What's Your Point?

Impact investing continues to struggle to define what it is. I believe we should focus more on how and who. Therein lies the key to building fairer systems and leadership for a better world. It is hard to objectively measure the how and the who, it requires time and commitment, spending time with people, understanding the context, and yes, judgement calls, which makes the system of allocating funding inherently flawed. But aligning on the how and the who allows for building trust in the process and a chance of positive long-term outcomes.

In a wonderful recent LinkedIn post, Cedric de Beer tells the story of how as a new CEO of an organization he was surprised to be told by a Board Director – representing a major investor – to “…test the limit of the markets [and to] be prepared to lose some money. Otherwise – what’s the point?”[1]

That question seems deceptively simple. If you can answer it, you probably know what you are doing.

I want to use Cedric’s provocation to share what I have learned about impact investing over the past 12 years. I want to do this now at a time during which I have taken some punches to the gut as our fund pursues investments in Tanzania and Kenya. While the failures are not often enough discussed effectively and publicly, I know that the failures we have experienced over the past 12 months do not standalone (you don’t have to be a master sleuth to know many investors and entrepreneurs are feeling the pain), and I really want to learn from this difficult time.

Just to be clear, knowing what you are doing is generally a good thing, but it doesn’t say anything about your morality, or the goodness or wickedness of what you are doing. However, therein lies a problem with the impact investment industry, it is assumed to be doing good, as that is what that word impact is meant to convey. But the industry’s continued inability to define what it means to invest for impact is illustrated by 232 SDG indicators (in Cedric’s words: “Is there any possible project or investment that would not somehow fall under one of the 232 indicators?”) or what now appear to be more than 700 IRIS+ metrics.[2]

With so many metrics and indicators to pick from, everything is impactful. And everyone is an impact investor. Which raises the question indeed, What is your point, impact investor?

In his LinkedIn post, Cedric refers to the Rockefeller convention at Bellagio in 2007 from where the term impact investing emerged. Ostensibly as a field or a movement that would do things differently. It was defined as “Using profit-seeking investment to generate social and environmental good.” But one must wonder: How is this different from Adam Smith’s butcher, brewer or baker from whom we expect our dinner, because we expect them to pursue their own interests?

It is probably not that different. And that is a problem. If the intent is to change things up, to create a better world, a more equitable world, a world that deals with climate change, a world with less people living in poverty, more of the same is not the way to pursue that change. If you accept that premise, the uncomfortable questions start piling up fast, mainly about power, privilege, wealth, and how they are not shared equally nor equitably. ?

So, if you say you are an impact investor, what’s your point?

Amartya Sen’s focus on a growing range of “freedoms” has always appealed to me and I believe that investments should contribute to giving people, be they company employees, stakeholders like suppliers and smallholder farmers or company clients and customers, more options, more choices, more agency over their own destiny. More freedoms. This frame forces me to think about how an investment in a company will affect its stakeholders, not necessarily how many it will affect. That is an important distinction, as the tyranny of numbers, to quote Cedric once more, has taken impact investors down another blind alley, nearly universally equating impact with scale. Where Sen considers freedom both an end and a means to development, it is important to remember that scale should only be considered a means. One means out of many, not a must. If it is a must for you, you are likely just out to dominate and monopolize power, privilege and wealth.

A final point to borrow from Amartya Sen’s argument about development states that it requires a package of overlapping mechanisms that progressively enable the exercise of a growing range of freedoms. Importantly, that development cannot be reduced to simply increasing basic incomes, nor to rising average per capita incomes. [3] This puts the private sector’s role in society in context, it is only a cog in the wheel and so is impact investing. The hundreds of metrics seem to imply that impact investors can and should do everything and here again I agree with Cedric that this is a sign of misdirected trust in the private sector as the solution for everything.

The focus on how an investment will affect the company’s stakeholders also places the idea of how finance and financiers can work for others, before how it can work for itself. This is the greatest point of tension in the impact investing industry, how to balance the good our investment dollars need to do for others, with the financial returns we expect for ourselves. While everyone will make their own decisions, how you approach making that decision matters. It should be easy for an investment manager to answer the question what they instinctively think about first when assessing an investment opportunity, is it the potential return for their investors or is it the effect it will have on the company’s stakeholders? That there is a trade-off between financial returns for investors and positive outcomes for others now seems increasingly accepted, even though the beginnings of impact investing were rife with promises that investors could do well for themselves, while doing good for others.

Concerns about the interest of finance and financiers driving the creation of – unnecessarily complex – solutions and the monetization of everything, from public services to nature, is closely related to this idea about the role of finance as serving itself first. I too struggle with the approach to monetize nature, putting a dollar value on carbon or biodiversity and trade the resultant credits like they are collateralized debt obligations (admittedly, a poor analogy, but what they have in common are that they are financial products that risk not being a true reflection of the real world we live in). However, here too, how it is done matters. Not all carbon credits are created equally. And if my goal is to invest in companies that benefit their stakeholders specifically by increasing their agency, increasing the number of options they have and increasing their control over their own destiny (for instance, by being able to govern the land they live on), then paying communities to protect unique and innately valuable ecosystems, absolutely meets that goal. Carbon credits are the chits that make it possible to transfer some monetary wealth, a little power and privilege to the stewards of these ecosystems that we surely want and need to keep. I am good with that.

