Impact investing is the hot new thing in capitalism. I attended Security Research Associates' Impact Investing Dialogue, an expert panel they launched with their annual Fall Growth Stock Conference in late October. I'll run down the main points the panel raised below, with my extraordinary insights in italics.
Impact investors are still too risk-averse to fund pre-revenue startups. Well, for crying out loud, they need to get over those first-date jitters. Either go big or go home.
Deal flow is still relationship-based, so VCs and money managers cultivate entrepreneurs for years. Not for long IMHO. Crowdfunding will wipe out some of the early-entry barriers to fundraising for social enterprises.
Impact investing seeks opportunities serving low-to-middle income consumers. Grameen Bank broke the mold.
Philanthropy can be integrated into asset class choices. I dunno, there has to be an ROI for it to matter. The ROI might be measured in charitable deductions' contributions to a lower tax burden but any new policy ideas out of Washington will have a say in that.
Fair trade products are an import/export opportunity. True, but too much of the fair trade community is exposed to single source supply risk. Read my 2011 article on fair trade cocoa to see the importance of building multiple suppliers into a fair trade business model.
Injecting business approaches into philanthropy will encounter tax law hurdles and cultural differences, but benefits are possible. Culture is the biggest one. I recently had a very bad experience trying to incubate new enterprises within an established, nationally-known non-profit. The people I had to deal with had zero understanding of how to cultivate a high-risk startup. They had been entry-level non-profit drones or government employees their entire lives and had never been exposed to risk-taking entrepreneurial personalities.
The Opposable Minds concept is like our opposable thumbs' evolutionary advantage. It means grasping two fundamentally opposing concepts (like business and philanthropy) to create a superior integrated solution. I haven't heard of this idea. It sounds legit but I need to read more about it. I have long believed the management consulting sector reinvents itself every few years by pushing new concepts on an unsuspecting public. I also suspect business leaders lap up these new concepts because they were too busy playing office politics on their way up the ladder to actually learn how to add value.
Impact investing happens in between pure ROI and pure philanthropic giving. Agreed, but then you need some hybrid measure of its value to convince money managers to keep doing it. A family office that does impact investing will need to measure how it lowers the portfolio's tax burden. A venture capital fund doing it will need to see some technology spinouts that they can commercialize.
Poor societies need more than access to capital; they need basic infrastructure. The most important thing they need is the rule of law! Impact investors can use the Heritage Foundation's Index of Economic Freedom to determine the likelihood of their investment going to some thug.
Impact investing is a highly fragmented, inefficient market that needs structure. Consolidation has already begun. Social Capital Markets (SOCAP) is a clearinghouse for this sector and I expect it to take a leading role in publishing whatever guidelines investors need.
Angel investors can find entrepreneurs who build enterprises that add social value. It's more like the other way around. Determined entrepreneurs go looking for angel clubs to give pitches. I still think it's funny whenever some wealthy person claims they found a new idea all by themselves after a dedicated first-generation striver banged on their door repeatedly to get their attention.
Microfinance can convert a non-profit structure into a for-profit structure that will add value. I didn't know that. Non-profit leaders need to seek good legal advice before they try converting their legal charter into something else.
The "informal economy" served by microenterprises is an uncorrelated sector. True enough, so the challenge for the finance community is to use metrics that convert System D activity indicators into a broad index. That also gives law enforcement agencies and securities regulators a means to track the underground economy, so some actors will be reluctant to self-identify. This is an area that cries out for an innovative financial solution, right up my alley.
Founders can look for credit enhancement instruments that make an equity offering attractive to institutional investors. I wrote about a few crowdfunding platforms that are developing pretty robust models. I believe those platforms that accommodate things like warrants, LEAPS, and contingent value rights will have a huge edge in attracting participants.
I appreciated the fact that two of the panelists were attractive women. Thank you Sonen Capital and Elevar Equity for showing off your finest assets. I always like to see quality in finance. I'll definitely keep watching the impact investing sector, and not just for the eye candy.
