Lack of Pipeline is Impact Investing’s Biggest Problem
The conversation surrounding the recent Monitor report (From Blueprint to Scale: The Case for Philanthropy in Impact Investing) focuses on the role of philanthropy in supporting game-changing business models that might not get to scale without some initial subsidy. In these cases, impact-maximizing investors – that is, investors focused on maximizing impact per dollar invested – need to focus on the goal and not get distracted trying to chase higher financial returns. For example, pretty much all of Acumen Fund’s deals involved some blend of philanthropy and investment, and there should be no apology for this.
But this focus on the proper mixing of philanthropy and investment at the individual deal level can obscure even bigger and, I’d argue, more important issues facing the impact investment industry – lack of good deal flow. Lack of good deal flow will become a bigger problem as more capital is mobilized, but it is only a symptom of a larger problem – the general lack of a support system to generate deal flow at scale.
Imagine Silicon Valley without Stanford. That is the state of the early-stage impact investing movement today. If the metaphor is not clear, read Ken Auleta’s recent piece in the New Yorker.
We need to build Stanford
Just five years in, the impact investing industry has developed a great recruitment strategy for investors, but there is no similar recruitment strategy for entrepreneurs. It’s a reason why many in the industry are worried that impact investing won’t get transformative capital to those entrepreneurs solving problems in the poorest communities and at the earliest stages of their growth – the kind of entrepreneur that can disrupt the status quo. These are the kinds of entrepreneurs for whom the term impact investing was invented. Unfortunately, as Acumen has discovered, analyzing over 5000 companies to invest in just 65, entrepreneurs of this caliber don’t grow on trees.
The success of this movement hinges on the entrepreneurial management team of these impact companies and the collective decisions they make everyday. These are the actions that determine whether the company succeeds or fails and if an investment reaches its full potential.
Impact investing is a team sport consisting of both investors and entrepreneurs. We have built a field of dreams for investors, and they have come and are still coming – more and more every day wanting to be more ambitious with their capital. From Kiva lenders to the sons and daughters of billionaires to college endowments and faith based groups, increasing numbers of individuals, groups and institutions want their money to work harder to solve our collective social and environmental challenges. The stage is set, but if the right entrepreneurs don’t know about it and are uninspired, untrained and unprepared, then all the blended capital strategies in the world won’t make a difference. You can’t complete the impact investing puzzle without good entrepreneurs who share the same vision.
So how do we recruit the best entrepreneurs into the sector and prepare them for investment, especially ones from particularly underserved communities poised for transformative change? How do we build Stanford for the industry? The answers are not easy, and they will be a major topic of discussion at the upcoming Impact Investing In Action conference later this month. With that said, there are many promising solutions that have yet to be explored.
The Need to Accelerate
So, how does the philanthropic community fit into all this? It can help by directly challenging cultural attitudes that are toxic for entrepreneurship and to build formal and informal systems that can filter and sort talent at the local level, like we do in the U.S. New Accelerator models that seek to partner with investors by doing the difficult, early-stage work at scale are a promising development. They develop entrepreneurs while also lowering transactions costs for investors, making it easier for investors to do smaller deals. Ultimately we need to directly recruit entrepreneurs to be co-creators in the success of the industry, in much the same way B Lab has rallied U.S. entrepreneurs.
It is only partially true that we need to inspire more donors and more “impact-maximizing” impact investors to build the industry. What we really need to do is inspire, develop, equip and accelerate more impact entrepreneurs.