Man does not live by bread alone. I have known millionaires starving for lack of the nutriment which alone can sustain all that is human in man, and I know workmen, and many so-called poor men, who revel in luxuries beyond the power of those millionaires to reach. It is the mind that makes the body rich. There is no class so pitiably wretched as that which possesses money and nothing else. Money can only be the useful drudge of things immeasurably higher than itself. Exalted beyond this, as it sometimes is, it remains Caliban still and still plays the beast. My aspirations take a higher flight. Mine be it to have contributed to the enlightenment and the joys of the mind, to the things of the spirit, to all that tends to bring into the lives of the toilers of Pittsburgh sweetness and light. I hold this the noblest possible use of wealth. –Andrew Carnegie
In stark contrast with Carnegie’s division of practice into that which earns money and that which does good, “Impact Investing” is the implementation of a belief that profitable businesses which provide social good enable the possibility of a new sort of investor, one who still demands a return on his investment, but who will accept returns lower than those conventionally expected. There are organizations and conferences supporting this new investor, and a number of individuals self identify as being such. Impact Investing isn’t simply the avoidance of negative impact (which is something that moral investors likely do in any case); rather it demands funds specifically put toward positive impact. Also, while any investor may be willing to take a smaller expected return in some cases, and most Angel investments provide no return, the Impact Investor is specifically about investing for good. Its definition demands that this be an area of both expertise and the implementation of a moral belief.
However, assuming as it does that investment for good is an area of expertise is an inherently flawed concept. While areas such as education, energy-saving technologies, etc., are categories in which possible social good may be achieved by investment, the expertise and interest brought to investing in these areas is of the same nature as other areas of specialization. An investor wants as big a return as they can derive within whatever areas of interest they may have, and while those striving for “impact” may feel that they’re more generous in accepting lesser returns, I’d suggest that rather than indicating that this is a different category of investor, it’s simply an investor whose category is seen as inherently providing lower returns.
A secondary issue with acceptance of the term “impact investing” is that it requires utilization of formulae reflecting equivalency between units of good and dollars. If I say that I will invest in something because I want to earn a profit, but I am willing to accept less profit simply because the business is “good” there must be a calculation of the value of good. How much less am I willing to accept in profits for a morally good investment than I for a morally neutral investment? Once I’ve figured that out, wouldn’t it be better for me to invest only for profit and donate part of my profit for good? Isn’t it more effective to earn as much money for good as one is able?
Money is the most fungible thing in the world, while “good” is the least. All of the efficiencies are on the money-earning side of things. Good is simply not efficient, while it is vital. Of course, business shouldn’t create a negative social or environmental impact, but that’s simply one set of boundaries among others, rather than an area of specialization. To state that one is investing specifically for good, as a central focus, on an ongoing basis, means in effect that one is being sloppy in how one invests, getting less benefit than one could, in order to derive money from a category that would be better suited either by conventionally focused investment (if available) or grant funding.
Of course, much of funding, especially at the highly speculative level of angel investors, is initiated by investors’ degree of personal interest and experience in a category. Hence, one could say that someone with experience in mission-based businesses would naturally both be interested in investments focused around, and personal involvement in, that same area. But, in action, whatever one’s background happens to be, simply starting from the perspective that you’re going to make as much money as you can, immediately puts you in quite a different universe of opportunities. -One which is driven by profitability well beyond the self-sustaining.
In any case, these days, institutions tend to require that a grantee have an ongoing model that is self-sustaining for any funded initiatives. Hence, modern grants are more like investments, but they’re investments appropriately skewed toward doing good. The strategic difference is that it’s an investment in which all value goes toward ensuring that the initiative is self-sustaining, rather than requiring such a strong growth that it generates extra profitability beyond its own needs.
Consider the massive difference between the requirements of an initiative that must return all investment plus whatever element of profit a specific investor demands for his specific model, versus one that simply takes that money in to enable a self-sustaining business model in the long term. The first cuts out a massive number of valuable projects, and indeed, a project-for-good that generates such surplus revenue may well be demanding more than it needs to of the community it serves.
Would not energy and goodwill be better used toward creating really smart and innovative donor advised funds (and other effective and transparent channels for funding), rather than taking at face value that “impact investing” is a meaningful model?
Does all of this go to imply that new models in funding social impact initiatives are irrelevant? I think it does just the opposite. “Impact Investing” is a concept which cannot let go of arcane definitions of both for-profit and not-for-profit initiatives. In our era, the biggest problem that smaller non-profits face is that they all must retool to focus on transparency and self-sustaining models.
A generation of boardmember/donors is aging out of active participation, leaving directors to wonder why young people aren’t giving as their parents did. Certainly, there’s a major element of the current state of the economy in this equation, but concentration of wealth should also to some extent mean opportunities to solicit funds from a flourishing donor class. But this isn’t happening and a lot of smart people are wondering why. At the same time, kickstarter and other crowdfunding sites are successfully raising funds, on a grand scale, from exactly this generation of “non-donors.” Certainly an element of the crowdfunding success is a premium element, that ends up looking a lot like retail pre-sales. But, overall, the principle drivers to donation in that environment seem to be a clear and viable, sharable (non-selfish) message. Nobody gets out of a kickstarter donation any more than they put in.