Who buys carbon credits and how those buyers behave needs strong guidance and potentially regulation, but is another issue altogether. It should be addressed, and carbon developers can play a role in determining to whom their credits are sold. But not justly rewarding those protecting valuable ecosystems is shortsighted.

The trade-off between financial returns and the good an investment can do, has come into focus most clearly for me in agriculture. Here the harm of scale, and its agricultural side-kick, monocropping, is clear, if not always easily observed in the present. Agricultural value-chains are abhorrently extractive, not only at the expense of nature, but also people, as the reference to Frank Aswani ’s post illustrates [4], and what’s true for coffee, is true for other agricultural products like tea. The producers of the key ingredient are never compensated fairly.

In a recent New York Times article, a Harvard student was quoted to have said that “they learn at Harvard […] that actually doing anything meaningful is too hard."[5] Not hard, but too hard. It is not just a little depressing that the most privileged at an elite institution like Harvard come away from their education concluding doing something, anything meaningful is too hard. There is also some truth to it. To illustrate how hard it is to do something meaningful, consider what it takes to set up agricultural value chains in countries like Kenya and Tanzania that work for everyone involved. To source a lot of eggs or vanilla or tea from smallholder farmers means, by definition, engaging with hundreds if not thousands of farmers, in remote areas, on roads that are hard to navigate, where communication, input supply and financial services infrastructure is often spotty and sometimes absent. But engaging those hundreds or thousands of farmers fairly is of course also exactly where good can be done and, in my opinion, should be done. This is not an uncontroversial statement as there is a stubborn narrative that smallholders are doomed, that their small landholdings lock them into perpetual poverty.[6] If you have only half an acre to farm on, you are limited in what you can earn. But their small landholding is not the only limiting factor on a farmer’s way out of poverty, so are the prices they get paid, the access to inputs and the ability to add value or to grow more valuable crops, and to be able to do things alongside farming, to name just a few. Often land and the labor are the only productive assets smallholder farmers have within their control, finding ways for them to use them to their benefit seems fair. I absolutely understand that for funders and philanthropists it is appealing, even a pleasant stroke of their ego, to be able to say that their dollars touched hundreds of thousands or even million of lives, but let me tell you, meaningfully improving the circumstances of individual smallholder farmers and their families will make a difference to each farmer and family in a much different way than being touched.

A company like East Coast Agritech (ECA) in Tanzania that enables farmers to raise chickens for eggs at no risk to themselves, without asking them to put in any capital, only 45-60 minutes of work a day to tend to a chicken coop next to their house, is showing how it can be done. ECA provides all the inputs (from the infrastructure to the chickens, to the feed and the water) so it can buy the eggs from the farmers. It sounds inefficient, but to some extent, that’s the point. The inefficiency is the good that is created. When ECA comes to their community, farmers have a choice, but not one in which they are asked to make a disproportionate sacrifice or to accept risk they can’t afford, just so investors have to take on less risk. They put in (limited) labor, a small parcel of land and take responsibility. The additional income they earn hopefully creates more options. While ECA delivers more additional income to individual farmers than any other model I have seen, it is of course not the solution to all their problems, but it is an increase in freedoms, delivered through a for-profit business.

What companies like ECA and Natural Extract Industries (in vanilla) and Kazi Yetu (in tea) do in Tanzania, and undoubtedly other agricultural companies that I do not know as intimately, is bring structure, discipline and a relentless focus on execution to secure the reliable supply (and processing and transport and sale) of high-quality products into a system that is often not set up to deliver it by itself. And this is where the impact industry has gone wrong. It has not effectively emphasized the strengths of the capitalist free market. The dominant belief that no system has delivered prosperity like capitalism, drove the idea that it could do better too when it came to poverty alleviation and climate mitigation in regions around the world by simply setting the profit-making goal alongside an undefined impact goal. It is beyond any doubt that profit making has proven a very (the most?) effective incentive to get lots of people to work hard and be successful. In a commercial enterprise profit is both a means and an end, it brings focus and internal alignment to deliver more of the same (profit). It is core to motivating Adam Smith’s butcher, brewer and baker. But it is folly to think that simply elevating the pursuit of profit will bring all the good to communities in Tanzania and Kenya that the impact industry claims it will deliver.

But social enterprises can and should learn from successful commercial enterprises. I would argue that the lesson to learn is to understand why having this singular goal of making profit forces companies to do certain things well. Those things include being disciplined, focused and an ability to create internal and external alignment to assure everyone is always pulling for the same thing. ?I believe the absence of this clarity of vision, this focus, this alignment is what is at the root of many of the social enterprises that are failing, including ones that we were part of.

