Impact investing as a sector is still very, very young, according to Sean Foote, Managing Director of Labrador Ventures (a venture capital firm), syndicated lecturer on microfinance at the University of California Haas School of Business, and member of the Center for Financial Inclusion’s Faculty Council. I recently heard Foote make the following assessment of the sector, speaking, as he noted, with his venture capitalist’s hat on.
First challenge: Impact investing is not yet mobilizing much funding from the true private sector. By far the majority of the funds currently counted as impact investing are coming from development finance institutions and major foundations – very much like microfinance investing 15 years ago.
Second, and related challenge: Foote noted that the size of most funds is often too small for mainstream investors to be able to handle. While the average impact investing fund is perhaps near $40 million, and the median is smaller, the average venture capital fund is closer to $200 million. Not only are the sizes of impact funds not commensurate with the scale of the social challenges they target, at this scale the cost of fund management takes a relatively big bite out of returns to investors.
Third challenge: Impact investing does not yet have the kind of “ecosystem” needed to support companies as they move from initial idea testing through to scale-up. The venture capital world involves multiple funds that specialize in specific slices of the business growth process, from pre-commercial angel investors to later stage funds that can invest and then supply expansion capital. In addition to the money, such an ecosystem provides tailored mentorship to entrepreneurs, contributing to the rate of business success.
Fourth challenge: The “impact” side of impact investing means different things to different funds. Some funds position themselves closer to the social end of a spectrum, with an acknowledged lower financial return, while other funds position themselves toward the financial end. While it is entirely appropriate for funds to set their own social and financial objectives, for mainstream investors the effect is a confusing splintering of an already tiny sector into several nano-subsectors.
While these points may sound like criticisms of impact investing, they are Foote’s brand of tough love. There are investment-worthy businesses that offer social benefit and financial success, he believes, but if impact investing is ever going to scale up to serve those businesses and help them grow, it will have to overcome each of these four challenges.
Image credit: LONDON+acumen
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