Pathways To Scale Impact Investing

Pathways To Scale Impact Investing Intelligenthq
Pathways To Scale Impact Investing Intelligenthq

Investing in social business that can scale and solve some of the world’s most difficult problems like access to water, energy, housing, health and education can be achieved in many ways but there is none more effective than business, according to Mike Kubzansky and Paul Breloff (2014) in a recent commentary on the Stanford Social Innovation Review.

One of those ways is through impact investing. As explained in the book The Power of Impact Investing, written by Judith Rodin and Margot Brandenburg. Impact Investing is based on a major effort that was undertaken to drive a new investment movement But how to measure if the potential investment is real ? Does Impact Investing really have impact ?  Business leaders and Stanford GSB alumni shared their insights about this at the 2013 Social Innovation Summit at the Stanford Graduate School of Business, and produce the following video:

 

Can Impact Investment be scaled ?
According to Kubzansky and Breloff, people want to invest to have impact, they argue, and to identify and measure the potential scale of enterprises that can have real impact. Measuring this impact can be a real challenge as some of the approaches used such as looking at the number of people served are wholly inadequate for understanding real impact. Sometimes such measures miss the real story that is important and do not understand the ways in which difficult challenges are being solved.

Kubzansky and Breloff argue that dealing with difficult social issues requires looking at the bigger picture. They state that it means understanding the indirect pathways that can lead to scale, including scale through copycats and competitors that improve what the initial entrepreneur did and take the innovation even further. Sometimes these copycats and competitors may even replace the entrepreneur that had the idea in the first place.

Kubzansky and Breloff liken these types of effects to ripples or “pinballs”, and argue that these are equally as valuable for scale as other types of direct scale with the initial entrepreneur that had the idea in the first place. However, as they explain, measuring this type of impact can be particularly challenging.

Some investment companies are already starting to try and understand these issues.  Omidyar Network and Action Venture Lab are examples of two such organisations. In investigating further they state that:

“Over time we’ve learned that there’s a long nonlinear thread that runs between early-stage investment and its eventual social impact.”

The reasons that they give for this are associated with the pinball effect. They argue that organisations do not survive, while others meet with difficult competition. Still others do not get the proposition right and never quite make it. This leads them to conclude that generating sustainable social impact requires taking into account not just the initial innovator but a whole range of other players. They argue that scale may often be achieved not just by one organisation acting alone, but rather by several organisations acting together to create the impact. Examples provided of this are mobile money, contract farming and microfinance, all of which have scaled and are providing impact to millions of people already.

Direct pathways to scale are explained by Kubzansky and Breloff to be when an organisation develops and grows in size independently of any others. The organisation may seek financing to help it to scale its impact, but it will essentially achieve it alone. It may also be acquired by another organisation that goes on to scale the impact further, but this too is considered by Kubzansky and Breloff to be direct impact and scale. This is argued to be the more difficult of the approaches, and indirect scale is opined to be easier.

On the subject of indirect pathways to scale Kubzansky and Breloff explain that one way to achieve this is to “inspire copycats” who launch a similar product or an improved product that is based on the product or service that was originally launched by the innovator. Alternatively, another indirect pathway to scale is explained to be when an innovator has the effect of inspiring a competitive response to what it is doing in an existing player in the field. The product or service may not be similar but it competes nonetheless. The competitor may even only be prompted to reduce prices or to leverage an opportunity that was not considered such in the past. These types of pathways to scale can lead to vast impact.

While their importance is becoming increasingly acknowledged, Kubzansky and Breloff describe how indirect impacts are often ignored. They explain that this may be because they may not be immediately obvious, since they are “nonlinear and slow-burning” on occasion. Additionally it can be hard to forecast these types of impact in advance since it is difficult to know how different players will react in response to change in the industry. Perhaps the biggest reason is the problem that investors do not necessarily want to have copycats and increased competition.

One way or another impact investing has come a long way in these last years. A recent report from the Global Impact Investment Network and jp-morgan mentioned that the world’s 125 leading impact investors will raise their commitments by 125% this year.
The scaling of social innovation that impact investing will bring will happen sooner or later.