Good Generation

Key Ideas in this Post:

• Impact investing is the latest hot topic in the do-good community around the world. At its core, the idea of actually “investing” in social-purpose organizations and achieve both “social and environmental” and “financial” returns for money, as an alternative and complement to philanthropy, gets people excited. Whether you think it’s just repackaging of old ideas or a legitimate paradigm shift, this “field” has undeniably gotten significant attention in the last five years.

• In Part 1 and Part 2 of this 5-part series, I proposed a 6-step mental checklist that may help you navigate your career in this field, and I started with elaborating on the first two items dealing with identifying opportunities and becoming more aware of your actual role on the job.

• In Part 3, I discussed the importance of  understanding what type of people and personalities manage impact investment funds to determine compatibility with your own style, but also to give you a sense how the negotiation may be influenced by their background.

• In this Part 4, I will suggest the importance of sensing whether or not your impact investors know what types of organizations they want to invest in. This will tell you something about your potential work environment and the long term viability of the fund you are considering joining.

*Disclaimer: for this post series, I will apply the term “impact investing” to a broader area of popular interpretations, which frequently is further confused by different terminology. Thus, I will deliberately include everything from socially responsible investing (SRI), environmental/social/governance investing (ESG), venture/engaged philanthropy, profit-for-purpose investing, to patient capital investing. Confused yet? Great, because cutting through that terminology mess is very much a part of the process as you’re looking for jobs!

Here’s my mental checklist to identify that job opportunity and how to think about it once you’ve been shortlisted for an interview. I will elaborate in this post about the fourth item.

Impact Investing Career Checklist

1. Identify the opportunities (Part 1)
2. Assess your potential role (Part 2)
3. Understand who runs the show (Part 3)
4. Define target organizations they fund (Part 4)
5. Know their return expectations (Part 5)
6. Know yourself (Part 5)

4) Define target organizations they fund

• Once you determined what companies to approach and got a sense of who it is you are dealing with, the next step is to test if they really know what they are talking about with respect to the most important thing: who do they want to invest in, and who do they not want to invest in? Similar to the approach in Part 3, I will assume the perspective of impact investment funds to be able to speak more specifically.

• No matter how many articles the founders may have written for the Stanford Social Innovation Review, no matter how many interviews they’ve given, and no matter how many accolades they have enjoyed in the past, I will bet you a bundle of burritos that many impact investors are still not entirely clear of who they want to invest in. Let me explain. Even if their website goes on about them supporting “socially driven” organizations, or “organizations that take social and environmental impact into strong account”, or “profitable companies with purpose”, the truth is that every single impact investment organization has a different definition for what that elusive “social” organization is that they want to fund. Will they fund social enterprises that are mostly commercial firms with a percentage of profits going to charity or some in-kind donation being made (e.g., Better World Books)? Do they target firms that are completely commercial, but happen to be located in developing countries and thus stimulate the local economy (e.g., Endeavor’s model or fair-trade companies)? Do they target more strictly defined social enterprises that are designed to produce a positive social/environmental outcome and happen to be for-profit to be more sustainable and scalable (e.g., Husk Power Systems)?

• As you can see, we are talking here about yet another continuum or spectrum with “pure commercial”  and “pure social” purpose entities on either ends, and I would argue that cutting this spectrum up into categories is challenging because (1) categories are not standardized at all and (2) may defy being placed in mutually exclusive buckets, i.e., since some firms could fit more than one category. Again, I am not talking about impact investors’ ability to decide if they prefer or are agnostic to incorporation status, i.e., nonprofits vs. for-profit, or financing type (grants, equity, loans, etc.) or issue area (poverty reduction, health, education, etc.). What I am talking about is that many impact investors, in their attempt to screen and evaluate potential deals, are not necessarily internally consistent in applying their own criteria according to this continuum of their target firms.

• In a sense, it boils down to a problem of ambiguous, still evolving terminology and definitions. This confusion can either exist between managers and their investment associates (like you), but more likely, between managers and donors/funders and people on the investment committee. You may be spending days/weeks/months evaluating deals and writing investment memos just to get the deal turned down by management, who later reveal it wasn’t in line with donors/funders’ expectations. Maybe you thought what you picked was indeed a “social enterprise.” But then it turns out their definition of social enterprise was for more financially profitable firms. Or maybe the company you picked is too alike a “traditional company” and management cannot see how it will benefit the poor or whatever the target beneficiary should be.

