Impact investing is still in its early years, but already some of the pioneers of the industry have begun reflecting on their years of work. The results are both sobering and hopeful. Sobering because it has
become clear just how difficult impact investing is. Hopeful because we are learning what it takes to do it effectively.

Today, impact investors have developed a more realistic set of expectations about what is possible. Most now realize that with rare exceptions, it’s not possible to generate both high financial returns and high social impact. To create real social impact, investors have to work harder, take on more risk, and accept lower returns.

Unfortunately, many impact investors aren’t willing to do that. “Although many impact investors care about social impact, their primary goal is to generate a significant return on their investments,” write Sasha Dichter, Robert Katz, Harvey Koh, and Ashish Karamchandani in “Closing the Pioneer Gap.” (Dichter and Katz work for one of the pioneers of impact investing, the Acumen Fund; Koh and Karamchandani work for Monitor Inclusive Markets, where they are helping to create market-based solutions to the lack of housing and clean drinking water in India.)

The undue focus on generating high financial returns means that many social entrepreneurs creating businesses targeting low-income people in the developing world have a tough time raising money. “Most investors, even those who care about impact, choose either to avoid these companies altogether or to invest at a later stage when the execution risk is lower or when these risks are better understood,” write Dichter and his co-authors.

Matt Bannick and Paula Goldman of Omidyar Network come to a similar conclusion. “The paucity of financial and human capital available for high-risk, early-stage ventures ... and for sector-specific infrastructure poses a massive impediment to the healthy growth of the impact investing sector,” write Bannick and Goldman in “Sectors, Not Just Firms,” the first of a six-part series of articles published on SSIR’s website.

One of the solutions is for investors to think about building entire industries, not just individual firms. “Our experience from the past eight years,” write Bannick and Goldman, “is that impact investors can massively increase the number of lives they touch by concentrating investments in specific industry sectors in specific geographies, and by investing in a range of organizations to accelerate the developent of these industry segments.”

Impact investors also need to realize that financial capital is just one of the ingredients needed to create successful firms and achieve social impact. The others are intellectual capital, human capital, and social capital, writes Antony Bugg-Levine in “Complete Capital.” (Bugg-Levine was an early champion of impact investing while at the Rockefeller Foundation.) “Mobilizing complete capital is not for the faint of heart,” writes Bugg-Levine. “It takes longer to pull off. It requires us to connect organizations and individuals used to operating in silos and to overcome legacy mindsets and mutual suspicions.”

The impact investing field is maturing as leaders reflect on their experiences and research. SSIR is proud to play a role in helping that to occur.

Read more stories by Eric Nee.