Opportunities and Barriers in Impact Investing

It was a thrill to return to WA last month to deliver a keynote at the Impact Economy Forum.

I'm sharing some of the key points I made here. I'd love your feedback on this analysis!

I was asked to provide some real talk about what is and isn't happening, and why, which I was only too happy to do. I spend a lot of time thinking (and talking) about the gaps in the current ecosystem, and how we can close them.

Because it is an ecosystem, it is only when you step back and see it as a system that you can you see these gaps. Otherwise, it's easy to be drawn from bright spot to bright spot, stated impact intention to stated intention, inspiring example to inspiring example.

The good news is these examples exist. The bad news is there are not enough of them, and the uneven nature of the impact investment ecosystem is a big part of why.

Inspired by a great talk I saw Katherine Trebeck give at the Social Impact Summit earlier this year, I decided to use a simple systems-thinking tool - The Iceberg Model - to help people new to impact investing see what's really going on.

Above the water are those bright spots. The positive actions (or events) and stated intentions that tend to dominate discussions at conferences.

But there's so much more we don't tend to see or focus on.

Under Events are Patterns.

These are patterns of behaviour, trends, what's changed over time.

The most important pattern to understand in impact investing is the "missing middle," the desert for impact capital in the 100k-1M range, or approximately the typical startup angel or seed rounds.

(For more on this, see "The Missing Middle is Still Missing").

Related to this is the insufficient supply of investment capital which is open to returns other than traditional market rate return, which is often unrealistic when also delivering meaningful positive outcomes for community.

Why this pattern?

Let's go deeper.

The next layer down is Structures.

Structures are the vehicles we use to deliver investment. In the Impact Investing world, this means Investment Funds. Funds have their own economic structures, including, typically, a very high cost of raising capital and of decision-making, ie due diligence. These costs make small deals impossible.

Funds also by their very nature abstract the impact. At most they can talk about impact thematics - affordable housing, female founders, clean tech etc - but not impact specifics - benefits to specific people and specific places via a specific model led by a specific founder - which is the stuff that inspires people to want to contribute, which makes them more open to earlier stage risks and more flexible returns.

But the biggest challenge is the lowest level, that of Mental Models.

Mental models are the way we think about things. Or, more profoundly, the things we don't even think of. The things we take for granted.

Investment Funds are set up and led by finance professionals and the finance industry has some very entrenched traditional concepts and ways of thinking, so entrenched as to be invisible.

Mental models such as the often-referenced concept of "investability" - usually stated as if it's a thing "out there", a simple fact of nature, not something the investor has control of. This is false of course! There's no such thing as "investability" beyond the decision to define what it means to you. See also "risk adjustment," "concessionary capital."

Too often impact investors act like guru's on the mountaintop, waiting for the enterprises to struggle to the top to receive their blessing.

This is reinforced by the tendency of governments here in Australia to prefer to invest in "capacity building" for enterprises than anything more long-lived or systemic.

I believe it is the aspiring investors who need the capacity building so that can better evaluate impact and economic returns together in a more sophisticated way. It's easy to want your cake and to eat it too. The real sophistication of building a new economy is being conscious about trade-offs and priorities.

But this brings us back to the structures and practices, because even as we change the story of business and investing to make it more purpose-driven and impactful, the legal structures around financial advice and fiduciary responsibility, and the impossibility of capturing impact, passion and purpose into an equation that allows it to be confidently calculated on behalf of someone else, makes most current structures unable to grow the impact investing movement the way we need.

That's why at LendForGood we believe that the new capital we need to help impact businesses grow will come from all of us. We are the largest untapped impact fund in the world, but to get more people inspired and engaged we need to remove the disintermediation, the focus on mechanics and finances and put the spotlight where it belongs, on the courageous founders and enterprises who are building this new economy, and giving everyone the chance to back them directly.

LendForGood harnesses the work of insightful and experienced ecosystem-builders and intermediaries to endorse enterprises raising funds on the platform - highlighting the work of these critical organisations at the same time as celebrating the enterprise looking to step up their impact, giving lenders a rare combination of choice as they can choose the specific deals and enterprises they want to back, and confidence, as you can leverage the guidance of experienced experts.

And it turns out when people know exactly what they're investing in - when it's about specific stories of specific enterprises making a difference for a specific community in a specific place - all the things that activate purpose and passion - people tend to be much more open-minded about returns than when investing into a fund.

We're always looking to partner with more entrepreneur-support organisations working with impact enterprises that need capital to grow. If you want to know more, please drop me a line.

And of course, we're always looking for more lenders to join our community to fuel these enterprises to increase their impact so if you want to see what I'm talking about and try out impact investing for yourself, I'd love you to join us at www.lendforgood.com.au.