The two most recognizable misalignments – surely this sounds familiar to many – are those between investor and entrepreneur and among co-investors. While everyone is dependent on everyone else in the constellation of a company that has attracted outside capital, when times get tough, a struggle for power tends to ensue. A lack of alignment around a shared goal to rally around invariably leads to compromises that everyone ends up hating (death by a thousand paper cuts) or a state of indecision in which nothing gets done (death by implosion).

I am not saying that lack of alignment, or if you wish, irreconcilable disagreements between entrepreneurs and investors are the only reason companies fail, but it is a contributing factor and an especially big impediment to concerted, decisive action during difficult times, when time is of the essence. External, macro-economic factors come into play, and a business model that is difficult to execute doesn’t help, nor does a lack of available investment capital. However, having a shared understanding of what the good is that you are trying to achieve is critical. But as we have seen with hundreds of indicators in play, arriving at that shared understanding is a challenge. And a shared understanding can not, should not be assumed, but established.

Herein lies a critical lesson for entrepreneurs. As hard as it is, entrepreneurs need to go to great lengths to make sure they take money only from investors that are aligned and want the same thing. This means having clarity about what you want and always communicate your goals honestly and transparently, from the first day you speak to an investor. It requires getting an understanding if the investor will be able to “stick with it (with you)” and be helpful, also during the tough times. It also means turning down money if it doesn’t align, and this of course is hard – and some will say unrealistic – if you raise money for your agricultural business in Tanzania. Investors are hardly lining up to invest.

As an investor, I now put even more emphasis on seeking alignment with the entrepreneur and among the people and institutions I co-invest with. I try to assess the entrepreneur’s strength of heart, are they going to stand up for their vision, for the good that they want to achieve, even in the face of investors with power pushing to do things differently?

In defense of (air) travel, Kevin Starr makes this point: "In our work as funders, we don't really know an organization until we've felt the context, gotten to see the model enough to fully grasp it, and come to know the people who run it. I've found that the single most important aspect of travel is the long conversations you can't have without it."[7]

You might be able to grasp the what in metrics, but the how and the who requires time, context and a deep connection, just to enable you to place a bet on someone with some more confidence that it may work out. It is worth remembering that it was Einstein (supposedly) who said: "Not everything that can be counted counts and not everything that counts can be counted."

This then has finally brought me to the entrepreneurs. There is of course an age-old adage in the venture capital world that holds that every investment is a bet on an entrepreneur. As you can see, I am not disputing the validity of this idea. In the world of investing for good, however, it is even more critical. The demands on entrepreneurs in countries like Tanzania and Kenya are simply greater. They are often not just building companies, but entire support systems and value chains, in a context of greater hardship, with fewer resources. To stay true to your stated goal, to keep pursuing that good and to keep rallying people in your support, is a mammoth task. The risk of compromising the pursuit of good, so the company lives another day, or to attract some more capital, is always lurking around the corner. But compromise and the good you set out to achieve may become an afterthought.

Carbon Tanzania relies on indigenous communities as stewards of the ecosystems they live in. This stewardship mentality is what I am looking for in all entrepreneurs, to me it means a willingness – a deep-held belief – to share responsibility for the ecosystem – the community, the society – they operate in. With these grand demands placed on them, one task has come into greater focus for me, entrepreneurs need to stay in control of their companies and their vision. It is a version of taking care of yourself (your company), so you can take care of others (society). This means growing your business at the right pace, limiting your need for outside capital, limiting your burn-rate, managing for profitability, preserving your place on the Cap Table and relying on fewer investors. Not easy, but it will make all that other hard stuff just a little easier.

That’s my point. What’s yours?

[1] https://www.dhirubhai.net/pulse/impact-investing-tyranny-numbers-a-provocation-cedric-de-beer-b3bsf/?trackingId=xHADBD9ZTIy0fC6VNdYivw%3D%3D

[2] https://iris.thegiin.org/catalog/download/

[3] https://en.wikipedia.org/wiki/Development_as_Freedom#:~:text=Based%20on%20these%20ethical%20considerations,a%20growing%20range%20of%20freedoms.

[4] https://www.dhirubhai.net/posts/frank-aswani-30803118_look-at-the-economics-of-coffee-activity-6710463072386994176-aSEq/

[5] https://www.nytimes.com/2024/05/22/business/gen-z-college-students-jobs.html?unlocked_article_code=1.uE0.21Uc.w3xX8EhDDEeP&smid=url-share

[6] https://www.dhirubhai.net/feed/update/urn:li:activity:7196160256748539905/?commentUrn=urn%3Ali%3Acomment%3A(activity%3A7196160256748539905%2C7196171613082451968)&dashCommentUrn=urn%3Ali%3Afsd_comment%3A(7196171613082451968%2Curn%3Ali%3Aactivity%3A7196160256748539905)

[7] https://www.dhirubhai.net/posts/kevin-starr-mulago_oof-just-read-another-of-those-flying-is-activity-7203259407319588864-stEN?utm_source=share&utm_medium=member_desktop