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Impact Investing: Criteria, Category or Feature?
Posted to: <Ned> Front Porch by Mark Grimes (222), Wed, 18 Apr 2012 06:49:58 PDT
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Early stage, pre-revenue investors evaluate deals through the four following criteria. Beyond these four primary criteria, how does impact investing fit in?
- Team: Is the team complete, competent, motivated and able to execute?
- Market Size: Is there a market size that offers opportunity within that meets to funds target investment criteria?
- Product/Service: Is the product/service defensible, have consumer/business demand, and ready to go?
- ROI: Will the angel/VC get a good ROI, and what's the time-frame?
Should impact investing be its own 5th criteria? Is it simply a category of investment, like health, retails, manufacturing, distribution, technology, mobile, etc? Or is it simply a feature, something that may be an addition to the investment opportunity?
Company stage: pre-revenue, early revenue, growth, mature. Those are the four financial stages.
Liquidity event: Acquisition or IPO (though royalty based investing has become a newer possibility the past couple years)
Most VC firms want a company that can grow to $100,000,000 in five years. A tall order, to be sure. Though (bubble or not) if a company can grow to millions of users in the same timeframe, there is still huge value there (Instagram, Twitter, Facebook, Zynga, etc)
Now an impact investment fund may be willing to take much longer for a liquidity event....but they still need that event to happen at some stage.
If a company grows and hires staff and pays them at a fair rate in an emerging market...is that a successful impact investment? Mobile phones, Twitter, YouTube and Facebook have all had very positive impact on social change movements in emerging markets, could they be considered impact investments in hindsight?
Impact investing, criteria, category or feature?
Thoughts?
By Jacen Greene (0), Wed, 18 Apr 2012 07:08:38 PDT
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I might reverse the question. If you see impact as a criteria, you're probably an impact investor. It can be part of any category. If you see it as a feature, you're probably more of an SRI person.
topBy Mark Grimes (222), Wed, 18 Apr 2012 07:24:55 PDT
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Per the diagram, I think financial first/impact second versus impact first/financial second is an important distinction. From a foundation/philanthropy POV they'd usually look at impact first, and from a VC POV they'd usually look at financial first.
If an angel/VC would not invest in the company, which could be okay, what I would want to know above all, is why not?
Is the reason to avoid deals that angels/VCs would do is fear of greed over good if a decision was to come down to that?
Angel/VC money (as smart money) would be welcome in a deal to help with mentorship, introductions, guidance, and an eventual liquidity event. Do the new Impact Investment funds have the same resources to draw upon?
By Jacen Greene (0), Wed, 18 Apr 2012 14:44:52 PDT
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I think the argument is that you can't prove impact without additionality. Most social value chains demonstrate Inputs > Activities > Outputs > Outcomes > Impact, where impact is what only happened because you were involved. Hard to prove that if every investor is trying to make the same deals (no additionality in Silicon Valley).
It seems like concerns around longer investment timeframes, lack of liquidity, and perceived risk around emerging markets/BoP customers are reasons angels/VCs aren't making more impact investments—and ways that impact investors can leverage their understanding of the field to make savvy deals traditional investors might miss. I haven't met many social entrepreneurs who would turn down an investment because of fears over "greed," unless there's a really serious difference in mindset.
By Jacen Greene (0), Wed, 18 Apr 2012 07:03:49 PDT
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I privilege Emerson and Bugg-Levine's definition. After all, these are the guys who coined the terms "blended value" and "impact investing."
"Impact investors intend to create positive impact alongside various levels of financial return, both managing and measuring the blended value they create."
So the positive social/environmental impact has to be intentional, managed, and measurable—which would exclude most social media. They also believe that additionality (investing in organizations that wouldn't receive money from traditional angels/VCs) is an essential component of impact investing.
See http://impactentrepreneurs.wordp ress.com/2012/04/16/an-introduct ion-to-impact-investing/ for a diagram of the investment spectrum and more around definitions.