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Impact Investing Troubles

image-6Impact investing is an emerging asset class but it has unique challenges and obstacles for investors. Some of the most noteworthy of these problems are outlined in Kevin Starr’s article on the Troubles With Impact Investing. Let’s review Kevin’s major troubles and see How Measuring Impact helps you solve them.

Trouble #1 – We’re not serious about impact

Before we learned how to measure impact, it was easy to be an investor who wasn’t serious about impact. By taking the time to quantify and measure the outcomes we’re aiming for, we will have informed decisions and actions. By measuring impact we’ve proven we are serious about measuring the outcomes that are important to us, our portfolio companies and our stakeholders.

Trouble #2  - There’s no market here

By defining and measuring our outcomes and metrics we know from the onset if there is a market for our investment or not. This is where my two Golden Rules of Impact Investing come into play.

Golden Rule #1 – Know Thy Investor Self

We have two options here—Impact or Financial. We can’t double dip unless we want to get into trouble. It’s time to decide once and for all whether we are  an investor who is Outcome Focused or Financial Focused. If we are Outcome Focused we know the level of financial return we need and then find the investments that yield the most outcomes. If we are Financial Focused we know what level of outcomes we need, and then find the investments that yield the highest financial return. Check out this chart from the Minotor Institute’s guide on Investing for Social and Environmental Impact which is a nice visual.

Impact-Investing-Financial_Return_Impact-Return-Graph

Trouble #3 – For profits tend to drift off the target population 

Kevin suggests impact investing isn’t necessary unless there is some degree of market failure to overcome. Overcoming market failure is risky and expensive, requires innovation and R&D, and generally provides low returns on investment.  Too many for-profits drift in response to the needs of investors, and many firms fool themselves about reaching into the poverty strata once they are established with the more affluent. Therefore, it’s important to commit to Golden Rule #2.

Golden Rule #2 – Serve Thy Target Population

The best way to serve our target population is to know and measure shared outcomes and metrics.

Trouble #4 – Impact ends up scattered and limited.

As Kevin says, the solution here is to catalyze industries by clustering businesses, building value chains, and spurring competitors. Nowhere is there better proof of this solution than in startup accelerators and business hubs. Some examples of these include Y Combinator, Techstars, The Hub, The Unreasonable Institute, 500.c0, Greenlite Labs, [i4c] Campaign and Galvanize.

Trouble #5 – We’re too risk averse.

By knowing and measuring our outcomes we’ll be better suited to embrace the inherent risk of impact investing. As a B Corp with a GIIRS rating, you’ll know whether or not the risks you’re taking are paying off. In the end, remember we’re not doing mutual funds here, you’re an investor who wants to change the world. Make a measure play, go big and hit your outcomes!

Posted 8/12/12

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