Business

Rethinking Impact Investing for the Real World



Tech stocks are down. Markets are volatile. Venture capital is slowing. Startups are making layoffs and instituting hiring freezes. Uncertainty is rampant across the global business world.

As industries from freight to healthcare to software brace for the economic impact of a potential recession, impact investing offers greenfield opportunities to apply innovation to make life better for as many people as possible. 

But the issue remains that there are so many impact investors operating today who are that in name only. Too often, committing resources to purposeful work materializes as a mere PR move or a nod to the climate-conscious social impact school of thought when it comes to conducting business. For investors who truly want to do good and do well, here’s the path forward:

    1.    Jump on fields that have been slow to digitize.

Legacy industries from energy to transportation to finance to supply chain/logistics still largely run on spreadsheets and analog filing systems. Impact investors should apply scalable software and applications to bring corporate and public data online. If they can do so with an eye toward collective good, even better. 

Take commercial lending. For too long, accessing working capital has been bogged down by a tedious, analog underwriting process that takes too long, drives cost up, and encourages predatory lenders. The end result is hardworking business owners not being able to access the capital they need to flourish, and their communities suffering as a result. 

By leveraging AI, lenders can maximize the efficiency of underwriting, mitigate risk for investors, and limit bias towards applicants – ensuring all borrowers have access to the capital they need. And when done correctly, lenders can track their impact on people and ROI in real-time, proving that doing good and doing well truly is possible through impact investing. 

    2.    Target financial technology companies with built-in impact measurement systems.

Financial technology is a massive multi-trillion dollar industry that is large, opaque, and ripe with opportunity. It covers traditional banking, impact investing, payments and cryptocurrency, and more. The challenge facing impact investors is how to sort through a massive wave of startups promising scalable solutions built with the customer at the center and those driving real-world applications. After all, there can be no evidence of progress without hard data that illustrates outcomes like the number of underserved communities helped or the running ROI of impact investments.

A shortcut: ask founders for a demo of products or solutions to assess the design-build, user experience, and, most importantly, the strength of built-in measurement systems–especially if they quantify social or economic impact. 

    3.    Identify areas of unmet need that impact multiple demographics and have the opportunity to make a tangible difference.

In the face of an uncertain economic future, we need to embrace the fact that investing has been, and will continue to be, what expands the world’s access to capital–creating jobs, lifting whole populations out of poverty, and enriching communities of all sizes. But there’s real work to do with regards to applying the best minds in innovation to creating tech with immense societal value. And we need investors who will do it with dignity as well as a competitive spirit.

Impact investors should look for startups working to solve real-world problems, like those addressing access to high-quality education, lack of food security, the effects of climate change, and expanding access to working capital, with scalable benefits. When possible, explore opportunities to help legacy firms and startups reduce costs to end-users. In other words, democratize advanced technologies, big data, and digital solutions that can change people’s lives-and potentially even save them when it comes to healthcare or hunger. Search intently for companies that not only promise to design accessible digital solutions, but have a strategy to design them better than anyone else.

    4.    Find and support mission-driven entrepreneurs with a scalable vision.

Investing is the driving force of capitalism. As such, we have a responsibility to exercise models of investing that have the potential to mold a more inclusive financial system for everyone. By mainstreaming the idea that good business and impact can and should go hand-in-hand, we can reaffirm that investing has always been about more than just generating wealth for a select few. 

In practice, this means applying a VC or institutional investor mindset to selecting startups and causes to invest in that 1) improve quality of life for a diverse population; 2) apply the latest technology to some of the oldest or most systemic problems; and 3) finding founders with sustainable, scalable business models that double as vehicles for delivering long-term economic and social impact.

The bottom line shouldn’t just be your bottom line

The Robin Hood Foundation pioneered a new framework for driving impact in local communities by approaching philanthropy with the same mindset as investing on Wall Street over three decades ago. So often was the case that critics argued impact investing was both immeasurable and ineffectual. But it was Robin Hood’s metric-driven, cost-saving approach that affirmed resources committed to driving impact could yield tangible outcomes. 

The time has come to revise a common narrative that growth and positive impact can’t really co-exist. Something that might be keeping impact investors in the “in name only” category. With fintech that modernizes financial operations and spurs new innovation, sustainable investors can prove the opposite. But that’s only if the financial services industry evolves to enable the mainstreaming of impact investing. Only then can we fund the next generation of companies delivering ROI as they improve the lives of real people.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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