Photo left to right: Juan Pablo Cappello (moderator), Catherine H. Clark, Benoit Wirz, Jocelyn Cortez Young, Ignacio González Nappa at The LAB Miami on March 6, 2013.
Miami – In January the Global Impact Investing Network (GIIN) released a study that predicts impact investing funds to grow from $8 billion dollars in 2012 to $9 billion in 2013. This large percentage of growth from year to year means that impact investing is in an explosive state.
“What’s interesting is that we’re also in a territory where we don’t have reliable performance data to give investors confidence,” said Catherine H. Clark, Director of the Center for the Advancement of Social Entrepreneurship (CASE) i3 Initiative on Impact Investing and Associate Professor of the CASE at Duke University’s Fuqua School of Business.
“We’re in this Wild West period where a lot of people think this is important, huge amounts of government subsidy and leverage are being put in the field, and we have to see where it all shapes out,” Clark added.
Touted as the next big thing and given its challenges, how would impact investing avoid the fate of being the next big thing for the next 20 years, as was the case in Brazil?
Jocelyn Cortez Young, Managing Partner and CEO of the Minerva Capital Group, explains that the challenge of impact investing gaining momentum is the amount of money allocated to it. “In Latin America, $7.9 billion was allocated to the private equity space last year alone, according to the Latin American Private Equity & Venture Capital Association. But there was only $100 million that was allocated to the impact investing space, and that was allocated among five managers.”
With respect to the numbers released by the GIIN, Young believes impact investing is gaining momentum. “But the question is how is that money being allocated? That’s the problem,” Young said, adding that, “There is not enough information when it comes to risk metrics, which is the driver behind this.”
Should you be an impact investor?
“Impact investing is when you’re making an investment, and you’re taking an extra degree of risk because you want a social return. For example, if I invest in alternative energy and I’m happy that alternative energy will lower the carbon footprint, but really I’m in it to make money, that’s not impact investing because I would evaluate risk and return the way I would any other investment. But there’s no additional risk that I’m willing to take,” said Benoit Wirz, Director of Business Consulting at the Knight Foundation.
“The first question to ask is are you willing to take additional risk to get a social return, and if you are, what kind of social return is going to make you willing to take that additional risk,” Wirz said.
On the other hand, Clark believes that some investors may not possess a philanthropist view. “I don’t think everybody in the sector is willing to say it’s not an impact investment unless it is managing risk and possibly giving a concessionary return.”
“This all has to be sustainable,” said Young, “because if it’s philanthropy dollars that we’re all going for, at the end of the day it’s just going to be philanthropy dollars that are going to sustain it.”
“What we really want to do is open the space beyond the philanthropy dollars and the only way to do that is to be able to speak the same language,” added Young.
Referring back to absent risk metrics, Young explains that speaking the same language means impact investing needs to be able to tell an investor of the risk they’re taking, the sector they’re investing in, the size of the company, and as a new addition, the social component.
Philanthropy and impact investing
“People are learning that philanthropy is changing and they want to discover new ways to engage in social impact. And business can be a way of driving social impact,” said Ignacio González Nappa, Chief of International Operations at Socialab.
“Given the stage of where this space is at, creating that ecosystem where you have people co-investing and you have both government and for-profit working together in these projects is certainly the way to go,” said Young.
In the impact investing space, people are becoming more interested in experimenting with co-investing because it allows each investor to attain their goals. “You can stack capital and you can get deals done with different levels of interest. A philanthropic funder might take the ‘first loss’, someone else will come in and say they’ll get a 2 percent return, and someone else will come in and get a market rate. That market rate person would not have come into the deal unless those other people were there. This is happening more and more as people realize they have different interests in the same deal,” said Clark.
An example of co-investing is America’s first Social Impact Bond program. The investment is intended to reduce recidivism among young men and was made possible by a grant of $7.2 million from Bloomberg Philanthropies to guarantee a $9.6 million loan from Goldman Sachs.
CASE also recently received a $10 million grant from USAID to work with health ventures around the world. Duke Medicine, McKinsey, and the World Economic Forum will help build business models and connect ripe ventures with capital.
Lessons for social entrepreneurs
The flip side of impact investing is the social entrepreneurs that it supports. Yet it is not uncommon to hear social entrepreneurs struggle to get capital from impact investors. What are social entrepreneurs doing wrong?
“The first thing would be to solve a real problem. As an entrepreneur, we fall in love with our ideas and we believe the thing that we have discovered is the very best solution, but that’s not true,” said Nappa.
Clark says that entrepreneurs should figure out how aligned their social value creation is with their business model. “When you sell and get $1 for your company, are you getting an equivalent value of social mission automatically, or do you have to do something extra to build it in? For example, an aligned model would be somebody selling solar panels. Every time I sell a panel, I’m having impact.”
A less aligned model, Clark explains, would be when someone’s mission is to hire hard-to-employ workers. Because there’s a whole set of things that the entrepreneur would need to do, such as train, find, and help their employees get jobs, they would have to do more than what the same company in the same industry would have to pay for.
“If your business does not have high alignment, then you should probably try to certify yourself or incorporate as one of the new forms [of organization],” said Clark. Clark is referring to the benefit corporation and the L3C in the United States, and adds that a yet to be released report surveying hundreds of for-profit social enterprises and their entrepreneurs show the ones which are certified B Corporations have grown faster, have more employees, and show greater success than those who are not certified.
Another piece of advice from Clark is that social entrepreneurs should understand how fast they can grow, to determine whether they are going to be attractive to an angel or equity investor, or look for alternative capital.
“Be very clear on what’s making your margins,” said Young. She warns that government subsidies could be dangerous because as in the solar-powered market in Spain, it almost collapsed because the government went down.
“If you take that subsidy out of your business model, does it still work? Is it still sustainable? If it’s yes you could last another 7 to 10 years, but if it’s no then you have to revisit your numbers and make sure it’s sustainable,” added Young.
“As an investor, I want to see you build something before you come to me. Otherwise it makes it very hard for me to invest, unless you’ve done it before,” said Wirz.
As for approaching impact investors, one advice from the group is that social entrepreneurs should understand what drives the investors to understand what they’re looking for.
Why impact investing?
“The mainstream investors are only looking for high growth if it’s equity or stable, low risk if it’s debt. There’s a whole lot of other stuff in between, and that’s where impact investors are stepping in to say there are other profiles they would want to invest in because of their impact,” said Clark.
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