High Impact does not always mean lower returns — A myth to be dispelled for impact investing to grow
The term impact investing was coined a decade ago at a Rockefeller Foundation meeting and the Global Impact Investing Network (GIIN) defines impact investments as follow:
“Investments made into companies, organisations, and funds with the intention to generate social and environmental impact alongside a financial return.”
Just as regular investing, impact investing is therefore encapsulating a very broad space of investors, asset classes and activities with diverse financial return expectations and strategic objectives. These include fund managers, foundations, banks, development finance institutions, family offices, pension funds, insurance companies, and others.
There are many different factors that can be used to categorize impact investors but I believe one is especially useful and important to clarify as it can potentially drive the growth of impact investing: the financial return target.
Impact investing is often associated with sub-market returns. This is misleading and a huge misconception. Some impact investors are targeting below-market returns but many others are looking for top-tier venture capital returns. There is no right or wrong and every impact investor has a meaningful role to play but I believe that recognizing the latter category is critical to allow the industry to scale.
In fact, many impact investors looking for top-tier venture capital returns are reluctant to use the impact investing label as this scares LPs, co-investors and other people they need to convince to be successful. This creates a vicious circle as the less people looking for top-tier venture capital returns will label themselves as impact, the less success stories will be associated to impact, the less people will get convinced that impact investing can generate above-market returns and the less capital will flow into the market.
Here are two things that may be useful to drive this perception shift:
- Clearly define impact investing categories and come up with labels for these.
“Impact VC funds” could be one of them and was described in this Techcrunch article as follow:
“Impact VCs are VCs first that intend to generate market-beating financial returns because of, not in spite of, an impact-oriented investment thesis. Impact VCs focus on early-stage and mid-stage private businesses and most have institutional LPs that are expecting 3x or higher returns on their investments.”
The newly formed Impact Capital Managers network could also be the basis for a better definition of the high-impact, high-return category. The network represents more than $5 billion in capital and membership is limited to general partners who have raised more than $25 million from multiple limited-partners, and who have explicit commitments to seek — and report — social and environmental impact.
- Widely promote and recognize existing high impact/ high return funds and investments.
A good example is DBL Partners, one of the first impact VC funds based in San Francisco that already has invested in a wide range of successful portfolio companies like SolarCity, Tesla Motors and Revolution Foods.
The good news is that a better categorization is already recognized as a priority by the impact investing community. In fact, clarifying the roles of various types of capital is one of the eighteen GIIN Roadmap actions that need to be taken on with urgency.
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