What if he’s conning me?

“What if this story this guy is telling me isn’t true? What if he, 70 years old, scraggly hair, sitting in a wheelchair, knee brace on his left leg, with a couple of bags and a book on his lap, didn’t really lose his place in Hurricane Sandy? What if that’s not what pushed him over the edge and shoved him back into a life of homeless shelters and benefits checks that don’t go far enough?”

Sure, that goes through my head.

But as I stand there listening I cannot help but stand face-to-face with my own good fortune, all the challenges I don’t face every day, all the barriers that aren’t in my way.

So, instead, I endeavor to think, “maybe this is a chance to help. Maybe a little bit will make a difference. Maybe experiencing the indignity of asking for money on the subway is something that this articulate guy shouldn’t have to go through.”

Maybe the chance to help even a little is a chance worth taking.

Give Impact Investing Time and Space to Develop

Note: this piece originally appeared on the HBR Blog.

Impact investing has captured the world’s imagination. Just six years after the Rockefeller Foundation coined the term, the sector is booming. An estimated 250 funds are actively raising capital in a market that the Global Impact Investing Network estimates at $25 billion. Giving Pledge members described impact investing as the “hottest topic” at their May 2012 meeting, and Prime Minister David Cameron extolled the potential of the sector at the most recent G8 summit.  Sir Ronald Cohen and HBS Professor William A. Sahlman describe impact investing as the new venture capital, implying that it will, in the next 5 to 10 years, make its way into mainstream financial portfolios, unlocking billions or trillions of dollars in new capital.

As this sector moves from the margins to the mainstream, it’s important to consider: What will it take for impact investing to reach its full potential?  This question is hard to answer because, in the midst of all of this excitement, there aren’t clear success markers for the sector.  Without those, the institutions managing the billions of sector dollars won’t be able accurately to assess the risks they are taking and, more important, the returns, both financial and social, they hope to generate.

Impact investing is not just a new, undiscovered corner of the investing world. It has the potential to join traditional investing and government aid and philanthropy as a third way to deploy capital to address social and environmental issues. A fully developed impact investing sector will incorporate the best features of markets—rigor and speed; quickly evolving business models; strong revenue models; and access to capital as ventures show signs of success—with the best features of government aid and philanthropy—serving unmet needs; reaching populations that are bypassed or exploited by the markets; investing in goods with positive externalities; and leveraging public subsidy to extend the reach of an intervention—to solve social problems.

Impact Investing_Time to Develop_1

Because impact investing really is something new, the old ways of assessing risk and return are not enough.  And yet, like a moth to a flame, those in the sector are endlessly drawn to discussions around what constitutes the “right” level of expected financial returns.  There is no single right answer to this question.  Under the broad umbrella of impact investments lie myriad sectors, asset types, and investment products, most of which still need to be developed and understood.  It looks something like this:

Impact Investing in 2014: Colorful, full of potential, and highly disorganized

Impact Investing_Time to Develop_2Note: Each circle represents a business and each color represents a business vertical (e.g. sanitation, housing, mobile banking).

To make sense of this kaleidoscope, three things need to happen.

First, impact investing needs time to develop. This is a nascent sector where entrepreneurs and investors are still figuring out business models, developing new financial products, and proving exit strategies and exit multiples, and only a handful of players are using agreed-upon metrics for assessing social impact.  Whether it’s solar lighting, mobile authentication, micro-insurance, mobile banking, drinking water, urban sanitation, low-income housing or primary health care, entrepreneurs need time to test, modify, and refine business models.  These entrepreneurs are looking for support from risk-seeking investors who have an appetite for failure, are willing to be pioneers, and who value the social returns they’re creating.

As the sector grows through this period of creative destruction, models that don’t work will die out, models that survive will attract copycats, operating costs will go down, and winners will rise to the top.  The sector will organize itself across the spectrum from philanthropy to investing, and the resulting clusters will demonstrate the differences in risk, financial returns, target customer, and social impact across the various sub-sectors of impact investing.

Impact Investing in the Future: Developed clusters across the spectrum

Impact Investing_Time to Develop_3

Second, in addition to time, the sector needs a framework to measure success, one that makes sense of the sector’s inherent diversity.  Akin to the Morningstar Style Box, such a framework would allow an investor to easily identify best-in-class social and financial performance across and within the various sub-sectors of impact investing.

Third, the sector needs practical, widely-adopted, and standardized tools to measure social impact.  This is easier to describe than it is to do.  Although investors value both financial and social return today, the sector only measures financial return well. The big, unspoken risk is that we’ll end up ranking and sorting impact funds by the only thing they can be ranked and sorted by – money – without assessing or valuing the different levels of social impact these funds have.

The future of impact investing depends on our ability to embrace what we’ve learned over the course of economic history: solving social issues requires both private and public capital, a combination of risk-seeking investors and incentives and subsidies from public actors to make it easier and more attractive to reach underserved segments of the population.  Hospitals, parks, educational systems, sanitation infrastructure, low-income housing — globally, risk-seeking investors build these solutions in partnership with the public sector, which plays its part to adjust incentives, act as a major customer, and provide subsidy where needed.

