Impact Investing

The Trouble With Impact Investing, P3

Real impact investing is not for the timid.

The Trouble with Impact Investing

There’s only one bottom line, and it ought to be impact. Impact investors need to step back and think about exactly what problem they want to solve.

When you do a three- part series called “The Trouble with Impact Investing,” people might reasonably conclude that you just don’t like impact investing. Not so—I think that if we do it right, impact investing might do a lot of good. At the Mulago Foundation, we’ve done three deals with good results and there are more in the pipeline.

The trouble isn’t with the idea itself, but how it’s played out so far. I’ve worked with more than 200 social entrepreneurs in the past couple of years and talked to lots of investors. Here is how we could blow it:

1. We’re not serious about impact.

When it comes to impact investments, the business model is usually the primary focus, and enterprises place surprising little emphasis on assuring real impact. Too often, the case for impact is pretty sketchy. A few examples:

  • Financing a mosquito net factory to combat malaria, when the issue is distribution, not supply.

  • Improved woodstoves presented as a means to prevent deforestation, when there isn’t a shred of evidence to connect the two.

  • A carbon finance deal to give away water filters to prevent emissions from wood-fired boiling, even though people in the area don’t boil their water.

Moreover, while the philanthropy world is still pretty bad about measuring impact, the impacting investing world is worse. Real impact measurement is a drag on the financial bottom line and investors are usually willing to assume it’s there, so few feel compelled to do it. What’s weird to me is that while all impact investors know that you could never maximize profit without measuring it, they often fail to recognize that the same is true of impact.

2. There’s no real market here.

Financial markets work because, despite hiccups, money flows effectively toward profitable firms. Philanthropy is hugely inefficient because there is no analogous market for impact. How an efficient market is supposed to emerge in impact investing remains murky. Talk of double and triple bottom lines is unhelpful—for a market to work, there can be only one bottom line, and it’s either profit or impact. One solution might be that impact investors decide what level of return they need, and then search for the firms that offer the most impact at that expected rate of return. Or maybe they decide on an expected level of impact, and shop for firms that can give it to them at the best rate of return. Whatever workable solutions emerge, impact investing will be pretty useless unless it can function in a meaningful way as a market for impact—and no solution will be workable unless impact is consistently measured and reported.

3. For-profits tend to drift off the target population.

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. We’ve seen too many for-profits drift up the socioeconomic spectrum in response to the needs of investors, and too many firms fool themselves about reaching deeper into the poverty strata once they are established with the more affluent. Investors need to commit to—and firms need to hold the line on—serving the original target population.

4. Impact ends up scattered and limited.

Philanthropy can make a real difference when it is directed toward scalable solutions and broadly applicable social innovations. Boutique projects don’t really move the needle. The same is true for impacting investing. Investing business-by-business in scattered geographies isn’t going to make much difference. We have to catalyze industries. It’s a useful exercise to ask, “Does this model have the potential to make a big difference for a million people and, if so, just how would that happen?” Rarely does that happen with a single firm. What it will take is clustering businesses, building value chains, and spurring competitors. We’re going to have to be more clever.

5. We’re too risk averse.

Studies and surveys point to huge sums poised to flow into impact investment. I find that it’s more useful to watch what people do rather than listen to what they say. And what they’re doing is . . . not that much. Startup for-profit social entrepreneurs have a hard time getting funded at all, while impact investors pile onto a very few enterprises that seem like safe bets. (The TONIIC group provides a refreshing counter-example, with a bunch of funded start-ups and an accelerating pipeline.) A lot of the investors I talk to complain that they can’t find enough fundable deals, and a lot of funds don’t seem to be spending much money. It seems to me there are three possible explanations: 1) investors aren’t serious about trading return for impact; 2) it’s a lousy field of would-be investees; or 3) we’re too afraid of risk. Given the good intentions of the investors I meet and the brilliance of the social entrepreneurs with whom I work, I’m placing my bets on #3.

Impact investing should be about trading some amount of profit to make good stuff happen that wouldn’t have happened otherwise. These are early days in a brave new world, and that makes it all the more important is that we understand our real impact and figure out how to apply real market dynamics. So: spend your damn money, put impact first, measure what happens, and share your results. We can still fix the things we’ve gotten wrong, and if we do this right, it might go big.

