This topic, like crowdfunding in previous post, is complicated. There are different definitions on what it means in concept and what it involves in reality.
So here is what I have learned to date:
First, impact investing is being replaced by the term social impact investing largely because more people and institutions are getting involved at varying levels. Social impact is in theory, clearer on the kind of impact one desires, although the term social also covers a broad range of meaning from addressing social problems such as poverty, lack of education, and disease to environmental and communication issues. For an excellent overview, see Short Guide to Impact Investing by the Case Foundation.
Pipeline Angels, Investors Circle and Toniic are examples of groups that focus exclusively on social impact investments. Toniic focuses on primarily social impact companies that address international issues. Many of the companies that present to these groups, are what would be further classified as social enterprises, also an evolving term, but really are companies that in earlier times like the 1990s maybe would have been called innovative nonprofits. But social enterprise is more inclusive term that can include for profit companies addressing social issues as well as the traditional nonprofits. However, this is where the complications in investing and expected returns (ROI and SROI) theory comes to play.
From an investing standpoint, social enterprises, while very honorable in mission and led by passionate social entrepreneurs can not return 5x or more. Key reason being that many social enterprises I have seen pitch at IC and Toniic are addressing issues that affect the bottom of the pyramid (BOP) population in developing countries. That means there is NO money to purchase the product or service. Payment has to come from NGOs which are non-profit organizations and funding becomes an Alice running down the rabbit hole experience. And further, because the concept of making money is frequently at odds with the social purpose, it can become well a goat rodeo of mixed expectations.
At best, the expectation for many of these social impact companies is 1.5- 2X return, which is fine. Many investors would then take that return and either donate back to the company as philanthropic gift or reinvest in another social enterprise. But that kind of investing was seriously challenged by many in the investment and financial worlds which is fair. Read this article that prompted a lot of response When Can Impact investing Create Real Impact?
Next post will focus on my social impact investments as I define them.