Since I was born the day man landed on the moon (July 20, 1969), I have always had a strong affinity with the Apollo missions, the moon, and Neil Armstrong. So I was saddened to learned that he passed away this weekend. Beyond the accomplishments of Neil Armstrong and his generation of astronauts, engineers and policymakers who literally "shot the moon" (in response to JFK's galvanizing challenge, what most struck me about Armstrong from his obituary in the New York Times, was his unbelievable sense of humility and service. He felt privileged to have been given the opportunity to be part of the historic space program and he acted that way. May we take as lessons from that glorious day in 1969 that we should have the audacity to dream bold dreams, and the humility to pursue their conquest of someone like Neil Armstrong.
Tuesday, August 28, 2012
Friday, August 24, 2012
Hopes vs. Expectations
I had an interesting debate with a friend about whether we should have hopes or expectations for our children. I had mentioned that having expectations is a form of a gift, in that it helps the child see possibilities beyond what might be currently within that young person's scope.
He interpreted it as perhaps a burden of reliving one's life through the child, and was aghast that any expectation should be set in specific return for, say, paying for a student's college education.
My counter was that I don't expect my children to become or do anything specific. It's not expectations about the what, but about the how. That they will live their lives with integrity, grace and pursue a path that fulfills their purpose. To find one's calling and to be the best at it is my only expectation.
In any event, as I walk by the Obama '08 campaign poster on the way to my home office every morning, I reflected whether or not the "Hope" theme from 2008 was in fact interpreted by voters as "Expectation". And perhaps "Expectation" was not the how but the what: more jobs, lower deficits, less conflict in DC and abroad, etc.
But maybe we are past the point where we actually "expect" anything from the political process, but can only "hope" that it gets better.
He interpreted it as perhaps a burden of reliving one's life through the child, and was aghast that any expectation should be set in specific return for, say, paying for a student's college education.
My counter was that I don't expect my children to become or do anything specific. It's not expectations about the what, but about the how. That they will live their lives with integrity, grace and pursue a path that fulfills their purpose. To find one's calling and to be the best at it is my only expectation.
In any event, as I walk by the Obama '08 campaign poster on the way to my home office every morning, I reflected whether or not the "Hope" theme from 2008 was in fact interpreted by voters as "Expectation". And perhaps "Expectation" was not the how but the what: more jobs, lower deficits, less conflict in DC and abroad, etc.
But maybe we are past the point where we actually "expect" anything from the political process, but can only "hope" that it gets better.
Monday, July 16, 2012
The (Real) Trouble With Impact Investing
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.
Tuesday, July 10, 2012
From CSR to CSO?
Despite increasing number of business cases where corporate
social responsibility (CSR) has led companies to build substantial competitive
advantages, generate higher revenues, or lower costs substantially, the
skeptics of CSR still abound. Milton
Friedman wrote in 1970 that the “social responsibility of the corporation is to
generate profits”. Today, many business
leaders echo the view that a business’ principal, if not only, responsibility
is to its shareholders.
The logic behind Friedman’s argument endures. First, the principal-agent theory, which
binds managers to act solely in the best interests of their investors, still
applies. Second, any diversion of
resources from a company’s core business for social purposes would amount to an
undemocratically levied tax on the investor is still a legitimate objection. (Of course, I assume that Friedman’s scorn
for diversion of corporate resources would also apply to excessive executive compensation
or the lavish trappings of the C-Suite). And finally, Friedman’s point is that
even if it were acceptable to commit to social causes, how is a manager to know
where to invest, as he writes that “one man’s good is another man’s evil.”
But if the logic has endured, the context has not. A lot has happened since 1970 that challenges
Friedman’s critique of social responsibility.
The first is the sheer number of companies that have embraced “CSR” as a
core part of their strategy. Companies
like Whole Foods or Honest Tea have moved beyond the “window dressing” that
Friedman mocks to strategies that integrate concern for employees, suppliers
and the environment into the products they sell in ways that translate into
strong market share or a robust bottom line.
Measured by sales per square foot, for example, Whole Foods is the most
profitable grocery store in the country, and a commitment to CSR is a central
part of their strategy.
Second, a small but growing group of investors has started
to look for options that combine financial returns with positive social and
environmental outcomes. Moving far
beyond the “screened investment” portfolios of the 1990s, funds like Generation
Investment Management or Parnassus believe that publicly traded companies with
strong environmental, social and governance practices will outperform the
markets in the long term.
And moving from public equity into private equity and
venture capital, a new generation of impact investor like DBL and the Calvert
Foundation are raising money from investors who want to see it invested in
privately held companies or socially responsible projects that generate
positive social and environmental returns.
So while Friedman’s principal agent theory may still be a legitimate
concern, there are now a large and growing number of investor who would be
willing to back business managers who aim to deliver more than just financial
returns.