Read more stories by Kevin Starr.

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  • BY Vivek Garg

    ON July 11, 2012 10:31 PM

    Excellent Kevin. Every point that you have made in this article is so relevant. My organization worked for promoting entrepreneurship among locals in conflict regions - to raise local’s stakes in development and peace. These regions were simply considered as ‘no-go’ by investors but then there were few brave hearts who believed in our vision and took the chance to invest in the local entrepreneurs. I would say there were mixed results but in every review there were great lessons learnt and most importantly, subsequent improvements were made.

    There is a need to understand that why ‘profit’ part has been included to this kind of funding (which I believe is to attract investments and boost accountability of entrepreneurs to deliver quantified results). Also there is a vital need to balance return expectation with the impact one wants to make. There are many factors like ‘in which geographical region one is investing’ ‘existing state of business, market, etc in these regions / communities’ ‘gravity of social issue one is trying to address’ which may dictate the return on investment and risk involved.

    Impact Investment hold the key to tough human challenges and we definitely need investors with strong business sense and an ever greater appetite for risk.

  • BY Chris Meyer

    ON July 24, 2012 07:34 PM


    The three part series has been appreciated. Our business Planting Empowerment went back and forth for two years between the non-profit model similar to Embrace and a triple bottom line, social enterprise—whatever you want to call it. We eventually decided to stick with the a for-profit “Impact” structure and I think we made the right choice.

    As you noted, different structures are necessary to solve different problems. In our case, growing tropical hardwoods sustainably requires financing periods that the non-profit sector has rarely provided, much less on a large scale. Moving the forestry plantation industry towards increased social and environmental impacts won’t happen with grant money, but can happen with “impact” and/or patient money. 

    It will be interesting to see in the coming years if impact investment can “win” more of the philanthropic and traditional investment “markets”. I assume it will capture more from both as the businesses will be better at producing impact and risk adjusted returns comparatively. We believe both philanthropists, impact investors, and traditional investors have yet to fully understand the new risk/return ratios (or impacts) that impact investments or for-profit “social” enterprises offer. As the space evolves and the risk/return ratios are better understood, significantly more capital from both pools will flow to it we believe. Hopefully, it becomes the new normal (ie, no need to label it differently) and the “hammer” in everyone’s toolbox to borrow Bugg-Levine’s analogy.

  • Ashim Roy's avatar

    BY Ashim Roy

    ON July 30, 2012 09:18 AM

    Excellent thought provoking article. If we agree that measure of an organization’s success can be mapped on a two dimensional graph - profit and impact, we will need a clear measurement of impact. Triple bottom line and other measures of success of social enterprises have failed (IMHO) because of non-universal definition of how to measure anything other than profit. Impact must be measured with respect to the goals of the organization and some baseline. Whereas profit measurements is done on an ongoing basis after getting the operations started, however, impact measurements require baselining before the start of the activities of the social enterprise.

  • An absolutely fantastic series, thank you!  True growth will only come when we’re truly honest with ourselves.  The time for drinking the Kool-Aid has passed.

  • BY Sean Murphy

    ON September 27, 2012 10:20 AM

    Kevin, this is a truly great article. I used it as a reference in my meeting with a new impact fund called the [i4c} Campaign.  Addressing the troubles was such a hit that I then wrote a blog post called “How to Measure Impact” where I used your five troubles at the bottom of the post to make sure the post hit the mark by addressing the troubles. I’d be curious what you think of it, if you see any ways to improve it and if you would like any additional citations/links.  Thanks again and here’s the post.

    An Investor’s Guide - How to Measure Impact


  • BY Philo Alto

    ON November 15, 2012 08:29 AM

    Hi Kevin,

    Great series of articles as shown by the responses that it generated. It helped sharpen the discourse as well as bring out other related themes and questions.

    I’d like to share my own article which was recently published in Lien Centre for Social Innovation’s Social Space magazine last week (2012 edition) entitled “Impact Investing: Will Hype Stall its Emergence as an Asset Class?” which I hope adds to the discussion:

    Regards, Philo / Asia Value Advisors

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