Philosophies of impact investing

 

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Not all impact investors are equally impactful. Most individuals who become angel investors only do so after other family needs, such as college education for their children and their retirement, are addressed. As a result, many become impact investors either late in life or after receipt of some significant financial windfall. Angel investors with a focus on impact may have different motivations at that stage of their investing life. Let’s consider some alternative scenarios.

Investor A focuses on the profit to be made at the “bottom of the pyramid.” He or she sees tens of millions of poor people in India, Pakistan, Indonesia, Nigeria, Pakistan – or specific high margin opportunities in less populated countries including developed markets. The investor simply calculates that the potential profit can return a healthy profit. Let’s describe that type as the “profit maximizer” although, in fact, they may not even describe themselves as impact investors.

Investor B is comfortable with the notion of equity investing in privately held, early stage companies. With the benefit of prior experience, the investor realizes that he or she could invest in the large pool of companies that are likely to generate a financial return commensurate with risk. Alternatively, he or she could choose to invest only in those that have those same risk and reward profiles but also have some sort of social or environmental benefit. Because of their preference for both financial return and impact, let’s call Investor B the “double bottom line” investor.

Investor C is different. He or she realizes that, until beginning to invest for impact, 100% of their investment portfolio was focused on profitability and determined primarily based upon return and risk. Investor C decides that for some small portion of his or her portfolio, the focus will be on social impact first and financial considerations of return and risk will be secondary. That is, for the impact portion of the portfolio only, social or environmental impact will be the primary criterion to be satisfied before the normal evaluation of return and risk. While we often describe impact investors as “double bottom line” or “triple bottom line,” that may not fit in this case. The result is likely to be strong social and/or environmental impact but perhaps less financial return or greater risk in this portion of the portfolio. Investor C’s priority is “impact first.”

Another view of impact investing is held by Investor D. He or she is driven by a mission to improve or remedy a specific issue such as climate change, employment in Africa, health care in India, or recycling of plastic waste, among others. The impact portion of the investment portfolio is focused on that industry segment. Because the number of deals in that sphere will be less, the investment choices may be limited. Over a period of time, the investor is likely to develop considerable expertise in the industry segment of choice, increase their portfolio weighting in that area considerably, and perhaps invest in a number of socially meritorious but financially dubious or risky ventures. If taken a few steps further away from the normal reward and risk profile, this investor could become a philanthropist, at least in some deals. Let’s call Investor D “mission-driven.”

These are, of course, stereotypes or exaggerations of common impact investor profiles. No reliable data on the number and characteristics of impact investors exists. Our guess is that “profit maximizing” and “double bottom line” investors are far more numerous than “impact first” or “mission-driven investors.”

Many impact investors may combine elements of one or more of our profiles. A mission-driven investor with a focus on renewable energy may discover an opportunity that may be peripheral to the mission but may have a larger market and a higher financial upside or a more certain outcome. The investor may consider that adding this investment to their mission-driven portfolio because it will provide some balance or diversification. The profit maximizer might be a co-investor in the same transaction.

The difficulty for social entrepreneurs is that they don’t know who is in the audience to whom they are pitching their product or service. That knowledge would affect how they position their product and company. That difficulty may be mitigated by the fact that most impact investors probably don’t view themselves to be one type or another. They often consider themselves to be impact investors more broadly and will invest opportunistically in those deals in which they have some personal comfort, perhaps because of prior experience, and which meet their standards.

Are there other investor types who should be included within the community of angel investors who focus on impact? Let us know in the comments sections.

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