Articles / 09.05.2012
Recognizing that I promised a multi-part blog on the possibility of pursuing impact in the public markets, I’m going to self-tangent today. Advance apologies to anyone who was breathlessly awaiting the next installment of the public markets discussion. Patience, grasshopper.
I read a recent interview in the Wall Street Journal with Gil Crawford, CEO of Bethesda, MD-based Microvest which sparked an afternoon’s meditation on the nature of profitability as it relates to impact. (full disclosure: Gill is a good friend, a passionate impact investor and a guy who stewards a fair amount of our client’s capital through the funds that Microvest manages. If you ever meet him, ask him about his time doling out Red Cross emergency food on the Chad/Darfur border. The resulting tale will provide a window into why Gil is so passionate about building on-ramps to opportunity for the world’s poor.)
A few choice quotes from the interview:
“I’ve seen many, many well-intentioned impact groups that have not been willing to accept the fact that to be sustainable, they need to be profitable.”
“… as with any good investment, choosing the right type of organization to invest in is crucial. The way to do that is to know the tell-tale signs that an organization is tending to both financial and social impact. The first things to look for are cash flow, collateral, and character.”
“It’s the difference between intent and impact.”
What I take away from this interview is not that well-intended entrepreneurs and fund managers should abandon their social mission in pursuit of profits when they open their doors to investors. Rather, that impact investors need to be hard-headed just as much as they are soft-hearted, and that entrepreneurs must focus on institutional sustainability to increase the probability of a successful outcome. And this outcome is just as much about respecting capital as it is about pursuing mission. We must remind ourselves, particularly in the midst of extremely compelling pitches, that we are investors, not philanthropists (some of us may be both, but to those special few I tip my hat). After all – as we have long argued – if a company is not profitable it is not sustainable. And if it is not sustainable, it cannot have long-term impact. And if it cannot have long-term impact… why are we labeling it an “impact investment”?
Readers of this blog will know that we group the universe of impact investors into three categories:
- Impact First: focus on creating environmental or social value, and intend to generate financial return.
- Investment First: focus on generating financial return, and intend to create social or environmental value.
- Catalyst First: embrace pioneer risk in the pursuit of financial return, and intend to build the impact ecosystem, primarily through seed investments in impact platforms.
I point this out to highlight that different lenses drive different analytics. An Impact First investor may have a minimum threshold for return. RSF’s Social Investment Fund, for example, yields about as much as a short-term government bond fund (with quite different risk characteristics!), but offers below-market rate loans to non-profits, social enterprises and farmers. Huge impact, with an enviable default and loan loss recovery record. At the other end, Investment First investors might be forgiven for salivating at the IRR’s offered by TriLinc Global: TriLinc is a conventional financial services firm which plans to offer the world’s first impact funds targeting retail investors. There is significant risk in the enterprise, of course, but if the company is successful, investors will be rewarded.
The question in both cases is not “does the company plan to be profitable?”. Profitability is the presumption. Rather, the question is “how profitable will the company be, and how do they plan to share the profits?” Seen through this lens, profitability and the treatment thereof can help us define where on the Impact continuum each company sits, and how each investor defines their own role in the Impact ecosystem.
Thanks for reading,