My mother asks me on a near weekly basis what exactly it is I do for a living. The inevitable follow-up question is when, preferably in mm-dd-yy format, I will start making lots and lots of money doing whatever it is that I do.
Unfortunately, even the best of my Excel abilities can’t help me deliver promises on the latter. But the answer to the first is something I envision daily with abundant clarity.
My job at ZORA is to unleash the fantastic potential of Israeli entrepreneurs who are driven to solve global challenges in health, education, economic inclusion, and the environment. We envision nothing short of a movement of Israeli companies committed to — and successfully executing upon — finding solutions to our world’s most pressing social and environmental needs.
We are lucky to share some version of this vision with a variety of partners with whom we work closely. They include: our investors (thank you, we love you); incubators and accelerators; field-building organizations; fellow VC funds and other co-investors; and, most critically, the entrepreneurs themselves. To work in a field with a vision passionately shared by others — a growing and powerful community within Israel and around the world — is a source of daily motivation.
Vision is beautiful. But those of us who are into execution need to gird that vision with some hard numbers around the distance we’re traveling and how quickly we’re moving. Whether on conference panels or in individual conversations, I spend time fielding questions about the state of the Israeli impact scene. Investors wondering whether it’s time to get their feet wet and who’s really doing it, entrepreneurs apprehensive about referring to themselves as ‘impact’ in anything above a whisper, fund managers suddenly having understood that even institutional investors are seeking to make allocations to impact. So I’ve been wanting to do a bit of research attempting to quantify impact investing in Israel and the potential that I see exists.
First, a bit of fine print:
· Calculations may or may not have been done on a napkin.
· Measuring impact investment activity on a global and national level proves a tricky business for a multitude of reasons, some of which I’ll address in a future post.
· I don’t have all the answers. What I can humbly put forth are some ideas on metrics to help us think about these questions and a request for your participation in what will be an ongoing dialogue. An advance note of gratitude for your feedback and suggestions.
Where Are We Now? And Where Do We Want to Be?
A few potential metrics for considering the size of Israel’s current impact investment market and how we can imagine expanding it:
Impact Investment per Capita
Let’s start with what we can measure definitively — the bottom-up approach, similar to that used by the GIIN in its annual survey, of self-defined impact investors in Israel. I have identified twelve active impact investing intermediaries in Israel, representing aggregate AUM of an estimated US$622 million. (If you are aware of others I may have missed, please let me know so I can update appropriately.)
What this table tells us is that Israel’s annual venture capital investments are 2.5x those of the US’s on a per capita basis. Not a surprise. Yet, our current impact investment AUM per capita of $76 is less than two-thirds that of the US. Assuming that we grow our impact AUM to a comparable 2.5x multiple vis-à-vis the US’s AUM, this would translate into $289 in impact assets per capita, or $2.4 billion in impact investments.
Given that part of our challenge in Israel is identifying existing investments in impact sectors (and assuming these companies apply best practices in impact measurement and governance to ensure true intentionality and measurable results) this figure is entirely reasonable. This is my new goal for the impact sector in Israel. Let’s make it happen.
Entrepreneurs in Impact Sectors
I’ve long suspected that Israeli entrepreneurs build businesses that seek to address social and environmental challenges at a disproportionate rate. Leaving any cultural and historical explanations for this phenomenon to others, I’ll take the easy way out with a simple graphic.
One-third of Israeli startups and tech companies (as tracked by Startup National Central) are in sectors that lend themselves to social and environmental impact. It is important to note that a company being in one of these sectors is no guarantee of social or environmental impact. However, as a rough number, it gives an indication of where entrepreneurial and technological interest and expertise lie.
These four impact sectors comprise 1,653 startups currently operating in Israel. To give a sense of proportion, BuiltInNYC has identified and tracks a total (not necessarily impact) of 2,063 startups and tech companies in New York City. Israel has 80% as many startups only in impact sectors. What’s more, the GIIN’s 2016 survey revealed that impact investors were eager to dramatically increase allocations in these four sectors — healthcare, energy, food/agriculture and education — relative to other traditional impact sectors (e.g., housing, microfinance, financial services). Clearly Israeli entrepreneurs have an outsized role to play here.
Additional Asset Classes for Growth
In Tel Aviv, we forget that ‘investing’ refers to anything beyond high-tech and startups. However, it’s worth remembering that private equity and venture capital together represent a mere 3.5% of global AUM. While VC will likely remain our local favorite and shiniest asset class, opportunity for high-impact and significant AUM growth exists beyond its borders.
Countries like the US, the UK and the Netherlands have decades of experience building out investment products in other asset classes — think real assets like sustainable construction and affordable housing, cash positions in CDFIs or microfinance banks, or pension funds managed with socially responsible strategies.
In Israel, we have so much more we could do in other asset classes. While efforts are beginning to form in affordable housing and community banking, we’re still decades from reaching their potential. Assuming market penetration comparable to that of the US, Israel could grow its impact investments by more than US$2 billion in communal banking, and support as much as $28 billion in socially responsible registered investment products (mutual funds, ETFs).
Social Finance Israel deserves a special shout out as one bright light in Israel’s non-VC impact investing scene, as they design and bring to market globally innovative Social Impact Bonds in employment, educational attainment, and diabetes.
In sum, prospects for Israel’s impact sector to develop to a $2.5 billion market within VC/PE within the next decade are entirely feasible. A good part of the homework involves working with existing companies and funds in impact themes to better measure, assess and report on their social and environmental impact they are looking to effect. This, combined with much needed advances in alternate asset classes like public equities, real assets, and fixed income, have strong potential to make Israel a global leader in the field. We’re rolling up sleeves and getting to work.