The Next Frontier in Impact Investing: Unlocking Trillions in the Capital Markets
I spent my day in NYC volunteering at SOCAP’s new initiative: The Good Capital Project. Here’s my take on what it was and why it mattered.
What was the Good Capital Project?
Social Capital Markets Group (SOCAP) holds an annual conference for the social impact space. It’s HUGE. Almost 4000 entrepreneurs, investors, and field-builders. The purpose of the convening was two-fold, to bring a wide range of stakeholders together from all over the world and to demonstrate that the impact market was alive and growing. That was then.
Today, the impact investing market is evolving; It is in need of coordination, setting up plumbing, and replicating what works in order to reach scale. That’s what the Good Capital Project was for — breaking down the silos where individual players were making progress and creating more room for collaboration. It was convening of players from all ends, from entrepreneurs and VCs to development institutions and Wall Street aimed at unlocking the trillions of dollars in the capital markets. — Kevin Jones, Co-Founder SOCAP
It was different from any other conference I’ve been to. After the keynote, instead of breaking out into smaller groups for another keynote, we used design thinking to brainstorm solutions to grand challenges in impact investing. What does that mean? We spent a ton of time in cross-disciplinary groups asking questions and understanding new perspectives.
These were the challenges:
- Creating Shared Understanding
- Enabling the Entrepreneur
- Impact Management and Metrics
- Efficient Product and Distribution
- Investable Solutions
- Legal Structure and Policy
What did I learn?
Impact Investing is not and should not be associated with concessionary or below market level returns.
Reports administered by banks and academia have showcased market and above-market returns by a number of investments across the spectrum of early stage venture capital to larger institutional investments. The conversation is moving towards scaling the proven products and processes of impact investing. New movers must be sure to not mistakenly associate investing with concessionary returns and the industry today must do a good job of educating the market and showcasing success stories to change the narrative.
Impact Investing is an opportunity for positive wide-scale change but also for doing more harm than good.
The ivory tower approach to impact investing is dangerous. Investors deciding “what” impact looks like and not understanding the roots of a problem can lead to projects which deepen rifts and wasted resources. This is especially dangerous in the current stage of the market where it seems impact investing must prove itself to higher standards than traditional investing.
Rodney Foxworth of Invested Impact challenges the community to focus in on systemic issues which deepen inequality and poverty — especially in the way fund managers invest in entrepreneurs. African American women are the fastest growing group of entrepreneurs at 322%, yet it’s enormously difficult for them and other minorities to raise funding (Fortune). The data has spoken. Entrepreneurs with lived experience have a better understanding, passion, and ability to outperform entrepreneurs who lack the above. Who can investors learn from? Impact America Fund (among a few others) has demonstrated entrepreneurs from non-traditional networks and backgrounds can build and scale investable companies.
Unclear definitions and terminology threaten the ecosystem.
The debate around definitions and terminology threaten scalability of impact investing. The market lacks a taxonomy of classifications and metrics. Understanding the right type of capital investees need at the right time will be key for new movers and building the ecosystem. Hear more on this from Brian Trestald of Bridges Ventures.
The Grand Challenge: Enabling the Entrepreneur
This 3-hour design exercise consisted of stakeholders around the room breaking down the deal side of the equation and figuring out what does and doesn’t work for finding, building, and scaling investable companies. Major takeaways included:
- Investing in entrepreneurs with lived experience in their markets
- Creating greater access to capital for entrepreneurs from non-traditional backgrounds
- Alternative deal structures and aggregating capital for different stages of a venture and markets
- Sharing tools and resources to create better awareness and execution of investable deals
This was a productive exercise; however, I couldn’t keep coming back to the fact that there were players in the space that had already cracked the code of enabling entrepreneurs. The venture capital firm Village Capital (complete transparency: I’m interning here) has baked these values into their program. Here’s how.
Breaking the pattern:
75% of VC funding goes to three states: New York, Massachusetts, and California. 90% of Village Capital investments occur outside those three regions across 38 states with 43% of founders being women (compared to the average venture fund’s 17%).
Village Capital like others makes investments in companies using equity and debt instruments; however, understanding that different companies grow at different rates, they’ve used alternative deal structures to better support their portfolio companies. Learn more about a revenue-share agreement with Fin Gourmet in the Midwest.
They’ve proven that creators, armed with the right tools, are often the best judges of whether or not an entrepreneur should receive investment. Through their investment-readiness program, entrepreneurs in their cohort rank companies based on progress and potential; across 70 early stage investments, 13 have exited and 90% are still living.
So what?
Although not every organization has the capacity to have program like Village Capital’s…there are tools and resources out there to better prepare the investors you report to, the founders you support, and the larger ecosystem you play in. A couple of great places to start learning:
- What do creators know about investment? Peer Selection Criteria
- Identifying your blindspots: Village Capital’s book.
- The Venture Investment Readiness and Awareness Level framework
- Report: What’s Working in Acceleration
The Good Capital Project has launched.
This event was the first of its kind. Bringing all stakeholders together and defining problems was the first step of an intensive, yet fruitful design process of creating scalable solutions in moving more capital towards solving the world’s most complex problems. I’m looking forward to the many steps to come.
Missed the event? Check out a visual overview here. Interested in attending the next event? Check out SOCAP later this fall.
Mohammad Malik is the President of Profit with Purpose, an undergraduate Impact-Investing organization at the University of Virginia.