Third, while it is true that “one man’s good can be another
man’s evil”, the emergence of new ratings systems like the B-certification,
GIIRS and IRIS promise to enable managers to track and communicate
non-financial performance measures in clearer and more comparable ways. We
still have a long way to go to get to a single, coherent measure of social and
environmental performance, but we are making progress. There is also increasing consensus on the urgency
of certain national and global priorities, from the jobless recovery to a
stalled public education system to the threat of global climate change, that have
allowed many business leaders to make clear and measureable contributions that go
well above and beyond what is required of them by law.
Finally, Friedman’s concern that the business executive’s
social initiatives would amount to an undemocratically levied tax was a
legitimate concern in an era when government worked. But in the United States, at least, tax
policy has become a dangerous game of partisan brinkmanship and double-speak,
where ending tax cuts is considered a tax increase and no one seems to want to take the long-term fiscal health of the country seriously. Many entrepreneurs, social or otherwise, are
tired of waiting for the government to get things done. Code Academy, a start-up education company,
and IBM’s P-TECH partnership in New York City are just two examples of
businesses finding ways to train more people for the technology jobs of
tomorrow. And consumers are also voting
with their wallets, feeling more informed and empowered to express a clear
preference for local, healthier, or more sustainably sourced products.
So maybe it is not the responsibility
of a company to act socially or environmentally, but these and many
examples certainly highlight the opportunity. Perhaps the only enduring objection of the
skeptics is the word responsibility,
which implies a moral obligation to do something beyond tend to the bottom
line. Corporate social opportunity,
instead, points to the new and growing markets, the vibrant and healthy communities,
the patient investors, and the talented and committed workforce open to managers
who take off the green eye shade that has long blinded them to the new
capitalism taking shape just outside their window.
Saturday, June 30, 2012
Why Affordable Care Matters...
The Affordable Care Act was upheld by the Supreme Court. On the one hand, this matters a lot. On the other hand, it may not.
I am a big believer that the decision is a significant milestone for public policy: we have many big problems to face and the Obama Administration, Congress and the Courts have found a way to make substantial progress on solving one of the hairiest: health care reform. Obama Care is not perfect and it is still viewed through a highly partisan lens, but when it comes to other big problems we need to solve (climate change, education reform), the recent decision renews my faith that when the stars align, our country is still capable of making (incrementally) good policy.
On the other hand, as Bob Kocher and Mohit Kaushal point out in a recent Forbes article, there is a significant amount of innovation already happening in health care that may not but totally dependent on federal policy. The unsustainable costs, the aging of our population, and the rise in chronic diseases are a gathering storm. Entrepreneurs and investors have taken note and are building innovative businesses that increase access, improve personalization and strip out the inefficiencies of health care.
I personally look forward to new innovations in pay for performance that link reimbursement not just to procedures provided, but outcomes delivered.
I am a big believer that the decision is a significant milestone for public policy: we have many big problems to face and the Obama Administration, Congress and the Courts have found a way to make substantial progress on solving one of the hairiest: health care reform. Obama Care is not perfect and it is still viewed through a highly partisan lens, but when it comes to other big problems we need to solve (climate change, education reform), the recent decision renews my faith that when the stars align, our country is still capable of making (incrementally) good policy.
On the other hand, as Bob Kocher and Mohit Kaushal point out in a recent Forbes article, there is a significant amount of innovation already happening in health care that may not but totally dependent on federal policy. The unsustainable costs, the aging of our population, and the rise in chronic diseases are a gathering storm. Entrepreneurs and investors have taken note and are building innovative businesses that increase access, improve personalization and strip out the inefficiencies of health care.
I personally look forward to new innovations in pay for performance that link reimbursement not just to procedures provided, but outcomes delivered.
Wednesday, June 27, 2012
The Open Road
The opening to Walt Whitman's Song of the Open Road, a part of his poem Song of Myself, speaks to me as I consider the heady, early days of a new venture fund.
Whitman seeks an open, inclusive society, where "none but are accepted", and he brings a spirit of adventure and curiosity to his journey through the still young Republic, recovering from a Civil War and finding its way in a globalizing economy at the turn of the last century.
As the not so young Republic turns another century, buffeted by civic rancour and a turbulent global economy, we need the same intrepid spirit, the same openness to all comers, the same endurance, courage and health that Whitman summons in 1900.
The inspiration for this blog, Open Road Ventures, is to pay homage to Whitman's spirit while I chronicle the new pioneers of inclusive, high impact innovation who are pushing new boundaries in search for both social impact and financial returns. From the innovations in emerging markets that I have been privileged to know at Acumen Fund, to new ideas transforming the American health, education, finance, philanthropy and energy sectors, there are thousands of Whitman's now traveling the open roads, helping create a more just and sustainable Republic.
This blog will be dedicated to those traveling the Open Road, those starting or leading new hybrid ventures that are looking to combine impact with financial returns, and those looking to join them in a professional journey marked by freedom, innovation, curiosity, inclusion, and impact.
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