The ABC’s of Impact Investing

Paladin’s Lessons from SOCAP 2016

Impact investing is on the rise — look no further than the recent launch of the Chan Zuckerberg Initiative, investing in companies that “unlock the gifts of every person around the world,” or the fact that impact investing is now a $60 billion market. As a social enterprise, we wanted to learn more.

Last week I attended SOCAP, an incredible conference in San Fransisco with thousands of investors and organizations passionate about leveraging their dollars to maximize positive impact.

Credit: SOCAP

I met some fantastic impact investors and social entrepreneurs, and learned a thing or two about impact investing. Here are a few takeaways:

1. Impact investing ≠ traditional investing

First off, impact investing is not synonymous with traditional investing.

Most traditional VCs aim to create a sweeping impact through their portfolio companies, in addition, of course, to healthy returns! In fact, successful ventures contribute positively to society in many ways, such as creating jobs and meeting unmet needs — just look at Facebook.

But a general aim to make a positive societal impact is not enough to qualify something as an impact investment—that intention must be followed by actually measuring the positive impact. This is reflected in Global Impact Investing Network (GIIN)’s definition: “Impact investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.”

Therefore, impact investments must satisfy three conditions:

  1. Intent for positive impact
  2. Measuring that impact
  3. Expected financial returns (← typical VC investment condition)

2. Measuring impact can be tricky

There currently is no “one” or “right” way to measure impact. Each sector has its own relevant metrics and may have some standardized frameworks in place to guide investors and entrepreneurs. But because impact investing is a new field, most of the KPIs are now (yes, right now!) being shaped through on-the-ground experimentation.

For instance, in Paladin’s domain — the legal field — measuring access to justice is still very much evolving. Historically pro bono measurement has centered on hours volunteered, however, hours fail to capture the outcome of that time spent, i.e. arguably the true impact. Capturing other data, both qualitative and quantitative, has proven difficult to do without additional tools or a centralized system. Luckily, facilitating the measurement of impact in the access to justice space is something Paladin is passionate about and hopes to contribute to in the coming months. Stay tuned!

3. Investing in what, anyway?

Impact investments typically are made in two types of organizations:

  1. Social enterprises — for-profit companies with an commitment to social impact either through their business model or their company practices
  2. Enterprising nonprofits — nonprofits with revenue/earned income

Like Toms and Warby Parker, Paladin is a B Corp and therefore falls into the first bucket. Our commitment to social impact is engrained in our model — namely, by creating tools to increase the amount of pro bono done, we hope to positively impact individuals and organizations who lack access to justice.

4. Financial returns and impact aren’t zero sum

There is a common misconception that higher impact necessarily means lower financial returns. While it’s true that some impact investors prioritize impact over high financial returns (known as a “blended” strategy), as the field of impact investing grows, increasingly investors are demanding market returns in addition to high impact.

Even further, some investors believe that impact and returns can create a virtuous circle where impact actually amplifies returns — indeed, that investing in scalable businesses with impact woven into their DNA is the future of smart investing. We tend to agree with this philosophy, and have allowed it to shape Paladin in important ways.

But no matter what school of thought you subscribe to, there is no denying that impact investing is a growing frontier that can’t be ignored. As a social enterprise focused on impact, it’s an exciting time to be (to borrow SOCAP’s motto) at the “intersection of money + meaning.” We’re excited to see what the future holds!

Want to learn more?

We don’t blame you! Here are some additional resources on impact investing:

  1. A Short Guide to Impact Investing, by the Case Foundation
  2. Impact Alpha, impact investing news
  3. Global Impact Investing Network
  4. Impact Assets, including IA50 (list of 50 impact funds)