A Question of Scale

Boston. Late March. Harvard’s oarsmen ply The Charles. Confluence Philanthropy’s annual practitioners meeting churns.

Five years ago, I attended the first such meeting. 30 people showed. This year, 180 people attend, and more than double that are turned away.

I had been asked to define and moderate the closing plenary, which is always an honor… and sometimes a risk. To recognize the former, I accepted. Enthusiastically. And to mitigate the latter, I asked for panelist veto authority. My lineup:

Debra Schwartz

Tracy Palanjian

Leslie Christian

Audrey Choi (who was ably replaced at the last moment by her colleague Hilary Irby).

Four experienced financial professionals harnessing four divergent orientations, ring-fenced to debate one question: “Impact at Scale; what do we gain and what do we lose as impact investing goes mainstream?”

My panel ran for 90 minutes without a single person leaving the standing-only room, so I’m going to say it was damn interesting. Maybe even important. But I know that I shall fail to capture the timbre of the discussion, so let me say that none of us broke into Kumbaya around the dais. In fact, there was no real consensus on what “scale” is, much less on whether we should embrace it or run screaming down the street.

Which was precisely what I had hoped. Why? Because anyone who promises to have The Answers, is either a salesman or a charlatan… or both. We are all in full-throated thesis validation and experimentation mode. To claim otherwise is delusional. And to have emerged with directional approval on scale would have stunned me.

Intriguing points were made, however, that I’ll do my best to convey:

  • Even proven, attractive investments face funding gaps. Tracy flagged the massive gap confronting even proven, highly effective social service providers. Social Impact Bonds (aka Pay For Success Contracts) have the potential to deliver scaled capital for these resource-starved non-profits. Similarly, emerging market trade finance suffers from an estimated $800bb global funding gap… that will surely grow with the Ex-Im Bank under political attack.
  • Ownership structure seems indicative. For example, the recently-launched, driver-owned ride-sharing service Juno could be an appealing alternative to the business-disruption-and-wealth-concentration mechanism otherwise known as Uber. Potentially scalable to virtually every city in the world, Juno could create distributed wealth for the people who actually make the company possible in the first place: the drivers.
  • As small, innovative companies grow, their scale can disrupt, influence or even create entire industries. Whole Foods has almost single-handedly created a viable local food supply chain that has positively impacted the lives of millions of small farmers and entrepreneurs. Organic Valley’s success forced dairies around the country to supply organic milk. Seventh Generation created not only a business but a consumer products category around non-toxic cleaning supplies. All demonstrate demand-response at a global scale.
  • Tools and systems that support scale – securitization, commodification, operating efficiencies, etc. – have the potential to be either destructive or constructive, with motive and regulation being the defining forces in that outcome. The obverse, for example, of social engineering through increased home ownership is the potential for mortgage fraud.
  • Thematic orientation matters. Investments such as renewable energy project finance or affordable housing lend themselves to scale: the bigger they get, the more good stuff happens. Investments such as community development banking or sustainable agriculture, might not: the push for scale can distort (or eliminate) the impact rational for the investment. Round pegs need round holes…
  • … and capital type and timing matter. Debra repeatedly returned to the role that MacArthur’s risk-tolerant capital plays in launching innovative social enterprises, and circled the idea that over-capitalizing a great company can be just as corrosive as under-capitalization.
  • Leslie gently reminded us all of the social value that can be created or destroyed through the application of capital. We must remember, as we push for “bigger”, that at the foundation of every financial transaction are two humans, trusting each other. This tension between human-scale interaction and institutional-scale transaction is not easily resolved.

Scale is thus both a challenge and an opportunity. The journey is fraught. And the potential is high that the “good intentions” pavers won’t prevent the large financial institutions from jacking the momentum, greenwashing whatever vehicles they already have, and accelerating along their current course. The opportunity spins the audacity dial, at stake: nothing less than the evolution of the capital markets.