What the sector needs is enthusiasm about the future and patience around the time it will take to get there.  In traditional investing there is a premium on liquidity, low beta, and lower risk, all of which justify higher or lower returns. In impact investing, we need to find a way to place that same premium on social impact by valuing the public good being created – just like we do in early stage R&D in science, IT, health, and biotechnology. We allowed microfinance and the venture capital industry the time and space to develop over a few decades. Surely we can do the same for impact investing.

An underdeveloped market for risk

So much of the conversation in impact investing is about returns: what are they, what should they be?  Now and in the future?

Not so much talk about risk, though.

It strikes me that in traditional investing, people are rewarded for risk-taking and the most successful investors are those that become good at taking the right risks, good at discovering information asymmetries, good at making the well-placed bet early.

My hypothesis is that our biggest ability to create impact is going to come from finding the “next big thing” business models, the ones that solve problems that haven’t been solved yet – whether in energy distribution, sanitation, water, education, healthcare, etc.  And it feels to me that it’s unlikely that, in most cases, betting on new, untested business models – meaning creating new markets with huge amounts of friction (bad roads, poor ports, unreliable distribution, corruption) serving customers who are, by and large, new consumers of whatever you’re selling (so high acquisition costs, etc.) – is going to fully financially compensate investors and entrepreneurs for the risks they’re taking.

[To be totally clear, I’m differentiating between “good” and “astronomical” returns here, and arguing that if we’re clear-eyed about the risks you have to take to solve problems that have never been solved before, then “good” financial returns aren’t good enough, if your yardstick is a simple financial risk/return analysis.]

Of course the whole point is that there are funds and investors that are willing to accept lower returns because they DO value social impact.  And I hope that space continues to grow.  But what keeps me up at night is whether there’s a strong reinforcing mechanism that rewards risk-taking in that part of the capital curve?

Meaning: are the kinds of people who place real value on social returns, by disposition and in terms of feedback loops in the marketplace, likely to be rewarded and culled and selected for their ability to take big, well-calculated risks?  Or is it easier to soft-pedal on risk when the upside is mostly non-financial?  And, if that’s true, are we systematically under-investing in the highest-potential opportunities, because we shy away from risk?

Going towards truth

Takes guts, involves risk, can feel like walking through the fire.

Turning away, though, doesn’t mean that the truth you’re ignoring doesn’t exist.  It just means that you’re choosing not to see it and stand before it.

Bear witness, find courage, go towards truth.

A wasted day

Think about it: on a day when you swing for the fences, you might swing and miss.

A miss means a complete miss, a whiff, an air-ball, and all the associated jeering (we think) from the peanut gallery.  Wouldn’t it be embarrassing, and inefficient, to be completely wrong, to put a big idea out there that goes nowhere at all, one that’s just plain wrong?  Wouldn’t it, objectively, be a waste of time to work on something all day long and have it amount to nothing?

We have no time to waste!  Let’s tick through our To Do list, take the meetings that are on our calendars,, chip away at the projects that others have asked us to work on.  We know, at least, that on a day like that we will never have accomplished nothing.  This not only feels safer, it’s also what we were taught to do for a major portion of our lives.  It’s where good grades come from and how we got good reviews at our first and second jobs.

On the other hand, hitting “send” or “publish” on an outlandish, important idea; digging in and doing the work that no one asked you to do; spending time with people who will push your thinking and take your work to the next level…none of that is linear at all.  And so we are faced with our anticipation of the possibility being totally wrong, of our idea missing the mark, of being embarrassed, of discovering that, at least at this moment, we’re not that good at coming up with The Next Big Thing, and, staring that anticipation in the face, we decide to keep on playing small and safe for long enough that soon enough that’s the only thing we do.

The question becomes: which really is the wasted day?  The one where you tried for something big and failed, or the one where you didn’t step to the plate, didn’t take the shot, didn’t put yourself on the line?

Never trying anything can’t be a strategy for getting from here to there.  Nor can waiting until you’re “in charge,” because: 1. You shouldn’t be put in charge until you’ve shown that you can make new things happen; and 2. If you’re put in charge without having learned how to make important things happen, how will you suddenly know how to break away from the task orientation that had served you so well for so long?

Have you ever met with your boss or a peer and had them tell you: “you’re doing great work, but I’m giving you a terrible review because you played it too safe last year?”   Have you ever told that to someone else?

What does it take to get us to start playing big?

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.

Two ways to ask for help

Business schools and career centers have taught the wrong lesson: when trying to get noticed (for a job, an informational interview, etc.) send an email (those used to be called “cover letters”) that succinctly tells your story, touts your credentials and all the amazing things you have done.

The reason it’s poor advice is because for a job or an organization that’s special enough to deserve you, you won’t standing out from the crowd based just on what you’ve done and what’s on your resume.   There are too many great and accomplished people out there sending too many emails that look more or less like yours, so you can no longer distinguish yourself by a record of accomplishment.  You distinguish yourself by how much you care (and I don’t mean caring about getting that interview, I mean caring about doing something of value, of giving more than receiving); and you might distinguish yourself by work that you’ve done that we can see, feel and touch.

