‘Investment’ in Impact. A Reality or Myth?

Often when I speak with social entrepreneurs about impact investment, their response is “there are barely any impact funds that are truly impact in nature.”

I know this is a one-sided view but there is an element of truth to it.

There is no dearth of examples of impact funds that end up investing in commercial ventures that don’t have a hint of ‘social’ in them or those that invest in social enterprises but once in, end up pushing them to think and act more commercially, sometimes even forcing their hand at it if they have the power.

So I completely empathize with and understand the struggles of social entrepreneurs who try to raise genuine ‘impact first’ focused capital.

But it would also be wrong to say that the universe of impact investment comprises only such funds that are sitting under the guise of being impact-focused.

There are funds that stay true to their ‘impact first’ ideology and ensure all investments are focused on creating social impact first and profit next.

But there is also a third kind. Those who want to stay true to their impact investing principles but are unable to do so.

I was recently speaking with someone who mentioned that an existing investor was not joining their new funding round because the latest fund that they had raised was at a higher cost. This meant that unlike earlier, their investments going forward would have to be more focused on profit generation as opposed to impact generation, given their higher cost of capital.

Which raises the question, are impact funds knocking on the wrong doors to raise capital? Or is it that there is extremely limited 'impact first' capital available? And the lack of that forces them to knock on the doors of those whose investment principles may not always be aligned with theirs.

There is a lot of buzz around how the new inheritors and generators of wealth are looking to give back differently, focusing more on investing in social enterprises rather than traditional philanthropy.

But is action following intention?

Are they, who seem increasingly interested to invest for impact, able to break the mental barrier that investment in the social sector is less about a 'financial return' and more about generating a 'social return' on investment? Do they understand the potential and leveraging power of capital as a force for creating good?

So where are the breakdowns really happening in the flow of investment capital to social enterprises?

Is it at the level of the impact funds? Or is it at the level of where they raise their capital from? Or is it that there aren’t enough deals that are ready and rightly positioned for raising impact investment? Or is it that there is a knowledge and expectation gap between capital providers, allocators, and deployers?

Maybe it’s all of this. Maybe it’s more!

But there are breakdowns for sure. And they need to be fixed.