Why Impact Investing is Difficult (for me)
Impact investing is difficult (for me, at least).
Over the last two years at Access Ventures, I have jumped head first into “impact investing,” which is a strategy to invest capital into companies that create positive social and financial impact. There are numerous web resources on the subject of impact investing, might I suggest the Social Impact Investment Taskforce as a place to start. The taskforce resources are helpful in defining the impact space, as well as chronicling the challenges it faces.
Impact investing is truly a rewarding experience, but it is not without it’s challenges. I also believe we can have an honest discussion of impact challenges as a way to improve and not simply complain. I step into these challenges each day knowing that its a worthwhile endeavor.
What is the bottom line?
The bottom line straightforward for typical investors: return. Return is measured in numerous ways, but is ultimately how much money do I receive in return for my investment. Investment evaluation and management is confined to a single problem to solve. If the company you are considering does not provide reasonable assurance it can return capital to match your needs, you don’t invest and move on to the next opportunity.
For impact investors, we consider social return on par with financial return. If you set aside the challenge in defining and measuring social return (another post in itself), it’s difficult to problem solve when your consideration set has doubled. What if the company cannot provide financial returns to match your risk, but it solves the societal problem you are convicted to solve?
When faced with this dilemma over the last two years, I have vacillated between the following extremes:
Extreme financial = “The impact is great and all, but I’ve got a fund to run!”
Extreme social = “This solution MUST exist and it’s my duty to support it!”
I have read of many solutions to this problem, which normally involve some technical language around balance and a resulting formula to follow. These frameworks have been highly beneficial as they inform our process, however they aren’t a one-size-fits-all solution. An investment demands more nuanced review.
Personally, I tend to get stuck on the idea that impact is inherently subjective, therefore all the formula’s in the world cannot reach an objective outcome.
Inclusive yet Exclusive
Investors say “no” WAY MORE OFTEN than they say “yes.” However, being in the business of creating inclusive economies, this dynamic presents an efficiency problem.
The problem is that I feel conviction to evaluate each deal without bias, however time can be a weighty constraint. Investors see upwards of a thousand deals during a given year. In order to get through it all, they spend less than 10 minutes on the initial screen, then 90%+ of the time they never look at the deal again. From the entrepreneur’s perspective, if you spent countless hours constructing and revising your investment deck and the investor closed it after the first few slides, would you feel the system was “inclusive?”
To make matters worse, deals come from all angles. Some come from trusted founders or co-investors and others show up unsolicited on LinkedIn titled “Great Opportunity!” Most investors ignore deals from people outside their network, which is a way to tackle the problem of deal review. Again, how is that “inclusive?”
There is only one Patagonia
All investors have some version of the same problem: quality deal flow. There are numerous opportunities to write checks, however the chance of getting one back is dependent upon the quality of the investment opportunity.
Although socially-conscious businesses have existed for ages, it has only gained mainstream attention over the past 10 years. This is a great trend to be celebrated, however the other side of it is that many mature businesses in the space do not exist. This means that we have few masters of the financial/social challenge from which to learn.
I am thankful for companies committed to their mission, like Patagonia or New Belgium and enjoy learning from them. Additionally, trailblazers like Omidyar Network and Village Capital continue to provide an example to those of us joining the impact investment movement. Finally, resources like B Magazine and Stanford Social Information Review make the learning process more enjoyable.
As the impact space matures, we will see proven ways to overcome these investment and business challenges for the benefit of society and the planet.
I would love to hear your thoughts on the subject! Optimism, skepticism, lessons learned, etc!
