Impact Investing’ Teeters on Edge of Explosive Growth
By JONATHAN WEBER
Published: October 9, 2010
Jonathan Weber writes a column for The Bay Citizen
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Conferences can be a good indicator of the health of an industry, and by that measure the emerging sector of “social entrepreneurship” appears to be booming. The third annual SOCAP conference last week in San Francisco drew more than 1,300 people paying as much as $1,395 a ticket, and you could feel the energy among the amalgam of philanthropists, foundations, investors and idealistic entrepreneurs.
The idea that it’s possible to marry hard-nosed capitalism and bleeding-heart causes has been around awhile, with philanthropic institutions working hard to be more business-like even as many businesses pay more attention to the social and environmental impact of their operations.
But the notion that for-profit companies with a social mission at their core could constitute an “asset class” is fairly new. And though there are myriad challenges in making it real, there is genuine progress.
One piece of the puzzle is a handful of investment funds recently established to finance businesses that address social problems, especially in the developing world. Emboldened in part by the success of the micro-finance industry, which provides loans for small-scale businesses, new funds like Ignia Partners promise the magic combination of strong profits and social impact.
For Ignia, which invests in fields like affordable housing in Latin America, “profit is a great engine” if the objective is reaching a lot of people, said Álvaro Rodríguez Arregui, the managing partner. “We have pressing issues, and we need greater scale” than traditional charities can provide, he said.
Ignia, with more than $100 million under management, appears to be the only such fund to attract institutional investment so far.
Another important component of this new sector is mechanisms to determine what constitutes an “impact investment.” A trio of social entrepreneurs has created a certification system called B Corp. — think of LEED certification for green buildings — and last week started a parallel initiative aimed at investors. Just as Standard & Poor’s provides ratings on bonds, this effort, the Global Impact Investing Rating System, would provide social ratings for companies and funds.
“There is a huge community interested in doing business in a different kind of way,” said Andrew Kassoy, a B Lab founder. “But we can’t have a marketplace without some kind of standards.”
Paul Needham, a San Francisco-based entrepreneur with a background in the computer business, exemplifies the most important component of this: creative entrepreneurs with an idea that could make both money and a difference. His company, Simpa Networks, is working on a solar power system that could bring affordable electricity to remote homes and businesses.
Mr. Needham’s first financing was a $40,000 grant from a nonprofit. He then went looking for angel investors, finding one who believed in the dual purpose. “He has given to philanthropies in the past,” Mr. Needham said, “but he’s tired of giving away money and wants to do social good through investment.” A consultant, Miguel Granier of Invested Development, was brought in to help the investor, John Shine, evaluate both the social worth and business potential of Simpa.
Simpa is also counting on offshoots of the micro-finance industry to help poor people buy the systems — an indication of the many interconnections in the impact-investing world.
I know from experience that the biggest obstacle to all of this is the mindset of many investors. When I was raising angel capital for New West Publishing, the company I started in 2005, I pitched it to people who cared about the Rocky Mountain West and believed in both the mission of the business and the financial opportunity.
But many investors I approached wanted to know whether I was offering a business opportunity or soliciting a charitable contribution — requests they evaluated on different terms.
Kevin Jones, a serial entrepreneur who created the SOCAP conference, said such attitudes were evolving rapidly. “There is a changing investor mindset,” he said. “There is a true moral hunger for a new asset class.”
Mr. Jones cited a recent study showing that some $120 billion of investment capital — much of it from wealthy families — is looking for a socially productive, and profitable, home.
Still, it remains an open question how quickly that moral hunger will translate into signatures on checks. The Bay Area especially is full of both investors and entrepreneurs who want to make a difference, and make a profit, too. We’ll soon see whether meaningful numbers of people can really do both.
Jonathan Weber is the editor in chief of The Bay Citizen.