Impact Investing for Science
By Andrew Wong
Impact investing is an emerging concept in finance where investors fund projects that actively target both a financial return and tangible social benefit. This dual mandate often positions impact investors to evaluate non-traditional opportunities facing some level of a market-failure — landing in a grey-zone between traditional philanthropy and the capital markets.
Historically deployed in sectors to address welfare, education, and financial inclusion challenges, investors are beginning to recognize the opportunity to adapt this thinking for science. At Boundary Impact Ventures, we’ve been advancing the thesis for science-focused impact investing as a form of fit-for-purpose financing needed to bridge deep technology startups across the valley of death (VOD).
The challenges with funding science
Healthy investment ecosystems need differentiated funders willing to underwrite varying levels for risk. For deep tech startups, this is complicated by the fact that there’s often a combination of both public and private capital needed to advance a technology from the lab bench to the marketplace. At some point in every deep technology company’s journey there comes a messy transition across the VOD — moving squarely from grants to private investment.
Unfortunately, startups beginning this transition often face a funding conundrum: they are “too late” to continue receiving grant financing, but “too early” to take on traditional venture capital. This has resulted in a system where the norm is usually some sort of systemic funding workaround, or worse, avoidance of funding the VOD altogether.
Introducing impact investment capital
Impact investors can bring a different mindset to help facilitate the journey across the valley of death. Many manage capital with structurally different financial and social risk-return expectations than traditional investors. The binding constraint isn’t always profit-maximization, fiduciary limitations on levels of risk, and political environment.
Some examples include:
One of the emerging groups of impact investors are private foundations. Following a recent IRS clarification, some are starting to integrate their investment and grantmaking functions into one.
Rather than targeting a market return through a separately managed endowment fund and then making grants using the interest, they are targeting returns and impact through the same investment vehicle. In financial terms, this implies either a downward shift in the risk-adjusted hurdle rate (expanding the investment universe) or willingness to structure investments to crowd-in other investors (blended financing). The Bill and Melinda Gates foundation has been pioneering this approach for life sciences.
Private Wealth Assets
Another growing segment of the impact investing marketplace are high net worth individuals and family offices. Similar to private foundations, these investors have capital that can be deployed over a longer time horizon — allowing the harvesting of a large illiquidity premium — and in general, higher-risk + higher-return prospects. In this context, impact investing has a place in the portfolio mix as a deep-value alternative asset.
For example, UBS recently launched a near half-a-billion impact investment fund, sourced from their wealth management clients, for the development of translational (VOD) cancer treatments. The fund is expected to earn a 10% IRR, and is structured so that a portion of any performance fees plus royalties from new drugs will fund children’s cancer care initiatives and further research.
Implications for angels and investment platforms
There are many benefits for angel investors to keep a pulse on the impact investing sector. At a minimum, angels can follow science-focused impact investors as a source of qualifying deal flow into the venture funnel. More strategically, there may be opportunities to collaborate/partner on structured investments to crowd dollars into science at mutually acceptable levels of risk- return tradeoff.
In particular, as investment platforms continue to gain momentum as a channel to bridge supply and demand, the tools for experimentation are already in place. Together, impact investors and angels can fulfill a critical role in providing risk-capital where it is currently most needed — creating value and a more robust funding ecosystem for everyone.
Andrew Wong (@akwwong) is the founder of Boundary Impact Ventures — an impact investing group focused specifically on science and deep technologies. Prior to Boundary, Andrew worked at Experiment.com.