Global Philanthropy Forum – video is live

I had a great time on Tuesday’s panel at the Global Philanthropy Forum with Matt Bannick, Maya Chorengel and David Bank.  It was an opportunity for all of us to dig in, in a substantive way, to the “facts and fictions” of impact investing.  My high-level takeaways from the panel were:

  1. We all agreed that just because there may not always be tradeoffs between financial return and social impact certainly doesn’t mean that there are never tradeoffs between the two.  This was language that Matt Bannick used and I thought it captured very well the nuance that, it feels to me, the impact investing sector misses when you just read the headlines.
  2. While the impact investing sector has grown and there’s more money at play, there’s still very little risk capital available, especially for early-stage ventures.  I include philanthropically-backed investment capital and enterprise philanthropy in the bucket of “risk capital,” and I’d say that, by and large, a year after the publication of the Blueprint to Scale report, as a sector we haven’t in any substantive way addressed the “Pioneer Gap” of early-stage, risk capital for entrepreneurs looking to solve old problems in new ways.
  3. A corollary of the previous two points is that we still haven’t mapped out a clear third way between “100% loss of principal” (philanthropy) and “market rate returns.”   My view is that until we create an equilibrium point around what this third way is, and until we do a better job articulating the impact we are having (and on who), then we have come up short in creating a new sector and a new way to solve problems.
  4. We have to get the metrics right.  If we can achieve breakthrough in how we quantify and understand impact, I believe we could change the whole game.  We all agree that there are some tradeoffs between seeking returns and seeking impact, but because it’s so much easier to gravitate to what we can quantify – the financial returns – and so much harder to accept tradeoffs when you struggle to describe what you’re gaining when you take more risk, we keep on gravitating to financial returns as the best indicator of success.   The onus is on all of us to articulate and quantify the increased impact you can have when you target harder-to-reach populations; when you dig into untested sectors like truly low-income housing or land rights or sanitation; or when put up risk capital on new, untested, potentially breakthrough ideas.

This panel was a conversation that wouldn’t have happened just a few years ago, and it’s a testament to how far we have come as a sector that we are able to delve deeper into the questions that underlie this work.  Enough time has passed that we have real data from which to draw initial conclusions.

At the same time, I’m reminded of how early we are in our evolution as a sector.  “Impact investing” as a term was coined in 2007, and each of the sectors in which we are investing – whether clean energy, agriculture, primary health services, etc. – are themselves nascent.  It is early days, and we must continually remind ourselves that we are in a period of experimentation and learning.  Indeed I fear that in an age where information and ideas flow so rapidly, we have rushed to conclusions far too quickly relative to the time it takes to actually build businesses on the ground.  We must ask ourselves: what changes can be accelerated by better information flows, better technology, more appropriate risk capital, and what changes necessarily come more slowly?  I know that if we retain a spirit of inquiry and openness, if we allow ourselves to continue to learn and evolve, rather than getting boxed in to old, narrow of what success looks like, then I believe we can really get there.

In case you missed the livestream, here’s the video of the panel.  Enjoy.

Global Philanthropy Forum – livestream

I’m excited to be speaking today at the Global Philanthropy Forum together with Matt Bannick (Managing Partner, Omidyar Network), Maya Chorengel (Founding Partner, Elevar Equity) in a session moderated by David Bank (CEO and Editor, Impact IQ).

If you’d like to tune in the plenary panel is being livestreamed.  The panel is at 12:45pm Pacific time (on Tuesday April 16th).  The link is: www.philanthropyforum.org/live

The title of the panel is “Facts and Fiction of Impact Investing” and is described in the program as:

The impact investing field is at a critical juncture as it moves to scale. There are various theories of change about how to get more early-stage capital off the sidelines and differences in how organizations define impact. This panel will have a frank, provocative discussion exploring the true realities on the ground as well as whether and when there are real trade-offs between social and financial returns.

I’m sure it will be a fun, provocative conversation.  I hope you’ll tune in, and if you have questions you think the panel should address just leave them in the comments or drop me a line.

What it takes to build dreams – Part 2

Paula Goldman, Omidyar Network’s Director of Knowledge & Advocacy and co-author of the excellent “Priming the Pump” blog series made a very helpful and clarifying comment on the last post (emphasis added):

Sasha, excellent post. I agree with you that as a field we need to get a lot smarter about the risk/social impact equation — this will make or break the field. I also agree with you that the path to scale here isn’t just about making this an asset class. Commercial markets are already incredibly good at allocating capital efficiently, including to businesses that generate positive impact and solid financial return. The risk is that by pumping up the industry in this way, there will be nothing incremental or new about investments labeled as impact investing.

I would ask you though to reconsider the use of the term ‘crummy’ economics. While the economics in many cases for impact investing are sometimes different than traditional investing, taking on additional and different types of risk doesn’t necessarily mean lowering financial returns.

This comment shines a light on exactly the distinction I’m trying to make, because, for this conversation, I’d like to take a pass on the whole discussion of what the returns are in “impact investing” (and whether or not they are “crummy”) since I don’t believe you can answer that question without better defining which segment of impact investing you have in mind.

Instead I’d like to ask whether, as I observe anecdotally, there are sectors/project outside of impact investing that attract huge amounts of capital that have “crummy economics.”

To recap the sorts of conversations I’d love to redirect:

Question 1: “What is the risk/return profile for impact investing?”

My current answer: “It really depends on what you mean by ‘impact investing.’  For some (significant) part of what could broadly be defined as impact investing, the financial returns may well compensate an investor and her LP well for the financial risk she is taking.  However, there are also big and important parts of impact investing – including those segments where the non-negotiable is impact; and those segments focused  on the poorest, hardest-to-reach populations – where the financial returns likely won’t fully compensate the investor or her LPs for the risks they are taking.”

Question 2: “But if the returns aren’t there, doesn’t that mean that the sector will never grow? Doesn’t that mean that capital will never flow in in significant ways, in which case the sector will never scale and reach its potential?”

AHA!  THIS is the question I’m aiming to dig in to, not the prior one.   This is why I said that I’d observed that “increasingly across sectors I meet more and more people who acknowledge that most of the most important (dare I say the most “impactful”?) work they do has crummy economics.”

Namely, I’m finding the discussion on “what the returns are” to be circular, because it hinges on how you define “impact investing” and what particular niche/sub-segment you are in.  The dead-end I’m trying to break through is the one that says “IF the returns aren’t there versus the risks people are taking, then capital won’t flow in.”

My hunch – and the thing I’m looking for data on – is that this statement might be empirically incorrect.  My hunch, informed by conversations with people in sectors far away from impact investing, is that the overall NET returns for huge swaths of projects that create public good (and have an underlying long-term economic logic) might be low (aka “crummy”).  But these projects and the people backing them find a way to make them happen at scale – whether by layering capital, layering risk, layering returns, bringing in philanthropy….. in such a way that lots of stakeholders and lots of stripes of money get what they want.

And so, my non-empirically-proven hunch is that the fundamental net (total project, total portfolio) return being low doesn’t inherently limit the ability of billions, even trillions of dollars, to find its way to meaningful project that have a blended return.   That’s the data I’m looking for.

One reader kindly pointed out the Kauffman Foundation’s recent report that revealed that 78% of their traditional venture capital funds “did not achieve returns sufficient to reward us for patient, expensive, long-term investing.”   And yet $22 billion a year still flows into venture capital.

Not exactly what I had in mind, but that seems to be a pretty great data point showing that failing to compensate LPs adequately for the risks they take doesn’t mean that money won’t flow in.