Valuing Social Impact Expertise in Impact Investing

When it comes to driving social progress, good intentions and a big heart are not enough to guide good decisions. Moving the needle requires skilled professionals who have experience creating social change. Unfortunately, our research shows that when it comes to impact investing, financiers don’t value such expertise and wisdom as much as they should.

Earlier this year, our team at the Center for Social Innovation at the Stanford Graduate School of Business examined the hiring preferences of impact funds to help business students identify pathways to impact investing careers. As we dug deeper, it became clear that hiring managers under-appreciate the social impact experience of prospective employees. Many fund managers assume that people can learn about social impact quickly but that accumulating investing experience takes years. The result? Eighty percent of the impact investors we studied had a background in finance prior to landing an impact investing job while only 45 percent had experience in social impact.

The rationale for prioritizing prospective employees’ experience with investing capital goes like this: New investors make costly mistakes. Experience helps them avoid those mistakes. The more a person works with entrepreneurs, the more they develop a sixth sense for whether a venture is going to be successful or not. Over time, experienced investors can engage in explicit or implicit pattern matching to inform their decisions.

The most widely accepted framework for exploring the impact potential of an intervention, program, long-standing organization, or nascent venture is the theory of change. An organization’s theory of change relies on a logic model that describes how inputs (such as programming time and computers) transform into outputs (such as a crowdfunding platform), and then traces those outputs to social or environmental outcomes (such as the funding of classroom needs), and finally long-term impact (such as improved learning). Simple, right?     

Not really. In fact, evaluating the social impact potential of investments requires hard-earned wisdom that comes only after years of practice. Some social ventures have no impact; others cause harm. Some have the potential to serve millions; others have no viable model for scaling. Investing in the wrong kind of impact intervention can be as costly as investing in financially unsustainable ventures.

This holds true even when no financial returns are at stake. Mark Zuckerberg learned this the hard way through the gift he made to Newark Unified School District in 2009. While Newark’s graduation rates are now higher, more high-quality charter schools serve more poor students, and principals receive better professional development, the reform process was devoid of community consultation and turned into a political nightmare that greatly limited the potential impact of the grant. Experienced philanthropists and investors know how important it is to involve local communities in social work. Priscilla Chan and Mark Zuckerberg's next investment in educational support, this time in local Bay Area, included a commitment to a community engagement and consultation process, and partnership with education professionals (led by tri-sector expert Jim Shelton).

Social impact professionals develop their own venture-gauging compass over time, which powers the same kind of pattern-matching expertise financiers have. As part of our research, we tried to capture some of what happens in the head of a social impact professional when she evaluates a venture’s potential impact without the benefit of quantitative studies such as randomized control trials. We also reviewed the extensive literature about and existing practices in impact evaluation. Based on our observations, we created a framework called the Impact Compass, which identifies six primary interdependent dimensions that come into play for pattern matching. We hope the Impact Compass creates a common language, and supports greater structure and clarity for discussions of social impact among professionals of all backgrounds interested in social impact.

While social impact professionals eager to bring the power of markets to bear on social and environmental issues may find that their social impact expertise is undervalued, there are still plausible pathways to impact investing:

1. Go to “the dark side.” Embrace the traditional investing world for a few years to develop an investing track record, then move to a social impact fund. This may not even require a move; most investment banks, private equity firms, and venture capital groups will move into the impact investing space in the next few years. Many traditional banks know they need a presence in the impact space but don’t yet realize they don’t have the right in-house talent for it. Well-meaning employees with a desire to contribute or give back generally drive current efforts, taking on social and environmental impact as a side project. After gaining a few years of experience, you could volunteer to take on impact investing as a project, and happen to have both the passion and impact expertise for the job. Be the change agent from within.

2. Seek a job with an “impact-first” fund. Most foundations that have added the impact investing model to their grant model perfectly understand the value of social impact expertise. They are generally ready to accept concessionary returns but won’t tolerate poor impact results. Examples of impact-first funds include Emerson Collective, Acumen Fund, USAID Impact Fund, New Schools Venture Fund, and Reach Capital.

3. Look into larger institutions that have the luxury to specialize. The smallest funds will hire someone who has a long list of skills: expertise in both finance and social impact; familiarity with the entrepreneurial process; the ability to provide strategic consulting to the fund’s portfolio; superb interpersonal skills; perspective on the future of a relevant industry; and a vision for the field of impact investing that will translate into thought leadership, public speaking, and writing. All this in one person! Instead, look for larger, structured funds that open portfolio management, talent development, and/or impact assessment positions. Examples include organizations such as Omidyar Network and Acumen Fund.

4. Participate in the growing economy of impact investing services. As more and more money looks for investments that have a social and environmental impact, more and more new entrants realize they are playing in unknown territory without the proper expertise and ask for guidance. This trend is giving rise to impact investing services such as landscape scanning, deal flow consolidation, investment due diligence, impact measurement, and impact education. For example, social scientists have a lot to contribute in the area of impact measurement, and industry experts have a role to play in educating investors in what works and what doesn’t. Examples include Purpose Capital in Canada, Arabella Advisors, Toniic, Investors Circle, Cambridge Associates, Tideline, and the Threshold Group.

5. Reinvent the partnership model and launch your own impact fund. If you are a true social impact veteran, consider partnering with someone who has a robust financial investment track record and launching your own fund. If you don’t have friends and family money to start a fund, your philanthropic connections can help you raise a small $1-5 million demonstration portfolio—a minimum viable product with which you can prove your model and approach before raising a fund from investors. The Impact Compass can help you explain impact to inexperienced, prospective limited partners and why your expertise is so important to the team. This was the path of Carl Palmer, who successively created three impact ventures after graduating from the Stanford MBA Program in 2003. His advice today? “Impact investing is still in the early days of its evolution as a field, and there are lots of niches yet to be filled, so [there is] lots of room for entrepreneurial initiative. There’s a wealth of opportunity out there now for folks who are motivated to create a place for themselves in the field.”

Management in impact funds today constitutes only a few hundred billions of dollars while traditional investing funds are in the trillions. But the new wave of successful tech entrepreneurs has more belief in the virtues of business to address social problems than the previous generation of tycoons-turned-philanthropists, and is making impact investing more relevant to traditional financial institutions. As Chris Cozzone, vice president of Bain Capital Double Impact, put it, “[Impact investing] is going to be the new normal of private equity over our lifetimes.” The corporate world is meanwhile launching impact investment funds such as Salesforce Ventures and Twilio.org, and diversity-focused funds such as Comcast Ventures. Impact expertise is crucial to ensuring that large institutions like these don’t dilute the impact part of impact investing. It’s time to prime the demand for it.

Read more stories by Neil Malhotra & Bernadette Clavier.