Impact Investing, a concept coined six years ago, has recently become quite hot, capturing significant mainstream attention and interest. At its core, impact investing seeks to harness the power of enterprise to address social and/or environmental issues.
By tapping the power of markets, impact investing can unlock new capital sources that complement existing philanthropic and government funds, and catalyse innovations to tackle complex global challenges. Intrigued by this idea, investors are increasingly ready and willing to support these efforts.
To learn more, we headed over to Omidyar Network (ON), brainchild of eBay founder Pierre Omidyar and his wife Pam, and one of the leaders in impact investing.
We spoke with Paula Goldman (Senior Director, Knowledge and Advocacy) and her team to find out about the field and ON’s approach.
1. What is Impact Investing?
To use the industry standard definition from Global Impact Investing Network (GIIN), Impact Investments are investments made into companies, organisations and funds with the intention to generate measurable social and environmental impact alongside a financial return.
They can be made in both emerging and developed markets and target a range of returns from below market, to market rate, depending on circumstances (we’ll explain more about this key concept below).
2. Why is Impact Investing hot now?
“There are a few reasons. First, we have left markets out of the social good equation for too long, but we see all the time that intentionally using investing can have a positive impact; far beyond just screening out negative impact.
“Second, the notion that the only way to do good is to give money away is out dated. People are searching for ways to use capitalism as a source for good given everything happening in global markets today.
“Third, there is early indication that some segments of the impact investing industry might be less correlated to the market, which appeals to investors who are looking to diversify risk.
“Finally, over half of global GDP growth comes from emerging markets, and investors are interested in taking advantage of that. Early stage risk capital is critical to help bring a lot of the most promising business innovations in these markets to scale, offering significant opportunity to achieve both financial returns and social impact.”
In an impact investing learning session for Giving Pledge members hosted by Omidyar Network earlier this year, the famous bond investor Michael Milken noted timing as another key factor, as the hurdle rate for impact investing is quite low.
“There is US$30 trillion yielding less than 1%, US Government securities have yielded at 1.9% for ten years. So there is a search for yield. If you can match the yield of a government and have a positive impact for society, then I don’t think there has ever been such an opportunity to attract large amounts of capital as there is today.”
3. How did Pierre Omidyar get into Impact Investing?
So how did entrepreneur Pierre Omidyar end up as one of the pioneers in Impact Investing? We were able to get a quick snapshot from the man himself in this video.
“At eBay we created a business model that enabled and empowered people to take control of their own lives and make their lives better through using technology to create an efficient market place that benefited many people.
“Now, eBay was a *for* profit company that wanted to make a profit, not to make the world better. However, as founders, the way we had always thought about the company was that we wanted to provide valuable products and services that helped other people and that seemed fundamentally, philanthropic.
“However, when we created our charitable foundation, Omidyar Family Foundation (OFF), we were not able to think about it that way. As a charitable foundation, whose mission is philanthropy, we were restricted to making grants only to non-profits – and that seemed a bit silly to me.
“So, I started to look at the scale and sustainability of the profit sector vs the non-profit and saw an opportunity and this led to the creation of Omidyar Network (ON) which innovated a new structure that allows us to make grants and /or investments.”
To further illustrate the benefit of leveraging private sector principles, a Harvard Business Review (HBR) case about ON notes, “The Bridgespan Group discovered that of more than 200,000 US non-profit companies since 1970, only 144 had grown to at least $50m in revenue, while ON estimated that in the same period, tens of thousands of business enterprises managed to do so. (source, Omidyar Network: Pioneering Impact Investment, page 2)
Again the shift from charity to investment is characterised by the following quote from the Harvard Business Review case, “many foundations continue to see their mission as addressing specific instance of market failure rather than sparking entire new markets for social change” (source, Omidyar Network: Pioneering Impact Investment, page 6).
4. How is the Omidyar Network (ON) different from the Omidyar Family Foundation (OFF)?
“As noted above, under the Omidyar Family Foundation, we could only issue grants to non-profits. In 2004, the organization was restructured into a new, hybrid entity with LLC and 501(c)3 components, allowing us maximum flexibility to do both grants and investments under the same roof.
“To be clear, half of what Omidyar Network (ON) does is issue grants – half is venture capital-style investment. We are capital-agnostic. We ask ourselves, “What is the right tool to fix a specific problem?” That could be an investment or a grant. We have the flexibility to choose the right tool to drive the greatest impact.
