Impact Investing isn’t big yet. And we love that!
Funding is the cornerstone resource for impact organizations looking to address social and environmental problems. And this underscores the pivotal role impact investment plays in supporting these organizations to deliver sustainable change at scale.
However, the reality is that impact investment is still quite at a nascent stage. It is small with the flows nowhere near what we need in the social sector to bolster the scale of change that is required. It is also not as “impact” oriented as we would like for it to be and has been mirroring traditional investing patterns and models.
But rather than seeing this as a weakness, I see this as a unique opportunity!
An opportunity to evolve and shape the landscape as it grows.
Being in the early stage allows for adaptability and creativity which gives investors the power to make bold strides, redefine approaches and revolutionize the field of impact investment. Here are a few ways to think about what these approaches might look like:
Innovating new deal structures: Given impact investing means to invest in ‘impact’, impact should be built into deal structures. Currently, deal structuring largely follows commercial structures which focus on financial variables and where impact variables are not assessed using an investment lens but as an add-on. What is needed is a shift towards integrating impact into deal structures, incentivizing and rewarding investees for achieving impact milestones.
While some progress has been made in this direction, such as the emergence of impact-linked structures e.g. interest rate rebates, outcome linked payments, equity earn back etc these are still a fraction of the market. This presents a vast opportunity for investors to explore innovative ways to embed impact into deals, compensating investees for meeting impact targets. As investors increasingly integrate impact into their deals, it will likely become standard practice, with impact metrics holding equal importance alongside financial variables.
Adopting a catalytic approach: Investors should adopt strategies that enable them to be catalytic in their funding approach. In other words, they should think about how their funding can play a role in unlocking more capital into the impact ecosystem.
Investors have different risk appetites and that can effectively be used to leverage their capital into de-risking investment opportunities and attract follow-on funding. This is particularly crucial in the social sector, where funding gaps and investment barriers are common due to perceived risks associated with underserved sectors, market failures or the inherent complexities of solving large-scale social problems. Catalytic capital is therefore important as it helps mobilize additional funding to bridge these gaps, break down investment barriers and support traditionally underfunded sectors. It calls for a collaborative approach where investors understand the need to partner and collaborate in catalyzing capital and by extension creating impact, beyond what they could individually achieve.
Staying mission aligned: During the investment period, impact investors should prioritize delivery of the social mission and offer support that extends beyond funding to what the social enterprise needs for its growth and long term success. From offering guidance and strategic expertise to providing non-financial resources and facilitating connections , investors should look at the different roles they could play to enable mission delivery. As we see more successful social enterprises emerge in terms of size, scale and impact, the importance of sustained commitment from investors will become increasingly clear.
Ensuring responsible exits: Exit is an important yet often overlooked aspect of impact investing. It is important because a wrong exit can jeopardize a social enterprise’s mission and undo the impact achieved. Impact Investors should help in ensuring that exits align with the organization’s goals. Here are a few things to consider:
Timing: Impact investors must know when to exit. If the enterprise needs more help than they can give, it’s best to step back and let others who can help take over.
De-Risking: Impact investors should actively support the enterprise through the investment period such that they are de-risked and ready for a larger player.
Selecting: Investors should offer insights into the suitability of potential investors and open doors to mission aligned investors from their network.
It is an exciting time to be in the world of impact investing, where investors have the opportunity to shape the field into something that truly harnesses the power of capital for creating positive impact.
The goal is simple….
Do it well and do it right.
