I had the opportunity to co-lead a discussion at the Aspen Institute this summer (with Seth Goldman, CEO of Honest Tea) where we read Part I of Kevin Starr's provocatively written piece in the Stanford Social Innovation Review, titled the "Trouble With Impact Investing: Part I". This, and his follow up this past week (Part 3) are a clear and skeptical voice in the debate about impact investing, and a sober reminder that impact is indeed hard to measure. While I agree with much of what Kevin writes, I disagree on what he thinks is the real trouble with impact investing.
But first, I have been working for the past eight years to measure and manage the performance of Acumen Fund's 70+ investments. It is not easy, and we have been the first to acknowledge the challenges of balancing competing demands of returns and impact, uncertain interest in the results from donors, and, at times, deep reluctance from our entrepreneurs to expose their business to a level of scrutiny not required of their pure for-profit competitors, or for that matter, their pure non-profit counterparts.
Often, the link between business growth and impact is in lock-step. For example, Husk Power's renewable energy business grows as it adds new customers, who are accessing formal energy services for the first time. And while we don't measure impact at the household level, we have gotten comfort with the evidence in the academic literature that demonstrates the solid link between access to formal energy services and increases in household incomes.
In other cases, the link is harder to define and therefore, even harder to measure. In those cases, we continue to look for evidence, and/or invite researchers in to truly understand the impact of the business intervention. And as Kevin notes, the problem with this is the cost and time of actually measuring impact, which no one is really truly willing to bear. In the US, we spend about 1% of a nonprofit's budget on a financial audit that gives donors comfort that the organization is legitimate. What if we sent that as the bar for spending on some assurance that claims of organizational impact are not simply made up?
But, back to the main argument... the trouble with impact investing is not that there is no universal measure for impact to compare one intervention with another, but rather, the challenge with impact investing is that there are no nodal points on which to rest our conception of impact. Instead, anyone doing anything vaguely impact-oriented is all lumped in together, from place-based economic development to paradigm shifting investments like the One Acre Fund.
On the financial side, there are some clear mental models, or nodal points, where returns congregate. What do I mean? Consider the financial axis in the two by two of "returns and impact". The nodal points include but are not limited to: "risk adjusted market return" (which is in the 10%+ range); "below market returns" (which is in the 0-9% range, depending on which market); "get me my capital back" (which is a 0% real return); and "philanthropy" (which depending on your tax bracket is effectively a negative 70% one time return). What kind of financial return you have is an absolute measure, but also reflective of which nodal point, or strategy you pursue. If you deliver a 5% return and were aiming to deliver "below market returns", that is pretty good... if you were aiming for "risk adjusted market returns" that is not so good (but still better than the average VC firm over the last decade!)
On the impact side, let me propose four nodal points, all conveniently starting with the letter "P".
The first is process impact. A fund like DBL in the Bay Area often helps purely for-profit companies improve their community or environmental footprint, engaging employees in local charities, or thinking about the carbon footprint of the office. A company like Pandora would fit that bill, where DBL helped the company think more strategically about non-financial stakeholders. Indeed the GIIRS rating system is largely about "process" measures of a company's impact, including governance, worker training, environmental health and safety. It is a very good start.
The second point of impact would be around place. Any economic activity in some places is a good thing. Think of investments in entrepreneurial activity in New Orleans or Cleveland or Detroit or Oakland (where Pandora is based). The majority of SBA money and CRA money in the US is "place based" investing. Whether it is a ball-bearing factory or rugged courier bags (like Rickshaw Bags in San Francisco, supported by Pacific Community Ventures), employing people in economically disadvantaged communities has real impact.
In fact, our first investment at Acumen Fund in A to Z was NOT to solve the malaria distribution problem, but was to bring private industry to Arusha, Tanzania; 7,000 some jobs later, we are proud of the economic impact of that investment. And our second investment in the same company was to help the company solve the distribution problem,. With the support of the Exxon Mobil Foundation, we worked with Pascaline Dupas to run a randomized control trial on pricing from which we concluded that private distribution would require large subsidies to become viable.
The third node would be product. There are products like Embrace's infant incubator or d.light's solar lantern that in theory, when widely adopted, could lead to substantial impact. Now, this is where impact can get much harder to truly measure, and where the marginal social value of the product is critical, not just the absolute value. For example, Honest Tea, is a healthy product that should lead to marginal health benefits, particularly if it is replacing highly processed and very sweet soft drinks. There are plenty of products that combine profit and impact, but Kevin is right to point out that many of the highest impact products do have some subsidy built into the R&D, marketing, or distribution. Our "Blueprint to Scale" report went into great detail about the important role of enterprise-grantmaking.
The final node would be paradigm-shifting products or services, like One Acre Fund or Revolution Foods, both of which are trying to take an unsustainable equilibrium and fundamentally reinvent agriculture extension or delivering healthy school meals. Kevin is right that most seismic shifts that have lead to substantial changes in the quality of life of low income people have historically not been investments. Social change is often the purview of individual action, political initiative, philanthropy or civil disobedience. But that does not preclude the possibility that some truly transformative ideas might in fact allow for compelling investment returns.
