Impact investors want you to know capitalism can be a force for goodDecember 21, 2015 Category: Featured, Funding
DisclosuresFull Disclosure: Garret Melby, who is mentioned in this story, is on the board of directors of the Generocity Community Alliance, the nonprofit which in October 2015 made a program-related investment to transfer the publishing of Generocity.org to Technically Media.
Let’s face it: Capitalism can be downright awful sometimes.
Capitalist economies can be prone to brief booms and blistering busts. They can give monopolies a leg up and foster gaping socioeconomic divides. As long as money is being made, who cares who’s suffering?
But that’s not the whole picture. Capitalism isn’t a monolithic system — there are mechanisms and tools under the capitalist umbrella that can be leveraged for social betterment. No longer is social impact a philanthropist’s game. Capitalists want in.
“What’s [capitalism] do really well? Well, it allocates resources really efficiently and it encourages a load of productivity,” said John Moore, principal at venture capital firm Investors’ Circle Philadelphia. Moore calls it “capitalism for purpose.”
“If you look at what your business generates in terms of profits and externalities, how do you fare? On a net basis, are you positive? Are you a tobacco company, but somebody else is paying for the medical costs?” Moore asked during a roundtable conversation about the topic last week. “If you can find companies that are net positive, that’s what we think is really motivating.”
By “we,” Moore is referring to impact investors, a small sect of venture capitalists investing in companies that are actively addressing social problems simply by doing business. They’re businesses like those that come out of GoodCompany Ventures, a social enterprise accelerator founded by investor Garrett Melby in 2009.
“If I need a plumber to come fix my pipes, I expect him not to make a mess of my house,” Melby said. “He doesn’t say, ‘Well, that’s not my job. I’m sorry I flooded your electrical circuits while I was working on your toilet, but that’s not my job.’ I think we should ask the financial system to create value and returns, but also not wreck our house.”
It’s not asking businesses to stop doing their jobs, Melby said. Rather, it’s asking them to do a little extra. But can investors actually make money by funding companies like that — especially when “impact investments” are so often considered concessionary?
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Kuhlman would know. According to Wharton Social Impact Initiative’s latest research, which analyzed exits from 53 funds, impact investments can provide returns ranging from 18 to 35 percent. Those are compelling numbers for competitive investors. But what about impact metrics? How can impact investors be sure the enterprises they’ve invested in are, you know, making a difference?
“Part of what we think about a lot is, what is that impact measurement going to look like from the investment angle?” Kuhlman asked. “When you put in things like risk and the ability to leverage up, the investor may want a very different notion of what counts as impact or what they need to know about impact and what stage than philanthropists might.”
An early example of using business strategies for social impact, Melby said, is Recyclebank. The company, which rewards consumers for maintaining good recycling habits, has “impressive” impact metrics, according to Melby.
“Risk and reward for money is not easy, obviously, but it’s straightforward. There are all these mechanisms to analyze it,” Moore said. Add impact, fiduciary obligations, ethics — it’s all hard to balance. “How do we design all the same things we have in our financial system to analyze all those other components?”
Take a look at metrics from some social enterprises in Investors’ Circle Philadelphia’s portfolio:
- DailyWorth, a financial media company for women, has reached over 1 million subscribers.
- Rezzcard, an electronic payment system for affordable housing tenants, has replaced nearly 155,000 money orders.
- United By Blue, a sustainable goods retailer, has removed over 252,000 pounds of trash from waterways.
These aren’t metrics capitalists would normally keep an eye on, because they’re hard to monetize.
“Part of this duality I want to get away from is the fact that monetization is the only part that matters, and the part I don’t have a way to monetize — a positive social externality — is valueless,” Melby said.
It could take some time before what has seemed like “just another trend” becomes “just the way things are,” and folks like Moore (the funder), Melby (the accelerator) and Kuhlman (the academic) continue to drive progress. Could capitalism as a force for good become business as usual?
As Moore put it: “This could be the coolest moment in capitalistic history.”