What it takes to build dreams

I keep on bumping into the same parallel conversations around the future of the impact investing sector.

With those in the trenches, what I hear continuously is that it is a long, hard slog.  That companies take a long time to build, that the costs of getting things right are high, that grants and really forward-looking and patient risk capital is key, and that there’s not a straight path from here to there.

And yet the reports that keep on coming out and the sectoral conversations continue to cheerlead about all the capital that is coming into the space – prevailing estimates for total potential market size by 2020 are in the $500 billion (Monitor Group) to $1 trillion (JP Morgan) range – and to get there, we’re told, impact investing has to become an “asset class.”  Part of getting from here to there, it’s implied, might mean sweeping under the rug the significant segments of impact investing where the economics don’t seem to fully work and where the financial risks are too big relative to the expected financial returns.

An investor I recently met at a roundtable on understanding and quantifying impact put it simply to me: “anyone who is looking at less than a ‘market’ rate of return is mispricing risk.”

(Whereas I think the big problem in the world is that we’re mispricing returns by equating returns with what we can see in a discounted cash flow analysis, thereby demoting “impact” to a fuzzy, non-quantifiable something for which it’s not worth taking actual, real risk.)

Without getting dragged into what is clearly a definitional conversation – namely, until we agree on what we mean by “impact” we can never have a serious conversation about the economics of “impact investing” – I have an observation that keeps on nagging at me: 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.  Getting these projects/endeavors/businesses to happen requires the dogged determination to get many different stripes and flavors of capital to come together, lots of irregular stakeholders to develop a shared vision of the future, and, usually, a healthy dose of subsidy or public funding because there’s a clear public good being created when you succeed.

And yet in the impact investing sector we often hear that if investors aren’t fully financially compensated for the risks they take, capital will never flow in any serious way.

If that’s right, how do we explain away the fact that we have managed to create trillions of dollars’ worth of parks or mixed-use developments or hospitals or museums or great schools, most of which don’t make full economic sense but all of which are integral to a vital, vibrant society?  The truth is that markets don’t fully work all the time, and yet huge amounts of capital are regularly mobilized to create things that are worth creating.

What I’m struggling to do is to better explain, by looking outside our sector, my feeling that the conversation we’re having in the impact investing sector is far too narrow and binary.  When I identify the underpinnings of what makes vibrant, successful societies – you know, all those things that disappeared for a little while when Hurricane Sandy hit – and if I think about all of the incredible pure market plays that have been built on top of the existing infrastructure that was provided by the public sector….well it becomes clear that the “markets” / “not markets” conversation we’re having is far too simple.

And yet I don’t know specifically which data to look for to help tell this story.   I need more examples across sectors and history, more evidence that helps explain clearly and succinctly what I know to be true: that solving big, intractable problems for disadvantaged communities by and large doesn’t pay (nor should it pay) handsome financial rewards.  And the fact that it doesn’t isn’t some sort of failure of a prevailing orthodoxy, it is in fact a vindication of a rich history of bringing public, private and third sector players together – to bring the best of what each has to offer, including skills and preferences and the right kind of capital – to solve big problems.

I’ll be talking about some of these questions next month at the Global Philanthropy Forum, and I’d love your great ideas on how to prepare for this talk.

So, help, please! What are the best examples out there from other sectors (housing, roads, infrastructure, parks, museums, schools, biotechnology, the Internet, telecommunications…) that will bust open this “market return” mindset that is hobbling our thinking about how to create real and lasting change through impact investing?