Paul Brest, Ronald Gilson, and Mark Wolfson’s article is very helpful in providing useful definitions to the emerging area of impact investment, and I agree with most of the definitions provided. I also believe that the thrust of the article is correct, in that it is much harder for shareholders to influence the direction and practices of publicly traded companies than of private companies. Where I depart from the authors, however, is that I think it is quite feasible for venture capitalists and other private investors to influence the direction and practices of private companies, including for social impact.

The best way to ensure social impact that is by prior written agreement concerning certain impact principles before an investment is made. This is what we did in my first impact fund, the Bay Area Equity Fund, which earned an internal rate of return (IRR) of 24 percent, exceeded all of its social goals, and its portfolio companies generated thousands of jobs. In my experience, this type of agreement is easily secured, as many co-investors in and managers of promising companies are eager to maximize their positive social impact as well as their financial return. They correctly perceive that, pursued correctly, these two goals are not in conflict in the long run.

It is true that the investable universe of non-concessionary return opportunities is a subset of all investment opportunities. However, many of the companies within the subset of non-concessionary return social impact investment opportunities enjoy advantages in funding, recruiting, and business development that non-impact companies do not. These advantages can, in certain cases, lead to higher financial returns as well as significant social returns. Here are three investments that generated both venture capital market rate returns and social impact: Tesla, SolarCity, and Revolution Foods.

Public policy is intended to reflect the social goals of a society, and investing consistent with government priorities is a long established practice. Just as robust defense department budgets fueled the growth of defense electronics and other companies in Silicon Valley, so to Department of Energy loans and federal and state subsidies of electric vehicles fueled the growth of Tesla and SolarCity. As impact investors we worked with Tesla and SolarCity to secure these funds and to modify or reinforce public policy to favor these industries.

In addition, due to the large increase in financial resources in the independent sector (foundations, social purpose LLCs, and family offices) there is an opportunity to seek less dilutive financing for the impact companies themselves and grant money for the customers of these companies (if not for the for profit organizations themselves). Both of these practices have the potential to increase return on investment for social impact investments, whether intended to be concessionary return or non- concessionary return investments.

These funds have contributed to the growth of another social impact company in which we were the founding investors: Revolution Foods. As the sole first round investor in Revolution Foods, we provided capital not otherwise available, enabling the creation of the company. Now a mid-size company, Revolution Foods provides healthy school lunches at the federal free and reduced lunch rate (just over $3 per meal), healthy meals to the Boys and Girls Clubs (and many others), and a line of healthy consumer packaged foods. The company has catalyzed change in the food service and consumer packaged foods business, and while still private, has generated venture capital market rates of return, based on recent private market valuations. Here too we worked with the company on all aspects of business development.

With Revolution Foods and all other portfolio companies, we worked also with the management teams to improve the lives of employees, the communities the companies are based in, and the environment. It is virtually cost-free to do this and it is not difficult to acquire third party philanthropic funding to offer English as a second language (ESL) classes, financial literacy training, green business certification, and other pro-social programs. Employees, management, and co-investors value these programs, which are not a substitute for, but rather a contributor to increasing shareholder value.

For this reason I disagree with the article’s narrow definition of a social impact investment. The authors state that to create social value through impact investment one must increase the socially valuable output of the enterprise. I believe, however, that additionality can be derived not only from the enterprise output per se, but also through what the authors call enterprise impact. The three examples cited above generated excellent jobs with employee benefits and career progression opportunities in low and moderate income communities. In these companies many employees are recruited through job training programs, some of which serve the formerly incarcerated. With our guidance and facilitation, in all cases the investee companies are green-businesses certified, employing a variety of practices to minimize their carbon footprint and maximize resource efficiency. And in all cases the companies are involved with their local communities, most often in activities that are accretive to shareholder value as well as socially positive.

With the exception of the too-narrow definition of social impact investment I cite above, the article provides an excellent legal and economic analysis of the topic. But by focusing on those two areas the article misses an essential point about impact investing: the important psychological aspects of the topic. One of the reasons that social impact investments have recruiting, funding, and sales and marketing advantages over socially neutral investments is that most people (employees, investors, and customers) want to contribute to improving the world. This is especially true of millenials.

Moreover, with the recent national election results in the United States it is clear that we continue to have a very polarized society. Impact investing, clearly defined and implemented, appeals to socially minded people across the political spectrum, since many who are skeptical of government programs intended to solve social problems do appreciate the discipline of market forces and the incentive of the profit motive. Successful impact investing does more for the world than does socially neutral investing. That is why, though it is hard, it is worth doing.

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