Your opportunity is to put effort into helping the person you want to connect with – offer them something of interest, something relevant to their work, an article they might not have found that they’d like to read, and explain why it connects to what they’re doing.  Create something that might help them meet their goals.  Share an insight, an actual insight, that they’ll want to hear.  Reciprocal exchange has a long history, and it doesn’t work because I am obliged to do something for you, it works because you showed that you care enough to do something of value to me, and I want to return that favor.

The reason people don’t do this is because it requires shifting the time/effort asymmetry away from the person asking for help.  In 30 minutes you could send a reasonably similar email to 30 people asking for 30 minutes of their time.  But it might take you four hours to do something remarkable to get one meeting with one person.  The worst part is that you might do all that work and still not get the meeting.

And that’s exactly why doing that work makes you stand out from the crowd.

What sets you apart

Not smarts or capacity or competence.

Not pedigree.

Not even accomplishments if they didn’t require putting yourself on the line.

Relentless passion? Courage? Going out on a limb? Refusal to give up? Yeah, now we’re getting somewhere.

It’s virtually impossible to lead if you’re not fully invested. It’s impossible to lead if the (potential) failure wouldn’t be personal. It’s impossible to lead without having something at stake.

What sets you apart is showing that you’ve done something that looks like that.

P.S. This all translates directly into questions to ask – and questions to skip – in interviews.

Generosity and social risk

In addition to all of the beautiful, touching stories I’ve heard about Generosity Day, I’ve also heard some very honest, usually light-hearted stories about people who tried to be generous on Generosity Day and failed.  People reached out to help and their hand was slapped away, often by an unknown stranger.

What we know about feedback (e.g. product reviews) is that the people who speak up are at the extremes, so I know that the stories I hear about Generosity Day are the best ones and the worst ones, the most moving ones and the failures.

The failures are quite interesting, and they are teaching us something.  There’s a certain class of spontaneous generous action that is all about taking social risk. This is why taking these actions makes us feel uncomfortable. We are breaking social norms and our own patterns of behavior.  We are practicing deciding to take a social risk and keeping our promise to ourselves.  And we have the chance to reflect on the validity of that pattern and, maybe, to decide to break it.

Guess what?  The new behaviors usually work out, and even when they don’t it isn’t all that bad.

So we add another layer in our understanding of why a deliberate practice of generosity might be transformative: because it is a safe opportunity to take social risk and to explore the difference between our terror before the risk and the actual experience of taking that risk.

Behavior changes don’t come from what we read or from what people tell us.  Behavior change comes from behaving differently, having something positive happen, and wanting more.

For those of you who had some generosity failures in the midst of your generosity day, I hope you keep at it and I hope the failures showed you that failure isn’t all that bad.  Better yet, I hope there were also some great successes that keep you coming back for more.

(HT to Keith Ferrazzi for helping me see the relationship between generous acts and social risk).

Enough with the bad news

You can subscribe to this blog using an RSS Feed (like Google Reader), or by signing up by email. I hope you do one or the other.

(NOTE: for those who find the phrase “RSS Feed” terrifying, it’s actually very simple. Google Reader, for example, is just a web page that puts all of your blog feeds into one place. It’s great.)

The email subscription for my blog is run by Feedburner. I don’t spend a lot of time on the Feedburner site. As long as it is easy for people to sign up for email updates I’m happy.

But Feedburner has one setting that has, slowly and persistently, been wearing me down. Feedburner’s default notification is that I receive an email every time someone unsubscribes from my blog, but I don’t get an email when someone subscribes.

Put another way: the default setting is to send me bad and discouraging news.

So, for the past few years, I’ve been occasionally getting emails like this:

Subject: so-and-so unsubscribed from Sasha Dichter’s Blog.

I almost wish the content were a little humorous. You know: “Sorry, we know you’ve been doing your best, but Sara decided to stop reading. It didn’t work out. Better luck next time.”

I let this continue for so long for two reasons. The first was inertia (finding the darn box to uncheck on the Feedburner site was difficult). But I also told myself that getting this feedback was important, because I could make some sort of connection between the unsubscribe rate and posts that I’ve written, and in so doing I’d improve as a blogger.

What I’ve figure out, though, is two things:

  1. The data are largely irrelevant. I have no idea if someone is unsubscribing because they have a new email address, because they started using an RSS reader, because they’d stopped reading months ago and finally got around to “blog housecleaning,” or because they actually didn’t like something I wrote. (plus it’s not even clear that creating strong reactions is itself a bad thing).
  2. My interest in getting the emails was a perverse form of rubbernecking. There’s a certain fascination with (and motivation) that comes from feedback that tells you you’re not doing a good enough job.

Enough already.  Yesterday I unchecked the box.

I finally figured out that this kind of negative feedback wasn’t helping me at all. It was feeding in to doubt, self-criticism and fear, and was making me more averse to taking risks. All bad stuff.

Are there places/people/things in your life that are set up ONLY to give you negative feedback? Have you been quietly telling yourself that it is useful or, worse, that you deserve it?

Any boxes in your life that you’ve been meaning to uncheck?