Over the last half decade in the trenches of impact investing, I have collected a few lessons learned: the opportunities, what’s going well, and what needs improvement. What I have learned is that marginal impact is better than not doing anything at all.
We can’t underestimate the cost of inaction given the size and immediacy of the world’s problems.
When people stop talking and “decide to do,” they often suffer from analysis paralysis. Many would-be impact investors are letting the drive for perfect be the enemy of good.
Progress towards impact is better than no impact at all, as long as all parties involved are honest with each other, always learning and sharing their findings. A better way forward depends on a lot of at-bats, and to extend the analogy, we need a functional system in place for people to swing more times.
We need funding mechanisms and support systems to allow a wide variety of learning to take place and be shared. Current fund structures prevent true iterative learning for both social enterprises as well as impact investors.
Many would-be impact investors are letting the drive for perfect be the enemy of good.
Yet we can’t underestimate the opportunity cost of inaction, given the size, speed, and immediacy of the world’s problems. The risk of no action is infinitely bigger than acting on only things that are cookie cutter, which impact investing is becoming defined by.
So what should we do? Here are four changes I’d like to see take place in impact investment:
1. Define the problem
Figure out what problem—specifically—each individual or organization is trying to solve. Spend lots of time exploring the problem.
2. Figure out the risk tolerance of the individual
If they aren’t somewhat risk-tolerant, they are in the wrong place.
3. Figure out the game plan for learning-by-doing
How can you test your hypotheses? How would you know if you are right? How would you know if you are wrong? How do you share what you learned?
4. Explore the use of risk capital for funding risk
Program-related investments are by definition risk capital for which only less than 1% of foundation assets are used (0.05 of which is put into equity). If you don’t know about program-related investments, you should.
Progress towards impact is better than no impact at all, as long as all parties are always sharing findings.
So, it seems we’re willing to take risks. But to what end? How can impact investing go mainstream?
Ross is the Executive Director of Village Capital and has worked with over 350 entrepreneurs in Village Capital cohorts using a pioneering peer investment model. Before launching Village Capital, he was at First Light Ventures and as an entrepreneur with four start-up ventures.