Unfortunately, crowdfunding is biased in much that same way as conventional grant-giving entities, very much toward sexy projects and away from general overhead. A smart non-profit can be confident that crowdfunding is an effective tool both for vetting community support and actually funding a project. But that entity still likely needs operating funds to initially cover keeping the lights on, and the basic and ongoing expenses of being an active organization. This represents the first two years before an effective revenue model can be expected to be generating funds. In a conventional commercial startup, a friends and family round may well be followed by an angel round to support the process. This funding is the highest risk imaginable, and wise folks generally think of it as much more likely to be lost than profitable. The reason they’re willing to invest is that it may possibly bring in massive profits in the long term (or they just want to give their offspring a break).
This is a place where Impact Investing breaks down as a concept, as this element of business creation and funding further exacerbates the problematic math of stating how many dollars each chunk of Good is worth; since, in this stage the big risk/big reward scenario is highlighted. One truly has to believe at this point that big reward is possible if one is to buy in under expectations anything like a conventional early stage investor model. If one cannot, then reference to Impact Investing as a subset here is illusory. This is the gap that either Impact Investing or Grants can fill, and it should most often be grants, because this isn’t a place where we want funders deciding that what will drive their decision is whether a business has the potential to win “big enough” in surplus profitability to justify the risk. Rather, the practical mission-based entrepreneur and his funders should be asking themselves the same two questions: “Is this the good I want to do?” and “Is this business model self-sustaining?” Anything else is off target.
Of course, there are other financial models and vehicles that are neither conventional investments nor grants. The Rochdale Society of Equitable Pioneers in Rochdale, England, organizing cooperative business structures for social impact in 1844, foresaw the hazards of Impact Investing when they forbade it in their original principals, but they did emphasize the value of issuing loans to worthwhile initiatives. This continues to be a powerful tool for business created in support of a mission. Not only for cooperatives, but in a number of scenarios, including micro-lending across the world.
Program Related Investments (PRIs) stretch the model a bit further than simple loans, as they may take the form of a loan, equity investment or simply a guarantee, but have none of the problematic elements of Impact Investing. The reason for this is inherently linked both to the nature of non-profits, as the only entities that may generate PRIs, and to the IRS regulations governing them. If a PRI arrangement takes equity for its provider, its purpose must be within the mission of the provider and “production of income or appreciation of property” may not be a significant element. Hence, one can see that the IRS, who deal most intimately with mission-based activities and their potential corruption, recognize the inherent risk of allowing the potential for large financial benefit to accrue via investment to those who present themselves at mission-driven.
Not only is a desire for maximum return generally off-mission for the impact oriented startup, it can be directly contrary to desired goals. For example, a conventional startup goes to the marketplace that validates its model by wanting, and being able, to pay for its product. However, if you look at a software tool used in education, it is most likely to be fully monetized by affluent and successful schools. Ironically, though, unlike other early adopter scenarios, this is the most meaningless environment for validation; simply because there is so much support behind any tool used in such an environment that it is almost doomed to success. Software in a high-performing school must succeed; the children are oriented toward success and experienced teachers will inevitably find ways to make a silk purse out of the worst sow’s ear. This truism also gives lie to the now popular concept that there can be competition in k12 education; competition requires the potential for failure, and no one can stomach an unbiased test matrix allowing failure of children. Those of good will and having the latitude to do so will inevitably do the best they can to help children.
Another relevant aspect of this dynamic likewise comes from K12 education; it is a product that everyone needs and for which no one will accept its true price. One aspect of this is that education is a complicated process, with as many variations in learning as there are kids. Hence, it’s incredibly difficult to assess the system price for teaching an inner city kid growing up in poverty against that of a suburban kid who has ongoing contact with positive aspirations and potential. Maintaining the structure of a large and diverse school district is not simply a multiple of the management costs of a homogeneous suburban school, it is significantly more than that. And adding charters to a school district shouldn’t actually lower that administrative cost, as it de-standardizes school activities, which will then be even greater need of oversight.
That is simply a question of comparison in public perception; even more significant is that when one breaks down how much a private school spends per child in Philadelphia (likely ~$30k in total, given $22k tuitions and additional fundraising), and compare that to about $6k per kid in a fully subscribed Philadelphia Public School, one sees that public schools are either vastly underfunded, or brilliantly well-run, or both. Unfortunately, for those who see easy solutions in charter schools or vouchers, the answer is always the former and very often the latter.
So…as the well-intentioned impact investor, with a focus on education, how does one look at the opportunities in K12 education? Does one create a product that will scale massively in sales to high-performing schools, with the idea that simply because it enhances student performance it is worth doing (even as we see that that’s not inherently required for sales success in the category), and perhaps even worth taking a bit less profit, in order to do this societal good? That’s just a big mushball of reasoning, though. My suggestion; go the route of Carnegie, Frick, Nobel, and Astor ; sell whatever product you have, to whoever will pay, for as much as you can get, then form a foundation, or simply donate, to whatever you think really needs to get done. Then make sure that it does get done, too. Because, like the robber barons of the 19th century, you will be a clear-eyed realist who bends reality to your will, and that’s what mission-based enterprise needs, if it’s to overcome the massive and inevitable barriers it faces.
