The majority of VC firms still focus on finding investment opportunities with the potential to generate high financial returns. However, some have begun to embrace impact investing in recent years. These companies address pressing social issues by providing services and products that benefit society. Their aims range from reducing the cost of financial services for the unbanked to making it easier for people to access healthcare.
As concerns about poverty and inequality grow, many investors like Brad Kern want their capital to generate both business and social returns. One way to do this is through impact investing, which directs capital to businesses with the explicit expectation of a measurable social return alongside a financial return. Impact investments are often made in for-profit, mission-driven companies that combine social and environmental values with a sustainable business model. For impact investments to succeed, VCs need a solid framework that defines their goals. This includes a Theory of Change that articulates a business model’s hoped-for outcomes and ties those outcomes naturally to the key performance indicators determining a venture’s success or failure.
Social Impact Investing
Many philanthropists and investors consider it desirable, even vital, to champion social change while generating financial returns. This is a guiding principle behind impact investing, which directs capital to enterprises that generate social and environmental benefits in projects. These include catalytic investments for entrepreneurs and intermediaries and new impact-investing platforms. As concern over resource scarcity and inequality escalates, many investors are eager to generate both business and social returns—to “do good while doing well.” But a fundamental challenge exists: While the world of finance has several widely accepted tools for estimating an investment’s expected financial return, no similar tool exists for evaluating an investment’s hoped-for social or environmental rewards. This gap is a critical priority for those who want to accelerate the flow of private capital toward solving urgent problems.
Dual Nature of Impact Investing
A variety of investors has embraced impact investing. For example, millennials are interested in investments that align with their core values. In addition, donors are using impact investing to breathe new life into or complement their existing philanthropic strategies. However, several challenges have arisen in the practice of impact investing. For example, there needs to be more research on how different impact investment configurations and adoption models enable portfolio SMEs to pursue dual mission objectives of social impact and financial returns. Furthermore, while the business world has widely accepted tools for evaluating an investment’s financial yields, there still needs to be an analog for forecasting hoped-for social or environmental rewards. Developing robust assessment tools and standards is a crucial area for future progress in impact investing.
Good impact evaluations have been powerful advocacy tools. They have helped persuade funders, policymakers, and potential competitors to invest in and replicate innovative programs. For example, when a nonprofit’s rigorous evaluation showed that its community health model reduced child mortality by 27 percent, this evidence convinced policymakers to support its rapid replication and expansion worldwide. But a relentless focus on impact measurement can also be counterproductive. It may lead to overly ambitious studies that fail to address the core questions or distract from collecting other essential data. It may also result in time and resources being devoted to an evaluation that will never be able to deliver the value it promises. To prevent this from happening, organizations should find a right-fit evidence system.