Stephen Muers brings up an interesting discussion of intentionality in his great SSIR piece, Talking About Ethics in Impact Investing. While he covers a few different topics in his article, this particular bit gave me pause:
“Some of our impact investments are in small start-up enterprises, with highly motivated entrepreneurs. We are conscious that demanding detailed outcome measurement not only risks creating bureaucracy that distracts these enterprises from their mission, but also sends an (unintended) signal that we don’t trust their intentions.”
For traditional investors, intention means very little. A portfolio company’s intention to scale won’t actually generate any returns to investors. It is only the act of scaling that will achieve the desired results. For serious impact investors, it feels to me like intention to create impact should be equally meaningless. It’s the measurable social returns that ought to matter.
But we shouldn’t divert resources away from the missions of our portfolio companies!
This is something we hear a lot in the impact investing space, and for good reason. Companies at all levels are resource constrained, both in cash and human capital, and adding a layer needless reporting bureaucracy doesn’t do anyone any good. However, impact investors aren’t the first to encounter this dilemma.
In the traditional private equity world, there is always a clear tension between an investor’s needs and the resources of a portfolio company. If you’re a private equity fund sponsor, seeing detailed budgeting models and granular reporting data makes your heart swoon; but if you are the CFO of a PE-backed company, you feel heartburn. This is part of the push and pull of taking on investment.
On one hand, additional reporting requirements are an added burden for the company. On the other, these reporting requirements come with the territory of receiving investment, and reporting is often the only way a sponsor can measure and maximize value creation. An investor needs to see data if she wants to identify and support opportunities for the company’s growth and measure progress toward her investment thesis.
But measuring social returns isn’t the same as measuring financial returns!
This is also a totally reasonable difference to point out between traditional investing and impact investing. Of course measuring and reporting impact is a completely different beast than measuring cash flows, but — to borrow from Sasha Dichter at Acumen Fund — it’s the act of measuring that is important.
Not all companies will generate the same type or amount of impact data (e.g., a seed-stage startup would certainly not produce the same amount of data that a multinational company would be generating), and that is ok too. If implemented correctly, impact reporting at all levels can be part of a winning formula to help social enterprises improve their value proposition, service delivery, and impact to their end customers.
But today, many impact investors try to provide logical explanations for why they aren’t reporting anything beyond the usual Net IRR and MOIC. I think the tough question we have to ask ourselves is obvious: if we’re not measuring and reporting impact, what are we actually returning to our investors other than financial returns?
Let’s return to the real goal of impact investing — to leverage mainstream capital markets to achieve philanthropic objectives. Good intentions and investor speculation about impact creation might be enough to entertain a niche investor base, but they are simply not enough to sustain the field’s long run growth toward embeddedness in mainstream capital markets. Like any other investment opportunity or asset class, speculation about value — impact or financial — will only lead to disappointment in the long term.
I’d love to hear other views on this. I’m certainly not beholden to these ideas, and am constantly learning from other perspectives! Say hi on Twitter if you want to chat about it.