Three Lessons on Impact Investing: Reflections from Batman and Robin

After our panel last week at the Social Capital Markets (SOCAP) conference in San Francisco, a colleague tweeted a photoshopped image of me and Antony Bugg-Levine, CEO of Nonprofit Finance Fund, as Batman and Robin, respectively. While the order should have been reversed (me Robin, he Batman) – as Antony literally coined the term "impact investing" in 2007 while working at the Rockefeller Foundation – either way it was a thrill to force multiply each other's message.

What was the message? Fundamentally, when targeting grossly underserved markets with private-sector approaches and investment strategies, it is important not to oversell or over-promise that lots of good and deep impact can occur without real risk or cost, and in some cases, even significant, well-targeted subsidy.

Take sub-Saharan Africa, where chronic underinvestment has left the agricultural sector decades behind that of other developing regions. In the African context, competitive agricultural businesses have huge potential for generating economic, social and environmental impact, but they face enormous challenges – not least, poor financial management and weak market connections. If those challenges are addressed, these enterprises can become engines of rural prosperity. But serving them often requires interventions that fall somewhere between efficient mainstream markets and an exclusive reliance on charity.

For that reason, Batman and I embrace the notion that “high risk, low return” might be the sweet spot of impact investing if we’re serious about unlocking the power of enterprise in broken markets. And we are not the only ones who believe this. SOCAP has become the largest gathering of impact investors and social entrepreneurs in the world, and this year’s event drew an inspiring group of more than 2,500 people. Throughout the four days, conversations ranged from big aspirational ideas to the nuts-and-bolts of implementing change. It is a one-of-a-kind experience from which I always leave energized and optimistic about the future.

I arrived at the conference directly from Kenya, where I visited Root Capital clients in the central highlands and colleagues in our Nairobi office. As I chatted with investors and innovators in San Francisco, I felt liberated by the ability to talk candidly about how tough it is to serve the high-potential businesses I’d visited the week before: a start-up agro-processor reviving an old mill that now produces nutrient-fortified maize flour to meet Kenya’s food security needs; three macadamia nut processors purchasing nuts from hundreds of small-scale farmers and selling to specialty buyers in North America; and a social enterprise supplying sorghum to East Africa's largest brewing company.

I thought about the thousands of other early-stage businesses that have outsized potential for impact but still lack access to the financing and support they need to grow. With more capital flowing into this sector than ever before, what will it take for impact investors to reach these enterprises and close the “pioneer gap”?

• We can’t achieve impact without taking risks. SOCAP attendees are modeling some of the most socially efficient and creative uses of capital. But they are also financing ventures that function in a world of profound and constant market failures. Many times, these organizations operate on the margins of formal economies, or are excluded from them entirely. For this reason, impact investors need to be careful not to over-hype and set false expectations. Rigorous due diligence, performance monitoring and external credit enhancements help mitigate risk and uncertainty. But ultimately, we must be more willing to embrace risk and forego risk-adjusted returns in place of impact.
• We can’t achieve impact without having room to iterate and learn from the risks that we take. In the 15 years I have spent building Root Capital, one of the most important lessons that I have learned is the importance of iterating. When deploying capital within uncertain and unproved markets, it is difficult to decode everything upfront. This is especially true for those of us working in agriculture, which is often subject to devastating crop diseases and increasingly erratic rainfall and temperature patterns. Impact investors need the room to take calculated risks, adapt to changing contexts and refine their approaches based on the results. And they need to constantly learn from their mistakes and those of others. In doing so, it is critical to be upfront and transparent with stakeholders, but be unapologetic. This is incredibly difficult work, and it’s unlikely that we will get it right on the first try.
• We can’t achieve impact without collaborating. Impact investing is a nascent sector that, by some accounts, is less than 10 years old. As the field continues to evolve, there are countless different structures, strategies and motivations for investing. Because of this, there are many – too many –uncoordinated and disparate efforts. When kicking off the conference, Kevin Jones, founder of SOCAP, compared today’s impact investing market to America’s early railroads, which facilitated access to new markets but operated with very little coordination and even less interoperability.

Thankfully, there is now unstoppable momentum around building this enabling infrastructure to achieve large-scale impact. Investors face the same sector-wide challenges, so it is pointless to continue the costly duplication of efforts. For example, finding consensus on standards, ratings, measurement and principles allows the entire sector to speak the same language and work together more effectively.

This is fundamental to the future of the field, but it is also expensive. Just like the railroad industry, this type of market building requires smart subsidies. Speaking at SOCAP, Judith Rodin president of The Rockefeller Foundation explained how the foundation has invested nearly $50 million over the last seven years to build the architecture and infrastructure for impact investing. Similarly, the U.S. Agency for International Development (USAID) announced last week a $6.3 million investment to accelerate early-stage entrepreneurial ventures. Alongside private capital, this type of government and philanthropic funding is essential to support the “public good” aspect of impact investing.

Or as Robin would say: Holy high-risk, low-return sweet spot!