global Entrepreneurship Summit. I’m looking forward to celebrating these innovators and to a great dialogue around what we need from the global entrepreneurship community to fully transition impact investing from its early days to a thriving, mainstream movement.
Jean Case
CEO of the Case Foundation, which invests in people and ideas that change the world, and Chairman of the National Geographic Society Board of Trustees.
