Eschewing “Complicated” Impact Investment Capital

With over $8 billion in capital rushing into emerging markets and allocated toward “socially responsible investments” (JP Morgan 2013), entrepreneurs have more of a choice than ever before when seeking funding.

As a component of my advisory for an impact investment fund, I conducted interviews with over 70 entrepreneurs (social and traditional), non-profits, and incubators/accelerators in East Africa.  I was surprised to hear that a number of entrepreneurs had a negative perception of the impact investment sector.

As opposed to traditional angel investors or venture capital funds, impact investment funds were seen to be either vague or inconsistent with their financial and impact expectations.  As impact investors refined their fund’s vision and theory of change, they imposed new standards or goals on their portfolio.  Worse yet, in an effort to adapt “industry standards,’ investors pushed time-consuming log frames or impact measurement and reporting frameworks on management.  While ceding that impact measurement was important, entrepreneurs often felt that the indicators were driven more by investors than by any real need/feedback on the ground.

One entrepreneur in Kenya noted: “I received a small investment from an impact fund – less than $30,000 – but had formal and informal reporting requirements that were more intensive than with larger traditional investors I have had to deal with in the past… My new venture is definitely socially-motivated and will make a huge impact, but I am looking for an angel investor or VC.  The expectations are easier to align and not as likely to shift around.”

When asked about indicators, another added: “The issue here is not female workforce participation – in fact, our issue in this context is male unemployment.  Why should we measure and report on an indicator that is not within our theory of change?”

Impact investing is still an emerging asset class.  However, if it is to succeed, it needs to strike a balance between adopting cumbersome, investor-centric measurement standards and giving management the space to build their business.  If we simply replicate the (absurdly expensive) M&E approach of the international aid world, entrepreneurs will look elsewhere to finance their growth.

Investors are certainly not the only ones at fault.  The core issue seems to be that in the excitement to develop a deal, both entrepreneurs and investors only have topical discussions about impact.  These discussions are a footnote in due diligence, as if to confirm that the business indeed does something “good.”  If the business model passes muster, then the deal is signed.

Most entrepreneurs I have talked with have a basic theory of change and a sense they are having a positive impact.  Without concrete language, objectives and a vision, though, it stands to reason that expectations will be misaligned from day one.

Far from eschewing all impact measurement, forward-thinking entrepreneurs should invest time (ideally in a participatory manner with their stakeholders) to articulate their mission/vision and identify key impact drivers that they feel are of the utmost importance to their venture.  During the courting phase with investors, leadership can take the initiative to drive all discussions related to impact, including the more pedantic ones related to reporting.  A business might go as far as to encapsulate their theory of change and impact-related activities/systems in the joint venture agreement (JVA) and/or articles of association (AoA).  The JVA and AoA are the two key documents that allow you to clearly hash out expectations, as well as define board, shareholder and management roles around mission, vision, and reporting.

As my old boss used to reiterate: “We operate under freedom within a framework.”  Entrepreneurs should be diligent and bring their framework to the investor as a starting point for discussions around social mission and impact measurement.

~ by responsiblenomad on June 24, 2013.

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