By Chris Jurgens and Robynn Steffen
As the impact investing movement rounds the corner into its second decade, organizations across the industry are taking stock in how far we’ve come — and indeed, there has been remarkable progress — and identifying with increasingly clarity what work remains to be done. Earlier this week, The Global Impact Investing Network launched their Roadmap for the Future of Impact Investing, offering a compelling view of priorities for the sector over the next decade, sourced from over 350 key players from across the ecosystem. The roadmap calls for mobilizing increased capital to achieve impact at scale and meet the Sustainable Development Goals (SDGs), as well as having a fundamental effect on investing writ large by ingraining impact considerations into all investing decision making.
At Omidyar Network, we see our ability to advance the roadmap as integrally tied to where we play in the wider impact investing market, the type of capital we have to deploy, and the spheres where we can have the most influence. Our evaluation of where we can be most catalytic in 2018 has led to three goals where we believe we can most significantly move the needle: 1) shift the field from awareness to action, with a focus on high net worth individuals (HNWIs) and families; 2) empower diverse investors to better navigate a fast-growing market and deploy their capital in segments that best match their expectations for risk, financial returns, and social impact; and 3) increase the supply of early-stage risk capital to frontier markets.
Moving from Awareness to Action
The past decade has seen an incredible increase in awareness of impact investing. Before 2007, there wasn’t even a name for the movement; today, everyone from institutional investors to the Pope have embraced impact investing, leading to a what conservative estimates identify as $114BN in assets under management, a nearly five-fold increase in just the past four years. However, significant capital remains on the sidelines. At Omidyar Network, we see HNWIs and families as catalytic first adopters. With tremendous resources, flexibility, and appetite for risk, HNWIs are uniquely positioned to strategically deploy capital against the most pressing issues of our time. Moreover, their influence with banks and ability to capture media attention enable them to deepen the credibility of impact investing as a field.
Our founders, Pierre and Pam Omidyar, were among the earliest high net worth pioneers. In 2004, before the term impact investing was even coined, they established Omidyar Network as a hybrid structure that allows us the greatest flexibility to leverage not only philanthropy, but also the power of the markets to achieve change.
More than a decade later, we are eager to accelerate the journey of families who are just getting started. Towards that end, we proactively share our own lessons learned with our peers, directly touching nearly 150 families to date; nurture high-trust networks such as The ImPact, Toniic, PYMWYMIC, and the Giving Pledge Impact Investing Affinity Group; and seek to seed catalytic on-ramps — safe, low-friction sandboxes where families can experiment and learn by doing. With an anticipated $30 trillion in wealth transfer from baby boomers to their heirs, we are particularly interested in supporting the next generation of investors, who have already shown a strong inclination for investment opportunities that are closely aligned with their values.
Segmenting the Market
The rapid growth of the market has made it difficult for investors and practitioners alike to navigate impact investing’s “big tent.”
In Across the Returns Continuum, published in the Winter 2017 edition of the Stanford Social Innovation Review, we shared our perspective as investors on the perennial debate whether there is a tradeoff between impact and financial returns. Our view is that investors can absolutely achieve significant impact and financial returns simultaneously, but that there also are certain types of impact that do not lend themselves to risk-adjusted market rates of return. Both can be true, and it is critical that we as an industry move beyond the “impact first vs. returns first” false dichotomy.
As we shared our perspective with leading impact investors — from across the market — we found that many also held this fundamental set of beliefs. In 2018, we will curate a series of articles in which our peers will share their perspective on investment opportunities across the continuum, adding much-needed texture to our collective understanding of the market.
As we have undertaken efforts to paint a shared picture of investor expectations for risk, returns, and impact, we have struggled with the lack of a shared language to talk about impact. In the 2017 GIIN Investor Survey, 98% of investors said they are meeting or exceeding their impact targets. However, when asked how they know, few are able to elaborate. This points to the need for a common impact convention to help existing impact investors more effectively describe where they play in the wider tent in a way that can be understood across market segments — as well as help those new to impact investing understand where they are best placed to enter the market.
We’re encouraged by the progress of the Impact Management Project, led by Bridges Fund Management, in engaging more than 1,000 impact investors in the development of a common impact convention, which has been embraced by a wide range of investors as a way to both inform their own strategies, and communicate where they are playing in the market and what impact they are achieving.
If we can indeed move past the stale debate regarding tradeoffs, the consequences will be significant: money will come off the sidelines; transaction costs will be reduced; and capital will more efficiently flow to the market segments it is best equipped to finance. This will both mitigate the risk of unmet expectations while also enabling the most patient, risk-tolerant capital to flow to the market segments where it can have the greatest impact.
Increasing Risk Capital
Finally, Omidyar Network will continue our efforts to mobilize early stage risk capital for emerging market entrepreneurs, with a focus on working collaboratively with other like-minded funders to amplify our influence and bring new investors to this segment of the market. Key to this effort is the Collaborative for Frontier Finance, a new multi-stakeholder initiative we are mobilizing in partnership with the Dutch Good Growth Fund, World Bank infoDev, and the Global Development Incubator. The Collaborative brings together investors, intermediaries, and field-building organizations with a shared interest in increasing access to appropriate capital for early stage ventures.
Core to this effort is driving experimentation and adoption of new financing tools and vehicles which deliver the right type of capital to specific types of small and growing businesses, recognizing the need for a more diverse set of financing solutions beyond traditional venture capital structures and collateralized SME bank lending. Early focus areas include expanding use of mezzanine finance instruments for moderate growth companies (e.g., quasi-equity, revenue-based financing, and flexible debt instruments, which we identified in Frontier Capital as critical tools to serve this market), and expanding sources of local financing — from angel investors to local fund managers — to meet the needs of enterprises at different stages in their financing journey.
At last week’s GIIN Investor Council meeting in Glen Cove, NY and Confluence Philanthropy’s annual gathering in Berkeley, CA, we were heartened to engage with peers on both coasts who are committed to our shared goal of advancing the impact investing industry into the next decade of its growth. As we move forward on Omidyar Network’s impact investing field building priorities under exciting new leadership, we encourage others to evaluate how they might best support the industry’s growth.
Paving the way for more investments is indeed at the heart of the movement, but we also cannot lose sight of the critical need to continue to build infrastructure to fuel the industry’s anticipated expansion. It is important for an ever-wider body of organizations to participate in both investing and field-building to ensure that the sector can support rapid growth and be sustainable in the long-term. Our work on sector-building over the last decade has provided us evidence and reinforced our view that investing in industry-wide public goods accelerates the development of well-functioning markets. And as the impact investing industry grows, so too does the need to strengthen core infrastructure.
We look forward to working with partners from across the industry, both those who are new to the market and the experienced veterans, to ensure that impact investing continues the remarkable growth we have seen over the past 10 years.