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Jun 17, 2015

Omidyar Network Addresses Confusion Over Expectations for Impact Investing

A recent article by Paula Goldman and Lauren Booker in the Stanford Social Innovation Review addressed their concerns over alienating potential impact investors by confusing them on what to expect from their investment.  At the heart of the confusion is whether impact investing must require compromises from traditional approaches to investment.

Here is a quick summary of their argument.

Initially, the purpose of impact investment was kept vague in order to attract as many foundation, pensions, and family offices to impact investing.  The basic goal was “to dissolve the age-old thinking that doing good and doing well are separate domains—that to ‘give back’ you should first make money and then give some of it away.”

Now with a tremendous variety of approaches to impact investing evolving they see two problems:

  1. “The difficulty newcomers face in making sense of impact investing’s diversity—of asset classes, geographies, sectors, and goals. Many are now excited by the promise of aligning investment dollars to impact goals; few can easily make sense of this increasingly rich smorgasbord to know what types of products fit their goals.”
  2. The broad definition of impact investing, the “big tent”, “has left us stuck in an unrelenting and unproductive ideological debate about whether or not there is a trade-off between financial return and social impact.”

The morphing of risk/return language into impact/return language has left “a false perception that investing for impact inherently means compromising returns.  There are indeed some impact investments where funders would be ill advised to expect risk-adjusted commercial returns. But there are also huge segments of the industry that offer fantastic returns; recent and forthcoming studies by GIIN/Cambridge and Wharton verify this claim. The key is in what problem you are trying to solve. ”

They advocate parsing the “big tent” into a tripartite categorization of risk/return/type of impact.  They hope this will better align actual impact investment opportunities with investors’ expectations and needs.  They also hope this will allow impact investing to segment investment programs along the same stage-of-development continuum applied to traditional companies: concept, prototype, start-up, early stage, growth, and of course, angel funds versus venture funds, etc.

Hard to disagree.  My big concern is that, if we want local impact, we are going to have to concentrate on the concept and start-up stages.  Social enterprise is just too new in too many communities.  Aiming for market returns in growth companies will provide such a meager local pipeline that impact investment dollars will go to the global scale initiatives that have dominated impact investing to date:  in past GIIN reports, as much as 70% of dollars raised in America went abroad.  Fine, if one’s goal is a big splash; but what about the problems that plague our own communities?  That is where we need angel impact investors, like Investor’s Circle or the CINCO Fund.

Get a flavor of how dominant start-ups are in a local social enterprise community by looking across the dozens in Central Ohio listed in our directory.

 

Yours in Linking Mission to Money,

Allen Proctor, President & CEO

Center for Social Enterprise Development