At Omidyar Network we have long suspected that it was time for the impact investing industry to move beyond the dichotomy between “impact-first” or ”returns-first.” On the impact first side, we were uncomfortable with the implication that one necessarily needed to sacrifice financial returns in order to maximize impact. Conversely we wondered what was new about returns-first investing. After all, commercial investors do a great job of maximizing return and many of the businesses they fund have great impact; are they all therefore impact investors?
To be clear, we are very positive about the role of commercial investors in impact investing. Indeed we would assert that the primary goal of impact investing is to seed and nurture socially impactful innovations so that commercial markets can eventually take them to scale.
But it’s high time for the industry to think in a more compelling way about the relationship between financial return and social impact. So we were thrilled when our colleagues Paul Brest and Kelly Born tackled this issue head on in their article.
We found Brest and Born’s article to be both useful and thought provoking. We particularly appreciated their fundamental argument: the true purpose of impact investing is to catalyze impact that is additional to what normal markets would create on their own. At Omidyar Network, we have focused our investments in socially impactful areas that traditional investors might have initially perceived as ‘too risky’—and have been gratified to see investors crowd in later when some of these early bets proved sound. We also find the authors’ parsing of different types of impact—in particular, the distinction between enterprise impact and investor impact—to be quite helpful.
Of course, our point of view is slightly different than that of the authors and we would therefore push them on a few areas.
First, we would urge the authors not to conflate “making money” and “risk-adjusted returns.” Brest and Born write, “The most novel and intriguing question we consider is whether and when investors can expect both to receive risk-adjusted market-rate returns on their investments and to have real social impact: that is, can investors both make money and make a difference?” We would point out that there are many attractive ways to make money that do not always constitute risk-adjusted returns. An investor can earn high commercial returns but not achieve risk-adjusted returns. It may therefore be worth differentiating between risk adjusted returns, commercial returns, low returns, and preservation of capital. Indeed, given the current low interest rates, commercial returns and perhaps even low returns may be acceptable to more investors.
A second point is related to the goal of catalyzing entire sectors through impact investing. Brest and Born observe, for example, that impact investors are often able to exploit information asymmetries—making investments that traditional investors would see as “too risky,” and thereby catalyzing new market activity. What they don’t capture is what we see as the highest goal of impact investing—the ability to catalyze new markets as a whole by taking these upfront risks. In our Stanford Social Innovation Review article, “Priming the Pump,” we divided social impact into firm-level (the direct outputs of a firm) and sector-level impact (the ability to prototype a generic business model that, if successful, can propel the development of an entirely new sector). The objective is to create a multiplier effect on impact, not just by crowding in later capital (what Brest would call investor impact) but by spurring the growth of more mature business models and a robust competitive market, which in turn creates impact for millions of customers. We would suggest that Brest and Born should consider sector-level impact in their article.
Finally, the authors start with the premise that it’s more obvious how concessionary investments can have impact. While it’s worthwhile to distinguish what impact investors do from the social good that commercial markets can have on their own, we shouldn’t take this logic too far. At Omidyar Network, our core belief is that investors can have impact at all points on the returns spectrum. This is especially true with early stage investing, in which one encounters a great deal of uncertainty about returns when making an investment. Some of our most socially impactful investments have also been ones that delivered the highest financial returns; conversely some of our investments that had the least social impact were the ones that were least profitable.
That the article provoked such interesting questions is an indication of the service the authors have done in writing it. This article is a solid contribution and we are grateful to Brest and Born for their leadership, carefulness, and courage in pushing the industry to debate these important issues.