Impact investment is a concept that may sound morally desirable, yet at times practically utopic. However, an increasing number of investment firms are challenging the dominant paradigm by pairing up with social entrepreneurs, only to discover that having an impact on society and generating profits are not necessarily mutually exclusive.
On February 13th, 2020, we brought together a group of like-minded impact investors, charities, purpose-driven businesses, universities and startups, at our AI for Good Investor Day. Our goal was to find out more about what the concept of ‘impact investment’ means for different investors and their companies, to discuss the role of impact in today’s global economy, to better understand the risks and returns of this activity and, most importantly, to spark new ideas about different ways of approaching it concretely and realistically.
I was more than surprised to find a group of motivated people driven by a simple, genuine desire to do good and to learn from others. Coming together in an open panel discussion revealed itself to be the best way of thinking about impact investment from a manifold of perspectives, and of encouraging investors to connect with entrepreneurs. As for me, I was able to gather a number of useful tips and information, to the point that I myself was inspired to jot down some ideas of the social impact I would like to see more of in the future.
Before the panel discussion started, our first guest speaker, Kate Rjabinina from Social Tech Trust, spelled out the flaws of the current funding system: one that tends to prioritise so-called “unicorns” (privately owned startups worth billions of dollars), as opposed to the lesser-known “zebras” (companies that focus on profit as well as on sustainable goals).
“So, what’s flawed about making lots and lots of money?” one might ask. As Kate rightly pointed out, the traditional financial system is failing in that it is based on a one-sided definition of success and impact, while relying on outdated and inadequate financial instruments. Fortunately, the world of investing is slowly beginning to change its focus. Moving away from a profit-only based model, today more and more investors are starting to view impact as a long-term driver of returns, while also switching to a revenue based equity model which as Kate puts it:
“Revenue based equity model allows businesses to focus on their financial sustainability, on their impact, and aligns the funding of the founder’s focus.”
This is essential to achieve a real shift in the broader investment industry, because although it’s great to have firm believers like social entrepreneurs, investors are needed for these beliefs to translate into concrete social outcomes.
Kate’s introduction was followed by two panels featuring Akash Bajwa (Cass Entrepreneurship Fund), Lois Ollerenshaw (NBS Ventures), Ali Morrow (Astanor Ventures), Zoe Peden (Ananda Ventures), Dama Sathianathan (Bethnal Green Ventures), John Spindler (Capital Enterprise), Libby Kinsey (Digital Catapult), Liv Sibony (SeedTribe) and Toby Eccles (Social Finance). They could not have stressed more the fact that impact investment should not be limited to a unanimous and simple definition. However, in a general sense as Akash Bajwa so eloquently explained:
“impact investing is investing in companies where their primary business activity generates a social or environmental impact."
Still, impact can mean different things to different people. Listening to the panelists speak about their experiences, it became clear that each and every one of them had a very unique way of conceiving impact investing: from funding digital health startups, to addressing gaps in the education system or improving farming practices in a sustainable fashion.
Although the possibilities of having a positive impact on society are unlimited, a series of fundamental conditions need to be taken into consideration. First, as agreed by Zoe Peden (Ananda Ventures) and Lois Ollerenshaw (NBS Ventures), investors always have to make sure their interests, values, goals and incentives align with those of the company they are investing in. In other words, the partnership between social investors and entrepreneurs must go beyond simply generating a financial benefit: in fact, investors have to make sure they are willing to fund companies even when things go wrong, even if the business collapses. Second, social entrepreneurs must come up with models that target measurable social or environmental outcomes, in order to attract investors. The field of AI has revealed itself to be increasingly useful in prioritising impact, as well as in getting to know the feasibility of a social impact project in advance. As an example, our organization utilizes the Theory of Change for Intended Impact together with the H.E.A.R.T. metrics to analyse user experience. For a newly-built business, measuring outcomes is the first step that needs to be taken: it will make the company’s vision more specialised, its goals more concrete, its communication clearer and its chances of securing funding more likely.
Overall, the evening was also an opportunity to talk about the problems of perception in the investment environment. For years, the venture capital system has been very homogenous. In order to start having a real, global impact, investment teams should reflect a wider demographic. Similarly, investors need to start seeing the potential in more diverse, under-represented founders. Dama Sathianathan from Bethnal Green Ventures cited a recent report published by the British Business Bank revealing that:
“for every £1 of venture capital investment, less than 1p goes to all-female led teams.”
The only way out of this is changing the organizational culture at its core: not only should there be a significant shift in the VC industry and in the way in which investment decisions are made, but also increased attention towards mentoring and creating initiatives that help under-represented founders access capital.
The challenges brought about by the introduction of Artificial Intelligence in the social impact space were also widely discussed. The question of diversity is a crucial one, just like in the VC industry. The engineering space needs to become more varied because only a diverse product will generate outcomes that can have an impact on a wider demographic. There also needs to be a more serious debate with regards to the ethics, accountability and transparency of AI more generally, as Libby Kinsey argues:
“Investors are very interested in understanding from a risk mitigation point of view in the first instance whether you have considered the ethics of what you are doing, also hopefully moving towards the opportunity point of view there should be a competitive advantage to developing responsibly in the AI space.”
Investing for social impact is tricky, it comes with many different risks and challenges. Moreover, the gap in funding is still quite big. What events like our AI for Good Investor Day demonstrate, however, is that the investment landscape is slowly beginning to change and that there are more and more impact funds coming through. Even more crucially, these community meetings can be a source of hope for all the social investors and entrepreneurs who are willing to exchange views and find solutions for the future.
On the photo above: Our wonderful panelists and moderators who participated in this event