So, a few weeks ago I wrote that impact investing needed its own investment banks. Someone I respect very much immediately emailed me with a string of rhetorical questions all enquiring after what he assumed was my recent head injury. What I had been trying to argue (and probably didn’t take enough time to edit) was that a set of services were needed to develop new impact investing opportunities and if I looked at those services and though about who could provide them, the closest analog I could find in traditional finance was investment banks (well, old timey investment banks anyway) What he read was an otherwise sane person advocating that the most destructive, toxic, avaricious part of late 20th century capitalism be transferred over to the still emerging field of impact investing.
I thought about it over Thanksgiving, and, Paul, you were right. I was wrong. Two months into blogging and I am already reversing myself.
I have been either investing or courting investments for almost 20 years now in a variety of transaction types and sectors and every successful new idea I have ever seen has been presented as an analog of an old idea. “You put it in your high yield allocation, but it’s financing Russian circus equipment!” “It’s like eBay, but for loans!” “It’s a socially responsible fund, but it performs just like an index fund!” “We’re an RIA, but for impact investing.” I’m sure part of this is due to good old fashioned risk-aversion. Part of it is because of the nature of asset allocation - no matter how good your idea is, if it doesn’t fit in one of your client’s existing buckets, they can’t invest. Part of it it is because investing is filled with pattern matchers, people who are giving you a very limited window to explain yourself and if you can’t link it back to something they already understand, they have no framework to make a quick decision to keep talking to you.
I like the analog as a sales strategy. I actively counsel people to use it. I even get annoyed with people who reject the analogies I use to try to understand them. Have you ever been in the meeting with the guy who is blathering on about paradigm shifts and new modalities, then something clicks and you say “Oh, I get it, you’re a blah blah blah, but for blah blah.” and he yells “No, it’s not that at all! It’s something completely new!!” Well, I’ve had a lot of meetings, and I hate that guy. (Side note: I have never had a woman entrepreneur yell at me that I am not getting it. They sigh and explain it again. They are usually right. I prefer women entrepreneurs.)
So, having had a few weeks to stew on Paul calling me dumb, I think I have realized my error. Analogs are a great way to sell something you have already built. They are a terrible tool to build something that doesn’t exist yet, let alone something that will participate in an ecosystem that isn’t fully formed. Take the investment bank example. I stand by my list of services that are needed, and I believe we need to build institutions that can provide a suite of some or all of these services. However, just by calling it an investment bank, we are including assumptions about how and how much it gets paid, who owns it, the nature of its relationship with funders and fundraisers, and the skill sets of people working there. And you are more or less committing to hiring assholes, burn-outs and asshole burn-outs. Oh, and because assholes are expensive you need $15 million to start it. That all comes, more or less, from choosing an investment bank as your analog.
Another analog: A while back I outlined the tough row of the impact investment focused advisor. You get people to hire you by saying “We’re just like your existing advisor, but we help you with your impact investments.” Good, you’re hired! But I expect to pay you in the same way I pay my other advisor. I expect the work will be done in a similar fashion and the opportunities you bring to me will look more or less like the rest of my portfolio but, you know, impact-y. Oh and they better all be investments, after all you’re not my philanthropy advisor.
Take another analog: the impact investing fund. You have identified a number of projects to support. You want to raise money to support them. You say “I’m a fund!” Ok, so you have now locked yourself into a 2/20 compensation scheme, which means bare minimum you need to raise $15 million (and maybe $50 million) to cover your expenses. You have to return capital in 7 to 10 years. You have to provide a return on that capital to investors according to whatever bucket they are putting you in (probably VC, good luck with that) Oh, and since you have never managed a venture capital fund, no one is going to invest in you. Good luck in your future endeavors. I personally think there is tremendous opportunity for impact if you create pools of capital that make smart, risky investments in genuinely impact-focused high growth companies and aim to return somewhere between 50 and 90% of principle. These pools could invest in a whole host of high risk, high impact businesses that can’t (or don’t want to) fit venture economics, but if they deprive themselves of the big exits that make venture firms work, there’s no way they’re returning principal . But we don’t have these pools at least in part because there is no equivalent in the traditional investment world and so we don’t have a short hand way of talking about them
Finally, what if impact investing is a false (or at least misleading) analog too? We’re investing money into projects to help them grow and do more good stuff. We’re trying to leverage our own funds with other sources (including traditional investors). We want to get some, all or more funds back so that we can do more good stuff and/or commit a larger portion of our funds to it than we could afford to with just philanthropy. That's a great way to have impact, but what if that isn’t really “investing” and we’ve been shooting ourselves in the foot calling it that? If that were the case, it would start explaining to me why impact investing has been poised for explosive growth without really seeing it for ten years. IT would start to explain why it’s so difficult to bring impact investment products to market that make philanthropists or investors happy, let alone both. It would explain why it is so hard to successfully integrate smart good hearted people from the investment world into impact investing. It would start to explain why, when something like microfinance goes into the investment mainstream, the impact side of it seems to go entirely off the rails. It would start to explain why whenever I tell an investment banker what I do for a living, they wrinkle their nose and say “That’s not really investing.”
What if impact investing isn’t investing at all, and that’s part of the problem? I don’t know. I don’t want to be that obnoxious guy yelling about paradigm shifts and new modalities telling people they don’t get it. But I’m starting to wonder.
Patrick Maloney lives in Portland, OR where he helps nice people working on cool stuff. He tries to limit his blogging to things about which he knows something.