(Editor’s note: This is the first in a series of guest blogs we will have from various experts in the Impact Economy space. All opinions expressed below are solely those of the author.)
When asked if it is possible to make as much money in socially responsible investments as in regular investments the quick answer is “Yes.”
Yes, you can make as much money on a successful impact investment as on a successful ordinary investment.
The underlying question is “Can you make the same risk adjusted return on an impact investment as other investments?”
Again the answer is “Yes.” All things being equal.
That last part is where I cheat.
Things are not all equal.
Venture investors don’t have equal expertise in all industries. They don’t have equal networks in all areas, and are not versed in the regulations and procedures of many sectors. They cannot support and mentor every idea equally. Thus, investors focus on their areas of expertise and avoid businesses in other, unfamiliar markets.
Experience and expertise are especially important in early stage venture investing. Unfortunately, most expert VC investors have no expertise investing in the impact economy. Many have pulled back from the bio-fuels, or the large capital investment solar projects to focus on light green investments. Light green tends to be in spaces and areas the technology investor has experience and understanding. Areas where software technologies can help improve green activities. The patterns, growth methods, valuations and networks are more comfortable and familiar for the experienced investor. These are the majority of “impact” investments that I’ve seen recently.
Most investors lack experience or expertise in nutrition programs, or reducing the recidivism rate; activities that affect the base of the pyramid. Many investors who have spent their time in technology have not spent as much time understanding other parts of the economy. It doesn’t mean they can’t learn about the base of the pyramid. Only that in the 24 hours each of us have during the day, these investment experts have focused on their comparative advantage, not on the social conditions or ecosystems where impact investments will have the greatest benefit.
In areas like alternate energy, a lot of good money was wasted in gaining an education in the space. The same transaction cost of education will happen in farming and in water, and waste disposal. This education is a real cost to new investors in any space, including impact investing.
For someone new to VC investing, the transaction cost of learning must be paid no matter what area they go into. For folks currently in investing this cost can make a new sector unattractive to invest in, even if that sector could be profitable. Many investors have become experts in one or two fields. Asking them to begin anew by switching fields, would not be as profitable as remaining and dominating their current fields of expertise.
This has been a barrier in finding capital for social enterprise. However, new investment experts will emerge in the coming years. They will prove en-masse that there is a lot of money to be made in impact investing. Part of the education for every investor is making and losing money. Already a small population of impact investors have emerged and demonstrated success in the field. More people will join them. This will be a new crop of investors, not ‘experienced’ investors transferred from other fields.
There is money to be made in the impact investment sector. When examined, it represents a risk adjusted return profile. Like every other field of investment, sector experts will be able to get a better than expected return on their investments. These experts are emerging today, but don’t try to find them in the traditional venture investment sectors. At least not until the established investors have learned something new.
Jean-Luc Park is the founder of ImpactPRI