Measure The Impact of Investments
There is no single way to make a decision on investments. Some people perform a detailed analysis of projected cash flow to determine the right price and if it’s favorable compared to other options, they may invest. Others have a thesis on how an industry landscape may change and they look for opportunities that support their hypothesis. Even still, some people make investments because they believe in the leader of an organization and trust she will produce value.
Given no single investment approach, layering on the complexity of investing for impact increases the decision variables exponentially. For investors seeking a financial return only, they rely on a well-worn process of transaction classification and reporting to evaluate the opportunity and evaluate progress. The impact investor uses these tools, but also must assess any number of impact variables. So how do they do it? As Ross Baird, President of Village Capital, says in the video below, “if you’ve met one impact investor…you’ve met one impact investor.” There is very little uniformity in decision making across the industry and it’s idealistic to assume that will change. Of course, there are a growing number of industry resources to assist with this problem, there is no silver bullet approach.
Instead of a checklist for investment, this situation calls for an impact mindset during investment evaluation. Below are the four major areas to consider while investing for impact, inspired in part by the framework out of Harvard Business School research.
Clarity on Problem You Want to Solve
It seems obvious but it cannot be overstated, one must have a clear problem statement in order to begin the process of problem-solving. If you care about inclusion, what does that mean? Why is exclusion a problem? What is causing exclusion and what offers the best chance for change? How would you know you successfully solved the problem?
Now that you have a clear problem statement (and an idea of what success looks like), let’s move on to investment review. During the process of due diligence, an investor learns as much about the organization and opportunity as it can. Financial opportunities are generally framed up in a financial model, built on assumptions of performance, that concludes with a range of investment returns.
For the impact investor, another model should be produced based upon success measures associated with their impact goal. At this point, the investor may compare impact opportunities more uniformly across an industry to determine which offers the social return on investment. Time and financial resources are finite, therefore choosing an opportunity with the highest impact return option is prudent.
Impact Measurement Plan
Within financial reporting, there is little need to specify certain reporting requirements at the time of investment. Rather, most operating agreements state a timeframe acceptable to receive “financial statements.”
As you work with early-stage ventures, you may see more descriptive requests around key performance indicators that are crafted specifically for their industry or even their operating initiatives. The same goes for impact investors, whereas they must set proper expectations on what should be measured, how it’s measured, and when it’s measured. If you are making a program-related investment, this step is necessary for you to justify the classification with the IRS. These are the metrics that should ultimately be defined and reported with diligence.
If management thinks it’s burdensome to communicate that number to me...then maybe we aren’t a good fit.
President, Village Capital
Establishing a measurement plan can be critically important in determining if management earnestly cares about the impact initiatives. As Ross mentions in the video “if [management] thinks it’s burdensome to communicate that number to me…then maybe we aren’t a good fit.”
Now that the investment decision has been made, and the measurement plan has been enacted, it’s time to manage the impact. First of all, both the underlying organization and the investing organization need to create space to adequately monitor impact results.
Each investor will find their own path forward, with metrics that matter to them.
Investment Partner, Access Ventures
Much like with financial performance, if impact results aren’t as anticipated one must investigate the cause. Is it execution? Poor assumptions? Something else? Unlike the measurement plan, this step involves work from both the organization and the investor.
If poor financial performance is a leading cause of partnership disputes, one can imagine the passion involved with impact goals to magnify the distress since the best investments have impact baked directly into their business model.
Each investor will find their own path forward, with metrics that matter to them. Keeping in sight the problem you are trying to solve and creating a pathway for success with your underlying organization is advisable to create the change you want to see in the world.
A Case for GIIRS
Allow me to make a case for adoption of the GIIRS system, which utilizes the IRIS taxonomy to score impact. GIIRS is the closest thing to a generally accepted impact rating system that the industry has, and it allows for ease of comparison across an impact portfolio. We use GIIRS at Access Ventures and Ross uses the same for Village Capital, as well as numerous other funds. Wide-scale adoption of a single rating system has the potential to lower the underwriting burden for people new to impact investment, thus growing the overall investment class.
Access Ventures strives for excellence and forward-thinking that challenges the status quo with new and creative ways to make impactful investments. Our investment approach begins with a process of reviewing a companies mission-alignment with our organization. After determining a fit, we then move to a financial review of the opportunity. We believe that opportunities to create an inclusive economy come in all shapes and sizes, therefore a single investment vehicle is not sufficient. We invest across a spectrum of asset classes, ranging from program-related investments to market-rate investments. This leads to a blended portfolio approach that is maximized for impact and weighted for return.
If you are involved with an organization, initiative, or idea that you believe is an investment that matters then we would like to hear from you.
Written by TJ Abood @aboodtj10