Date: January 31, 2012
By: Ben Powell
If you are like many people, you are new to impact investing, have a mild notion of what it is, and believe that it could be important, maybe even revolutionary. But this notion is tempered by massive confusion surrounding the term.
Understanding the different agendas of the three key camps under the impact-investing umbrella can help you navigate this complex conversation.
Impact-First Investors (also called “Social-First”)
The origins of the term impact investing begin with a handful of foundations and non-profit organizations (incidentally, nearly all of which were founded by entrepreneurs). These groups believed that investing in entrepreneurs was a better way to solve social problems around the globe rather than the project-based approach that has dominated development assistance since the 1960s. These foundations wanted to get affordable, “patient” capital to real entrepreneurs who could then turn it into measurable impact. For this group, which includes most of the founding members of ANDE, the primary purpose of impact investing is social – to serve the needs of society, as quickly and tangibly as possible
A good example of an impact-first investor is Kevin Starr at the Mulago Foundation, author of an excellent recent post on the dangers of impact investors chasing returns over impact. His definition of impact investing is:
The practice of putting money—loans or equity—into impact-focused organizations, while expecting less than a market rate of return
Return-First Investors (also called “Finance-First”)
This is a group of mostly mainstream investors interested in creating products for their clients that allow their money to generate a triple bottom line return – meaning a market rate of return and a measurable (or at least ratable) social and environmental return. Much of the attention around impact investing has been focused on these big players like JP Morgan and Prudential. The hope is that traditional finance companies will unlock billions in investment capital that also demands to know its social impact. Return-first investors are trained in closing deals that make money. For them, the defining feature of an impact investment is that it can favorably compete with the financial returns of a traditional investment. Ignia Fund is a good example of this approach, as is the official definition of impact investing from the GIIN.
Entrepreneurs and Field Builders
The third group doesn’t consist of investors at all, but of non-profits and some foundations that are focused on entrepreneurial eco-system development and supporting the field at the entrepreneur level. This group includes many of the founding ANDE members and smaller start-ups. As a whole, this group believes that the key drivers of development are entrepreneurs, not investors, and that now is the time to focus our efforts on entrepreneurs. For this group, impact investors are key allies, but they lament that not enough of them are yet willing to pull the trigger, especially with smaller, angel deals, where their impact can be greatest. The basic allegiance of this group is to the entrepreneurs on the ground. An impact investor might ask, “How can I find good deals that created blended value?” The entrepreneur camp, on the other hand, asks, “How can we help entrepreneurs make better decisions that result in increased growth and increased impact?” B Lab is a great example of this camp.
A working definition of impact investing for this group is Agora’s own:
The practice of investing in impact entrepreneurs.
While each group has its own motivations and agendas, they must all rely on one another if we are to put ourselves on the path to a more sustainable capitalism for the 21st Century. Whether these groups can coordinate their resources effectively and work together is one of the most fundamental questions facing the movement today.