The trouble with impact investing is that we are still talking at a very high level about process, place, product, and paradigm-shifting impact. Until we invent the universal impact ruler, we need more sophisticated vocabulary to understand and measure what is working and what is not within each node. It's great that Kevin continues to stoke the embers of the debate, but he needs to work with the field to keep pushing for more accurate, standardized and transparent measures. It's a collective action problem, so only if we join forces will we make any progress on the trouble with impact investing.
But first, I have been working for the past eight years to measure and manage the performance of Acumen Fund's 70+ investments. It is not easy, and we have been the first to acknowledge the challenges of balancing competing demands of returns and impact, uncertain interest in the results from donors, and, at times, deep reluctance from our entrepreneurs to expose their business to a level of scrutiny not required of their pure for-profit competitors, or for that matter, their pure non-profit counterparts.
Often, the link between business growth and impact is in lock-step. For example, Husk Power's renewable energy business grows as it adds new customers, who are accessing formal energy services for the first time. And while we don't measure impact at the household level, we have gotten comfort with the evidence in the academic literature that demonstrates the solid link between access to formal energy services and increases in household incomes.
In other cases, the link is harder to define and therefore, even harder to measure. In those cases, we continue to look for evidence, and/or invite researchers in to truly understand the impact of the business intervention. And as Kevin notes, the problem with this is the cost and time of actually measuring impact, which no one is really truly willing to bear. In the US, we spend about 1% of a nonprofit's budget on a financial audit that gives donors comfort that the organization is legitimate. What if we sent that as the bar for spending on some assurance that claims of organizational impact are not simply made up?
But, back to the main argument... the trouble with impact investing is not that there is no universal measure for impact to compare one intervention with another, but rather, the challenge with impact investing is that there are no nodal points on which to rest our conception of impact. Instead, anyone doing anything vaguely impact-oriented is all lumped in together, from place-based economic development to paradigm shifting investments like the One Acre Fund.
On the financial side, there are some clear mental models, or nodal points, where returns congregate. What do I mean? Consider the financial axis in the two by two of "returns and impact". The nodal points include but are not limited to: "risk adjusted market return" (which is in the 10%+ range); "below market returns" (which is in the 0-9% range, depending on which market); "get me my capital back" (which is a 0% real return); and "philanthropy" (which depending on your tax bracket is effectively a negative 70% one time return). What kind of financial return you have is an absolute measure, but also reflective of which nodal point, or strategy you pursue. If you deliver a 5% return and were aiming to deliver "below market returns", that is pretty good... if you were aiming for "risk adjusted market returns" that is not so good (but still better than the average VC firm over the last decade!)
On the impact side, let me propose four nodal points, all conveniently starting with the letter "P".
The first is process impact. A fund like DBL in the Bay Area often helps purely for-profit companies improve their community or environmental footprint, engaging employees in local charities, or thinking about the carbon footprint of the office. A company like Pandora would fit that bill, where DBL helped the company think more strategically about non-financial stakeholders. Indeed the GIIRS rating system is largely about "process" measures of a company's impact, including governance, worker training, environmental health and safety. It is a very good start.
The second point of impact would be around place. Any economic activity in some places is a good thing. Think of investments in entrepreneurial activity in New Orleans or Cleveland or Detroit or Oakland (where Pandora is based). The majority of SBA money and CRA money in the US is "place based" investing. Whether it is a ball-bearing factory or rugged courier bags (like Rickshaw Bags in San Francisco, supported by Pacific Community Ventures), employing people in economically disadvantaged communities has real impact.
In fact, our first investment at Acumen Fund in A to Z was NOT to solve the malaria distribution problem, but was to bring private industry to Arusha, Tanzania; 7,000 some jobs later, we are proud of the economic impact of that investment. And our second investment in the same company was to help the company solve the distribution problem,. With the support of the Exxon Mobil Foundation, we worked with Pascaline Dupas to run a randomized control trial on pricing from which we concluded that private distribution would require large subsidies to become viable.
The third node would be product. There are products like Embrace's infant incubator or d.light's solar lantern that in theory, when widely adopted, could lead to substantial impact. Now, this is where impact can get much harder to truly measure, and where the marginal social value of the product is critical, not just the absolute value. For example, Honest Tea, is a healthy product that should lead to marginal health benefits, particularly if it is replacing highly processed and very sweet soft drinks. There are plenty of products that combine profit and impact, but Kevin is right to point out that many of the highest impact products do have some subsidy built into the R&D, marketing, or distribution. Our "Blueprint to Scale" report went into great detail about the important role of enterprise-grantmaking.
The final node would be paradigm-shifting products or services, like One Acre Fund or Revolution Foods, both of which are trying to take an unsustainable equilibrium and fundamentally reinvent agriculture extension or delivering healthy school meals. Kevin is right that most seismic shifts that have lead to substantial changes in the quality of life of low income people have historically not been investments. Social change is often the purview of individual action, political initiative, philanthropy or civil disobedience. But that does not preclude the possibility that some truly transformative ideas might in fact allow for compelling investment returns.
The trouble with impact investing is that we are still talking at a very high level about process, place, product, and paradigm-shifting impact. Until we invent the universal impact ruler, we need more sophisticated vocabulary to understand and measure what is working and what is not within each node. It's great that Kevin continues to stoke the embers of the debate, but he needs to work with the field to keep pushing for more accurate, standardized and transparent measures. It's a collective action problem, so only if we join forces will we make any progress on the trouble with impact investing.
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