The Future of Impact Investing
Sir Ronald Cohen, widely regarded as the father of British venture capital, caused a stir with a recent post on the HBR-Bridgespan Insight Center: "Social Impact Investing is the New Venture Capital." The piece, co-authored with William Sahlman, argued that impact investing (the practice of investing for both profit and social impact) will be as transformative for society as the institution of venture capital has been for the state of entrepreneurship globally.
This point of view, part of a series on scaling social impact supported by the Omidyar Network, provoked a conversation so rich that we decided we needed to continue it. On Friday, April 19 at noon on HBR.org, Omidyar Network is sponsoring a free webinar in which Sir Ronald, one of the foremost financial innovators, will share his own reflections on the future of impact investing. All interested are invited to register here. The following interview with Sir Ronald portends his coming discussion.
We're intrigued by the parallel you draw between the early days of venture capital and the early days of impact investing. It took roughly 30 years for Silicon Valley to establish itself (from the time people starting doing venture deals to 1980 when Apple's IPO proved the model). Do you think impact investing will take the same amount of time to prove the case?
I feel impact investing is where venture capital was in 1983, 30 years ago. My experience of the growth of venture capital suggests that social impact investment will be established in the next seven years. I would hope by the end of the decade a significant number of institutions would have made an allocation from their investment pools to impact investing. These institutional investors are likely to include charitable foundations' endowments, pension funds and family offices.
What's the number one obstacle preventing the impact investing market from taking off?
In my view the first challenge is to get charitable foundations to accept that the fulfilment of their mission would be aided by impact investments made from their balance sheets. I believe the asset class of impact investment should be able to deliver a 7 percent return, uncorrelated with equity markets. If I am right, this would enable charitable foundations to pay out 5 percent of assets each year and maintain the value of their endowment while achieving significant social returns.
There are some who fear that impact investing will divert money from worthy non-profits because wealthy individuals will believe that grants are no longer necessary. What's your take on this?
Impact investment focuses on releasing assets from balance sheets, not grant allocations. If successful, this will significantly increase, perhaps even double, the flow of money into non-profits. The discipline that comes from measuring social performance or evidencing it in other ways should hugely increase the impact that the social sector achieves.
You've been the driving force behind social impact bonds. Tell us about one of the currently outstanding bonds you're most excited about and why.
At this stage all social impact bonds are exciting. I think the one launched by the Private Equity Foundation to equip vulnerable teenagers for employment is particularly exciting. It is very focused on improving their lives and measuring the results it achieves. It combines passion for the mission with the management skills required to achieve scale in tackling such a widespread social issue.
Paint us a picture of what the impact investing market looks like 10 years from today.
Ten years from now, a social investment firm will be a recognized entity and social investment a recognizable asset class. Social entrepreneurs of every age will have innovated in the ways we tackle different social issues and they will be admired for it.
So many young people are looking to start their careers in impact investing -- what advice do you have for them?
Impact investing is the next Big Thing. Society cannot continue to cope with prevailing social issues in the traditional way. We need to harness entrepreneurship, innovation and capital to achieve in the social area what they have achieved in the creation and growth of entrepreneurial firms in general, and technology firms in particular.