What is Impact Investing and Why Should You Care?

Impact investing is a very simple, yet misunderstood by many SMEs and startups. To shed some light, here’s a mini guide on impact investing.

Impact investing is a new term that’s come into the investment sector less than a decade ago. Few people actually understand what it is, or who it benefits, but it’s actually very simple to understand when broken down in simple terms.

Unfortunately, most of the information out there regarding impact investing is far more complicated than it needs to be. Worse, there are a great many small, medium and large startups out there who could potentially benefit from seeking out impact investors.

Sadly, due to a lack of proper understanding, these startups instead mistakenly waste their time looking to corporate and private venture capitalists; most of which have no interest in dealing with the risk associated with the few industries that impact investing caters to.

Impact Investing 101

There’s a reason impact investors aren’t the right fit for all companies. That’s because this type of investing is much more centered on the philanthropic than it is in making millions and billions in profits. The nature of the investments also often require a great deal of capital.

It’s called impact investing because a positive outcome from the investment will lead to improvements in society and the world in general. These improvements will have a positive, lasting “impact” on people, society or the entire planet.

What makes impact investing so interesting is that the investor may not necessarily expect a large ROI. As long as the impact can be measured, it may well be considered viable by the investor.

Impact Investments Must be Measurable

photo credit: Woodleywonderworks / Flickr

Depending on the industry and desired impact, they may expect to at least break even — either in profits from a product or initiative, or savings that come about from the investment. In other words, the impact, whether financial or otherwise, must be measurable in order to fit the mold of an impact investment.

Most all impact investments are funded by large corporations, organizations, or wealthy private investors with plenty of capital to burn. The goal is always to cause a positive and lasting impact on people or the environment, leading to changes that benefit humankind and/or the Earth positively.

While there are many industries that apply, the following 4 are the most common, with the last being considered the least common (and often most risky) of all:

  1. Agriculture
  2. Infrastructure
  3. Charitable Efforts
  4. Education

Does your startup fit into one of the industries listed above?

Examples of Impact Investments That Would Interest an Investor

Providing examples is both easy and difficult at the same time. While many examples exist out there, much of the story regarding this terminology is yet to be written, as impact investing was only coined recently in 2007.

Some simple examples of a startup that would catch the interest of impact investors would be:

1. Agriculture

photo credit: CropX

A machine that can extract massive amounts of water out of the air, ground or from up in the atmosphere to provide arid climates with the ability to grow crops in spite of water shortages.

Consider that many developing countries like Africa have most of the world’s starving populations because of their lack of access to clean water for growing food and the “impact” such a system would have on the world at large.

Not only there are startups that build the necessary agricultural systems, but there are also startups that aim to improve the existing systems using technology. One prominent example is CropX. The startup, funded by agritech accelerator Sprout, helps increasing farms’ crop yield while minimizing waste using technology, focusing on optimizing the current field irrigation systems’ water consumption.

2. Infrastructure

This is a much simpler industry to provide examples for, but it’s also generally limited to startups in the architectural and engineering industry. If your company has found the ultimate way to make a building or bridge suspension that’s earthquake resistant, this would be an example of a very “impactful” product or concept that would appeal to the minds of a corporate or private impact investor.

Other examples are programs or technology that promote a greener earth such as garbage cleanup initiatives, environmental improvements and reducing the impact that industry has on the environment.

3. Charitable Efforts

photo credit: GoToVan / Flickr

There are too many examples, it would be impossible to list them all. Something as simple as finding a new way to make mosquito nets on a large scale and cheaply for distressed countries where people live in tents or shanties. Another example that may surprise people is Zipcar; a vehicle sharing membership site funded by the non-profit funding organization, Calvert.

This is one of the most common, yet rarely will charitable efforts attract the interest of a single private investor. Typically, organizations work together to pull impact investing funds from multiple sources including companies and individuals in order to fund their various agendas.

4. Education

Currently, very little impact investing takes place in the education sector. Any changes in this area can indeed be considered positive. However, public education always costs money while non comes back, and a large portion of the cost is handled by tax-payers and governments.

Privatized education is a different matter, but investors of all kinds aren’t difficult to find and, most important, the “impact” of private education is very hard to measure in the short term and may well be just as hard to measure in the long term. It’s risky and thus rarely attracts impact investor groups and individuals.

Interested in Learning More?

For more examples of different types of impact investments that have been made over the last few years, take a look at the profiles and stories shared on Entrepreneur.com

To learn even more about this investment concept, visit the Global Impact Investing website here to learn more about impact investing and to research more about their partners and whether your business or idea fits the mold of what impact investors are looking for.

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Originally published at www.fundingnote.com on August 16, 2016.