Impact Finance Bulletin: Risk-taking for impact is no longer in fashion
As impact investors become increasingly risk-averse, innovative social enterprises further struggle to raise the investment they need to respond to growing social and environmental crises. Laura Joffre introduces this month's digest of impact investing news and analysis.
Impact investors are becoming increasingly risk-averse. That is one of the findings of the GIIN’s latest investor survey, which found that impact investors are moving towards 'safe' investments in mature companies and developed markets, despite a rising need for investment in innovative solutions and emerging markets.
Investors point to a difficult global economic environment, but some would argue that this is exactly when we need impact investors to step up and take risks. Where are those high-impact social enterprises, perceived as risky just because of their development stage or location, going to find the investment they need to grow and thrive?
On the commercial side, venture capital investors are usually seen as the ultimate risk-takers in the (private) finance industry: they back promising but usually early-stage startups, in the knowledge that most will fail but a handful will survive and have an exponential growth that will yield hefty returns.
Unfortunately, this doesn’t work for impact businesses, because VC investors are impatient, and impact takes time. As Markus Freiburg from FASE writes in Pioneers Post this week, if your business has an impact that can’t be yet monetised, an unusual structure or a slower growth trajectory, the chances that VC investors will “bet” on it are slim.
Back in September I attended a session run by Brigit Helms from the Miller Center for Global Impact during the AVPN conference. Her starting point was striking: we’re being told the impact investing market has topped US$1.5tn globally, yet many social enterprises – viable businesses that create real impact, widely known as zebras – see no sign of this investment money.
The reason is that they are stuck in what Helms calls the “Valley of Death”: the investment-dry land between the small nonprofits that can access grants, and the safe, mature companies that attract impact investors’ money. The solution to that problem isn’t easy. In a 2022 article, Helms explained how the Miller Center tried and failed to bridge that gap, and the lessons it learned from it. The experiment concludes that use of concessional finance (high-risk, lower returns capital, for example from philanthropic or government sources) is necessary to serve those social enterprises. Freiburg points to a new fund, for example, that uses EU subsidies as guarantee.
The Miller Center is about to publish new research in partnership with several impact investors, presented yesterday at the Socap conference in San Francisco, US, that backs this argument: impact does have a cost. (We’ll publish a story about it as soon as we can.) It is increasingly clear that “impact investing with market-rate returns” only works for a small share of impact businesses and leaves behind the most impactful enterprises – should we be more outspoken about it?
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