5. When do you offer grants and when do you offer investments?
“It first requires intensive consultation with the entrepreneurs that approach us—usually, they come with a very specific need in mind for the capital required.
“Our key question when looking to structure an investment is: ‘what is the path to scale?.’ Often times, this path will hinge on sustainability.
“On the non-profit side, we look at earned income potential as one key factor. On the for-profit side, it’s a bit more straightforward, but there have been some cases in which form has come into question (how companies choose to incorporate as legal entities).”
6. What is the dynamic between not for profit grants and for profit companies?
“At ON, we use non-profit grant making to support the creation of new markets. At the same time, we use for-profit investing to seed innovative business models in these new markets to help scale products and services to become widely available.
“We believe grants and investments work hand-in-hand when looking to develop sectors—a key part of ON’s philosophy (see Priming the Pump). Non-profit capital is often needed to support infrastructural changes critical to achieving sector-level impact, which in turn can help for-profit entrepreneurial ventures succeed. For example, ON will use grants to fund industry bodies that create market standards to foster enabling environments that allow for-profit business to grow.
7. Which other Billionaires are active Impact Investors and does their approach differ from Omidyar Network?
“We are noticing tremendous interest and activity from high net worth individuals in impact investing. Those looking to understand the field often ask us for insights and lessons learned on how to get started.
“In addition to Pierre, a few key Giving Pledge members that are publicly active impact investors with very different models include Vinod Khosla, Steve and Jean Case, and Jeff Skoll among others.” (see links below for additional information)
- Vinod Khosla: Khosla Ventures (http://www.khoslaventures.com/) and Khosla Impact (http://www.khoslaimpact.com/)
- Steve and Jean Case: Revolution (http://revolution.com/) and Case Foundation (http://casefoundation.org)
- Jeff Skoll: Skoll Foundation (http://www.skollfoundation.org/) and Capricorn Investment Group (http://www.crunchbase.com/financial-organization/capricorn-investment-group)
Outside of this group we would also note important leadership from people like Lisa and Charly Kleissner and Frank and Margaret Van Beuningen, who are developing networks of high net worth individuals pursuing impact investing.
8. What are the risks and challenges to Impact Investing?
“Right now, impact investing as a concept cuts across many asset classes and geographies. It’s important to the industry that we begin to segment the many types of products and risk/return equations so that investors can make informed decisions about what they’re investing in.
“Political risk is another consideration. We believe that market-based solutions can be a sustainable and scalable way to serve disadvantaged populations. However, this area is ripe for demagoguery- those who say that business cannot responsibly serve the poor. We are working on developing strong relationships with policymakers and establishing industry rules and best practices to ensure that disadvantaged customers receive the full array of consumer protections and that vigorous competitive markets are able to serve them with high quality, low cost products that help increase their access to much needed goods and services.
“Just as with traditional VC, there is a possibility that companies may fail, for all the reasons that companies fail.
“Lastly, the impact investing sector is experiencing a lot of hype and therefore, we need to ensure we are communicating a sensible range of risks and returns to avoid inflated claims and the risk of subsequent disappointment and disaffection.”
9. What are the most important lessons that you have learned from Impact investing?
We were excited to find that ON had actually memorialized several of their most important lessons in a recent publication, “Eight Years In: Lessons Learned in Impact Investing from Omidyar Network.” We’ve included a few of the highlights below:
Problem First, Structure Second: it’s important to first examine the problem you are trying to solve—and what kind of talent, legal and financial resources you need to get this done—before creating an organizational structure to execute on the vision.
Talent is Key: Our learnings on this front are two fold: first, we learned the value of seeking strong and experienced for-profit investment professionals. Our early impact investing efforts were executed occasionally by foundation staff accustomed to only making grants, making it challenging at times to execute on for-profit, venture-oriented deals. When we began to recruit investment professionals with deep backgrounds in venture capital and industry, we began seeing stronger results. Secondly, we learned the importance of building strong local teams with deep expertise in the markets they serve. While it is expensive and sometimes time-consuming to create a local presence in specific markets, it generates robust deal flow, builds local credibility, increases local coinvestment opportunities and ensures better due diligence.
