Not “Impact Investing,” Not “Social Entrepreneurship,” But Problem Solving

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culled from:http://unreasonable.is
Impact investing is, by far, too input-defined. Often, organizations measure what they’ve done by inputs—consulting hours given (yes, but to what end?) or dollars deployed (great, better than nothing, but to what end?), or enterprises served (but how well?). Metrics are hard, and we are all guilty of this, too, sometimes.
Instead of inputs, true innovators start with a problem-solving prerogative. Instead of “access to education for the poor,” innovators say, “Look there are hundreds of thousands of low-cost private schools serving the poor in emerging markets. Parents—even those living below the poverty line—can afford these schools, so money’s not the problem. The problem is that parents have no idea how these schools are performing, and they’re worried they are sending their kids to bad schools. Families living in poverty are spending as much as 30 percent of their budget on education. How can we deliver quality information about educational performance to parents in a way that fits within that 30 percent budget and solves their problem?”
What we find is that, from an impact perspective, many involved in social capital markets are not sure what problem they are trying to solve. These market participants confuse a high volume of inputs focused on “social entrepreneurship” with real impact on the sector they are attempting to address.

If I had an hour to solve a problem, I’d spend 55 minutes identifying the problem and 5 minutes on the solution.
–Albert Einstein

We’ve found these mistranslations while recruiting for Village Capital cohorts. We look for the best possible ventures to be in our programs—yet we often find that when we look for self-described “social entrepreneurs,” we get ventures that are of substandard business quality. We get a lot of what we call “social entrepreneurs who have never heard of social enterprise.” We’ve learned that instead of focusing recruitment strictly on “social entrepreneurs,” it is often more productive to recruit entrepreneurs who are simply focused on addressing X.
The world would do well to understand that the greatest entrepreneurial successes weren’t done under the umbrella of “impact investments,” but these great successes probably made a greater impact than any “impact investment” to date. Find a problem, start a business that addresses the problem, and make it into a model where someone is willing to pay you for the value that you are creating. Consider the ventures below.

• Sorenson Communications: Provides communication services in the United States for deaf individuals to communicate with the hearing – huge value and financially successful. Therefore, this venture is considered valuable.
• Etsy: A B-Corporation that provides market access to small scale artists and individuals producing volumes too small for “major retail.” The company has received $40M from venture capitalists and has processed $1B in sales–no need to be considered a “social enterprise.”
• Tesla (the electric car company): We don’t need to tell you the problem statement. What we can tell you is that Tesla’s first financing was originally a PRI from the MacArthur Foundation.

How do we get more problem-solvers? Invest in quality infrastructure. Instead of generalist, input-oriented surveys that are designed to figure out “why people aren’t doing more impact investing,” we must focus efforts on figuring out specific problem areas within target sectors. We like what ACCION Venture Labs is doing in East Africa or what Pearson Affordable Learning Fund is doing in India, looking at specific leverage points in financial inclusion where entrepreneurs can make a difference.
Instead of input-oriented technical assistance that provides vague “handholding” and “consulting hours” to entrepreneurs, invest in real deliverables: pro forma financials, market tests, customer validation (or business hypothesis nullification), HR services, and more.
Impact investors must be willing to invest in infrastructure, as well as riskier businesses than they might like, if they want quality carriers. Impact investing has been described as an “emerging asset class.” Yet if we continue to subscribe to the mantra of starting with the problem, we need to identify the clear, system-level breakdowns that prevent an “asset class” from being possible. These blocks could be inefficient markets for startups, the language surrounding social capital markets that turn serious entrepreneurs and investors away, or the misallocation of capital to reward risk aversion in a sector that actually requires risk-tolerant structures.
What does this mean for you?

• If you are an entrepreneur and you meet someone with capital, and you want to work together, figure out what they want to do, and help them solve their problems. If they want to invest in businesses that help address cancer, figure out where they are getting stuck. Is it lack of quality deals? Is it poor problem identification? Is it public policy/regulation around investing in health services? Don’t convince them that they should buy your solution, figure out how you can solve their problems.

• If you are someone with capital, realize you need to invest in (1) infrastructure, and (2) quality. Don’t assume someone is doing a good job just because they’ve won awards or are getting a lot of press. Figure out what they’ve done, and what they’ve delivered, from a problem-solving standpoint instead of only from an input standpoint. This is a corollary to the above point—invest in great businesses, and people with thoughtful (and falsifiable, changeable) hypotheses on how to build the businesses. “Patient capital” shouldn’t mean “infinite capital”—we’re investing, not grantmaking. True solutions to major social problems will yield great businesses if done well and with appropriate infrastructure.

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This piece was originally the final of a three-part deep dive into “Thoughts from the Trenches” as we kick off this year’s Social Capital Markets Conference. For the series overview, click here.  For the first post, “Talk Isn’t Cheap, It’s Incredibly Expensive” click here. For the second post, “Marginal Impact Is Better than Doing Nothing,” click here.