The Downside of Hype

So, this is my third post of the week.  The deal with myself is that I’ll post on a regular basis for the rest of the year, even if I don’t have the time to refine the post down to a cogent point.  So,  . . . sorry.    I’m resolving to be funnier starting today, so let’s see how that goes.

Yesterday’s topic was Oregon, a topic I’ll return to .  Today, let’s talk impact investing.  I assume if you are reading this, you know what impact investing is, but just in case: http://en.wikipedia.org/wiki/Impact_investing.  I’ve been working in some capacity in impact investing since 2004.  First as an investor at Omidyar Network, then as a consultant to google.org, as an investor and grantmaker at Lemelson Foundation, as an advisor to foundations and families at Imprint Capital and finally focusing on Oregon here at Occam Advisors. 

Over the ten years I’ve been doing this, two things have remained constant.  Every year there is more interesting stuff happening than the last - more diversity of deals, higher dollar value, better defined impact – and over the whole time, the hype has stayed way, way ahead of reality.

Impact investing has been a hot topic in philanthropy (and increasingly in finance as well) for as long as I have been around, and people’s introduction to the field has stayed depressingly similar the whole time.  A person -  be they an entrepreneur, an non-profit executive, an investment professional, a foundation staffer or a wealthy individual – reads an amazing story in the New York Times about this amazing new field of Impact investing.  Maybe like this one? Armed with this glimpse into an exciting new field, our intrepid professional dives head first into this brave new world, ready to raise (or invest, or raise and then invest) big money.  Doing well AND doing good!!!  Isn’t this great?   There is big stuff happening!!! I mean, for heaven’s sake, 11% of the capital market is already investing this way!!!

Only it isn’t.

They go to their conference.  The speakers are inspirational!  The vegan lunch is served by an at-risk youth making a living wage!   They get a laptop bag made out of recycled waste!  There’s only one problem – despite all of these charismatic entrepreneurs, despite the regular announcements that this old foundation or this newly minted billionaire is getting into impact investing, our friend slowly realizes, very little is actually being invested.  Our panelist friends -  the entrepreneurs and budding impact fund managers -  are on the circuit for one, two, three years with very little to show for it.  If they do raise money, it’s often from “regular investors.”  Our foundation friends and the financial advisor to that billionaire secretly (or publicly) complain that they can’t find anything that meets their mandate, especially because impact investing is only part of their job.

There is almost no money changing hands.

Now, I am being slightly hyperbolic.  Of course some deals are getting done.  But in comparison to the hype, in comparison to the need, in comparison to what many people think the potential is for impact investing to fund a whole set of socially and environmentally beneficial initiatives, almost nothing is happening.  So what is happening?

That 11% number that people love quoting – it includes every negatively screened public equity fund on earth, most of which are pension funds whose only screening criteria is to stay away from tobacco stocks.  Most of that 11%, in fact, is comprised of these negatively screened funds.  Now, I am not the word police.  I know that screening public equity funds falls under some definitions of impact investing, and that’s fine.  But quoting a number that is overwhelmingly comprised of one type of investment that is not what most people think of when they think “impact investing?” It’s either naïve or intentionally misleading.

So what’s the harm, you may ask?  Why not spin that number as much as possible and get people excited, get them involved?   Well, 11% implies that impact investing is a mature market.  In a mature market, an investor with capital to invest can rightfully assume that there will be a full suite of investable options across asset class and sectors.  It implies that there is a diverse set of advisors to help you navigate all of these options.  If you are a fund manager or an entrepreneur, often someone who is taking a ton of career and financial risk to start a new venture, it implies that if you build something of value, there is 11% of the available capital pool ready to look at what you have built, more than enough to make a go of it.  And that isn’t what either group finds.

I think this let down has a real price.  It repels investors who are initially excited.  It especially damages the credibility of the board member or senior staffer who put their neck out in the first place to get their foundation or fund to look at the space.  And most importantly, they show up unprepared to do (or to pay for) the hard work that is still necessary to build a portfolio in most areas.  On the other side, entrepreneurs and impact fund managers waste months or even year chasing phantom “impact dollars” that are reported to exist in the billions but are only ever seen in the wild in the millions (or for an entrepreneur, often only in the thousands).  Finally, I think the triumphalism of 11% leads people to blow past the need for core infrastructure and middleware that does not exist yet.  Advisers, investment bankers, deal structurers, match makers, incubators, accelerators, standardized documents and structures – everything that people have a right to expect when they see that 11% number – they’re not all there yet.  And not enough people want to pay for them.

Let me end on a positive note.  Every year I have been in impact investing, including during the recession, we have grown.  There have been more investors, more capital, more interesting deals, and more diversity every single year.  But if we’re not honest about where we are, we’ll never build the stuff we need to get us where we want to go.