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The Stanford Social Innovation Review just ran a very interesting six-part series of very succinct blogs by Matt Bannick and Paula Goldman on Impact Investing.

The authors are from the Omidyar Network, one of the pioneers in social impact investing and their central concern is over “the gray space between grants and risk-adjusted return investment. They note that by insisting “on deals that … yield risk-adjusted commercial rates of return, [the sector] systematically under-invest[s] in creating the conditions under which innovations, and entire new sectors, could be sparked and scaled.” Furthermore they conclude that this insistence on risk-adjusted rates of return is driven by fears about distorting free-markets and the sector’s desire to be as rigorous as possible in the investment process.

The series is fascinating and corroborates so much of what I have found personally over the past five months learning about impact investing. To prepare myself for the role of investment manager for the impact fund HRSV, I basically had to start from scratch, understanding the sector, understand what an impact investment is, or should be, and what I should be doing as the fund’s manager. I have spoken to dozens of people in the US, Europe and Africa since May, impact fund managers, CEOs and social entrepreneurs. I met more interesting and generous people than I could have hoped for in the process, this in itself has been a huge privilege.

But what I also found was a sector that continues to evolve, which is no surprise, the term “impact investing” was coined only about five years ago. And while people were already pursuing impact investments before then, it was only labeled as such just then.

Bannick and Goldman describe the objective for most impact investors “as finding and investing in enterprises that yield strong financial returns and social returns.” Others have started referring to this as blended value. By its very nature, the ambiguity of this aspiration causes tension. It turns out it is difficult to live up to. My sense is that the sector desperately wants to prove to be and be accepted as profit-driven and uncompromising when it comes to financial returns. Many of the people behind the creation of the sector and those piling into it now are themselves successful entrepreneurs and having been successful and made fortunes in the private sector, they are strong believers in its ability to spur innovation and create value, including value of the social and public good-kind.

At the same time, there seems to be a sense that the sector has oversold its own promise of doing good by doing well. Successes of enterprises that do deliver a social good and make a handsome return have been touted and the financial success of for-profit lenders in the next-of-kin sector of microfinance may also have contributed to the perception that it is possible to make money while providing the poor a job, product or service.

I don’t disagree that a return is often possible, good ones even, while having social impact too, but with the caveat that not all problems were created equally and that profit could be expressed along a continuum.

From what I have seen and heard, many institutional impact investors are displaying risk-averse tendencies. I presume in many cases these are increasingly risk-averse tendencies, assuming that many started out as true trailblazers and risk takers. Now many are seeking a financial return they can justify to their investors, while covering their overhead and negating such issues like exchange-rate risk which are typically exacerbated in developing country investment settings. In practice this means higher IRR demands and larger average investments. The flipside of that equation is that smaller start-ups and early stage enterprises continue to struggle to find the necessary concessionary funding. Or as Bannick and Goldman put it, the companies in the gray space.

Laura Hattendorf of the Mulago Foundation put it more bluntly in an earlier blog on the Stanford Social Innovation Review: “…[t]here’s a critical question for the would-be impact investor: Are you a private equity investor in emerging markets? Or are you focused on solving an important social problem at the base of the pyramid?” The phrasing of the question leaves little guesswork about where Mulago stands on this issue. Hattendorf’s colleague Kevin Starr puts it like this: “In the real world of the poor, real change still means stepping up with money that you don’t expect to get back, while demanding maximum returns in the form of impact. When you find someone who can do that, just give them the money.”

I agree with the central tenet of Starr’s argument, that there is a trade-off between serving the poor and achieving social impact on the one hand, and achieving financial returns on the other. However, there is a sense that acknowledging this trade-off will risk the credibility of the impact investment sector, Bannick and Goldman write: “If impact investing becomes the domain of low financial and low scale expectations, many may question the fundamental impact investing premise that business generating social impact also can earn strong returns.”

This is a fascinating statement; it reveals an underlying fear about possibly being wrong about the sector’s premise. I have often felt that the philanthropy sector ends up selling its programs on the bases of arguments that are meant to please the donor, rather than making the genuine argument for the program on its merits as they see them. The last thing the impact investment sector wants, is to be considered part of philanthropy and its ways (at least not traditional philanthropy, well-intentioned but misguided do-gooders), which may be driving the sector to overemphasize its potential for financial returns and economic viability of its investments, purposely nurturing the image of a sector driven by hard-nosed business mindedness.

So maybe it is about returns. And in particular about readjusting expectations for financial returns when it comes to specific investments, in specific sectors, at specific stages of an enterprise’s development. If it contributes to solving a social problem at the bottom of the pyramid, maybe getting back 80% of an initial investment is good enough if it secures the long-term success of the next best social thing?

Now where does this leave me, am I writing my boss and ask for permission to accept an investment with a projected -20% IRR? Maybe not yet, let me make a few more traditional impact investments first, and then we’ll talk.