• For example, if you find a company that sells widgets to mothers from underprivileged households, how poor do these mothers have to be to be considered poor or underprivileged? What if the customer base is mixed between “underprivileged” and “less underprivileged”? Does your impact investor care more about the “motivation” of doing good or that, irrespective of intentions, the “consequences” end up ultimately “good”? For instance, renewable energy providers could either exist because their main motivation is to reduce the world’s dependence on oil (“good motivation”), or because they think it’s a great business opportunity because the government is subsidizing it (“commercial motivation with presumably good outcome”). Would your impact investment fund manager prefer the former to the latter or be indifferent? Do their funders agree with this?

• Hence, an important clue to an impact investors’ viability (and your employment’s longevity) is how narrow or broad their definition of target investments is. It is not enough to simply specify a target size range for making investments, or incorporation types. What matters is an understanding (which you may not even know by the time you finish interviewing) of how much agreement there is between donors/funders and managers about who should receive the money. What matters is managers’ ability to communicate this with you and the extent to which they can demonstrate an understanding of the nuances in defining these boundaries. Be wary of people who appear extremely confident and have it apparently all figured out. As this is an emerging field, I would consider those investment managers as wise who have thought hard about their definitions and targets, but who also have the humility to admit that they are working on and changing their views with experience. When these modesty traits are absent, you should be very suspicious of what you are getting yourself into. Besides indicating potential character shortcomings, the more critical problem of this is that the manager may be too cocksure and rigid about importing his or her convictions from her former background (soft-social or hard-nosed, as mentioned in Part 3) in an area where we all will have a lot to learn going forward as far as the need of calibrating operating models is concerned. As an exercise, go ahead and visit the websites of your favorite impact investors and read the “About” sections on who they invest in. Then be honest and think about what their words convey to you about their understanding of what they want.

• In other words, try to be sensitive to language and how much (potentially false) confidence it contains. Look for how much depth investors go into when they describe their definitions (if they have them). Beyond language, and as a personal bias, I am generally worried when impact investors’ websites look and read as if they had copied and pasted the text from a conventional venture capital or private equity firm and sprinkled the words “social”, “purpose” and “environmental” within the paragraphs. This gives the false impression that they have done this investing in social businesses for a million years already (like they really have with technology companies, food companies, and paper mill manufacturers). Honestly, I believe that nobody can or should put claim to this. Not yet. Not today. Do not be fooled either by slick-looking diagrams and flow charts that talk about the unique, proprietary, scientific methodology used to select targets. Even Acumen Fund with its publicized claim as a pioneer in impact investing has but 10 years under its belt and deployed no more than around $76 million over that entire time. But back to those copy-paste websites (which Acumen Fund is not one of, to be fair), those other firms even sometimes use the same stock photos that VC/PE firms use featuring the mandatory (1) hands holding a globe (cringe), (2) green saplings and trees, (3) weirdly unrelated landscapes like the Grand Canyon, and, in particularly uncreative cases (4) images of cable cars and the skyline of San Francisco! Gaudy “business” aesthetics aside, and this is just a subtle point,  I do not believe it is that simple to do a “plug and play” from traditional to impact investing in form and function, and the website design alone can give a first indication about its creators’ attitudes as to their firms’ value proposition.

• In summary, if the target organization definition is not clearly articulated, you may spend a lot of time screening deals that get turned down, usually for inconsistent reasons. If the definition is too narrow, you main run out of pipeline and do no more than 1-2 deals a year. If the definition is too broad, your fund risks allocating money in areas where you have no particular value-add or control over the investment. For example, if you decide to fund larger commercial projects that will have positive social and environmental benefits, like housing or renewable energy, your fund may not have enough money to own a significant share of equity to have any say on the direction and management of your investees. Then the time may be better spent putting money into smaller organizations that would really benefit both from your capital and human resource expertise. I am not arguing that these problems cannot be overcome. I am just trying to make you aware that depending on how patient a person you are, you may want to watch out for the conditions that could frustrate you more than you would have expected.

• Next, in the final part 5 of this series, I will conclude this mental career checklist for impact investing by talking about the importance of understanding what impact investors’ return expectations and determining how realistic that may be. Lastly, I will suggest that you need to know yourself (and in what way) to make the best informed decision for impact investment.