A Flexible Toolkit Increases Impact: Being able to use a range of tools—from traditional for-profit investments to grants, and everything in between—benefits our ability to achieve impact in a number of ways. When considering individual deals, for example, it allows us the flexibility to think creatively about what kind of investment would best support the work of our investees. Our flexible toolkit also allows us to think creatively about advancing the overall market sectors in which we work.
10. In which scenarios would you accept an Impact Investment which offered a lower than market rate of return?
With impact investing, certain investors are willing to accept ‘below market rate’ returns in exchange for a social impact. So we asked ON how investors are prevented from simply investing in weak ideas and propositions?
“This is a subject about which we are very careful and thoughtful. In the majority of businesses in which we invest, we expect high returns. We are willing to consider exceptions in cases where the entrepreneur is serving a very poor client base with low disposable income and the business may need a little extra time or help to mature to the point where it can tap commercial capital. In those cases we are very careful to conduct diligence to ensure that we are not distorting the market with our investment and to measure the system wide effects of our investment. For example, does a business pioneering a new model of mobile payments for the poor start to generate competition or interest from mainstream investors? Is an ecosystem of services developing around it? We also of course conduct all the standard diligence on the entrepreneur and the business model itself.”
11. How does ON measure Impact Investing?
Omidyar Network takes a three-pronged approach to performance measurement:
1) Financial Performance: For for-profit companies, we focus on profitability indicators; for non-profit organizations our lens is geared towards sustainability.
2) Social Impact: For each investment, we, along with our investees, determine a tailored set of social impact metrics that they track towards.
3) Sector-Level Impact: In addition to organization-level metrics, we consider the overall sector-level impact of each investment.
12. Don’t all future successful companies need to be ‘mission driven’ in 2013?
“At the very least, we are starting to see that having a powerful mission can be a strategic advantage in at least one key aspect of business: attracting and retaining top talent. At ON, we definitely look for entrepreneurs that can demonstrate they are addressing a huge market with a huge need that can have the potential to create massive social impact. We have seen in our portfolio companies that mission is key, in particular, to attracting and retaining talent.
“Equally, impact investing courses at universities are way over subscribed and this shows that lots of people want to work for companies that are delivering a social good. So, a powerful mission for your business or project will help you attract and retain the best people.”
13. Where are the centres of Impact Investing? Silicon Valley? New York? London? Anywhere else?
“We actually discuss this exact topic in a Huffington Post article from earlier this year. Beyond the traditional U.S. and European centres, we’re quite excited by emerging markets taking a leading role in the industry’s growth as sources of growing wealth and investing talent—including South Asia and multiple countries in Latin America among others.”
14. Impact Investment seems to be more than just about the money. What else should entrepreneurs expect?
“In addition to financial capital, ON offers our entrepreneurs insight and access to expertise in areas such as strategy, management, operations, human resources, legal matters, marketing, and technology. We also open doors to a vast network of business and philanthropic contacts outside of our firm, encouraging the exchange of ideas, knowledge, and best practices, and connect organizations within our portfolio, helping them take advantage of synergies, build relationships, and share ideas.”
15. Do you call these entrepreneurs ‘Impact Entrepreneurs’?
“No – just entrepreneurs will do nicely! Some organisations talk about social entrepreneurs, impact entrepreneurs etc., we are less concerned with the naming conventions and consider them all entrepreneurs.”
16. What advice would you give to Impact Entrepreneurs looking to raise funds?
“Go after huge markets – this makes it scalable – and find an area where there is real demand – this makes a sustainable business. Marry your impact measurements to core business success – so that the social impacts occur when your business succeeds.”
ABOUT OMIDYAR NETWORK
Omidyar Network is a philanthropic investment firm dedicated to harnessing the power of markets to create opportunity for people to improve their lives.
Established in 2004 by eBay founder Pierre Omidyar and his wife Pam, the organization invests in and helps scale innovative organizations to catalyse economic and social change.
To date, Omidyar Network has committed more than $630 million to for-profit companies and non-profit organizations that foster economic advancement and encourage individual participation across multiple initiatives, including entrepreneurship, financial inclusion, property rights, government transparency, consumer Internet and mobile. To learn more, visit www.omidyar.com.
In addition to thanking Paula Goldman for her help in developing this article, I also want to thank Lauren Booker and Meher Iqbal for their support in this effort. Thanks :).