Seeking Impact: Investors and Innovators (Part one)

Seeking Impact: Investors and Innovators (Part one)
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Impact Investment has been around in one form or another for decades.

Attempts at innovating the investment culture--particularly that of investment banks and private equity funds presented a fragmented, inefficient, and challenging environment. Early innovators had limited knowledge exchange among themselves and were natural to proselytize. A small, committed group of investors willing to learn from each other and collaboratively built a market that could be used to solve some of the world's most pressing challenges.

In just seven years since these first conversations were percolating, very few would have characterized the impact investing community even a "market"-individual investors were operating as pioneers in mostly uncharted territory. "Social Investing," or "Impact Investment" has many monikers. Whatever the name, we are referring to investment funds or managers for whom the allocation of capital and assets comes along with the explicit intention of social return. In addition to innovatively leveraging their IP to exclude rivals and to build better markets, these firms and individuals wish to make an appreciable difference that extends beyond ROI back into the causes they believe in and their communities.

Investors in this emerging field intend to get more out of their money, than, merely money. They expect to have an impact, to make a difference. The key differentiator between this investor and her colleagues is that she leverages the use of technology or innovation as a driver for change in the financial ecosystem and society at large. In this sense, Investment and Innovation are synonymous.

Impact Investment and Innovation is focused on net positive outcomes that include all stakeholders, both internally and externally. Impact Investors work and think differently. These bold new companies manage their firms and frame their economic choices with greater conscientiousness. Indeed many of these investors -- large and small -- actively analyze and vet funds and opportunities that have both ROI and ROR. Return on Relationship. Impact Investors and Innovators are internally sound--they run better companies, have happier employees, and contribute to social welfare. Almost all of them have a principal concern for natural resources, and desire to better society in some way. They are externally focused on improving societal conditions that range from affordable housing and rehabilitation to natural resource conservation, to local structural issues.

Impact Investors wisely adapt their existing portfolio approach to risk-taking and leverage their sources of knowledge. Some impact-minded firms will insist on clean corporate governance and allocate a dedicated budget for venturing and testing concepts that are both profit and purpose driven. HBR, Forbes, and WSJ all have presented arguments that Impact Investment is far from being run by "hippies with money" but presented as a pragmatic approach to, and insistence on processes that strive for efficiency and the ready skills to manage failure that leads to activist companies with stellar market performance.

Innovative portfolio managers excel at impact and social portfolio management, especially at scrutinizing and even stopping projects before they burn too much of their investors' capital. Innovative investors and portfolio managers will not invest in them unless they believe they have real promise. Utilizing the same highly disciplined processes that focus on progress reviews, clear decisions, impact investors insist on frameworks and time completion that they have used to guide their investors when investing in "normative" yield instruments to counter any notion that new tools are somehow not up to par.

While on the innovation side--they are also more likely to use IP to exclude others or gain competitive advantage--and to use IP as a lens for portfolio management. Tesla Motors, for example, recently announced it will not sue other electric-car makers that use its technologies "in good faith." Tesla realizes that while it has a formidable patent portfolio, it cannot build the electric-car industry on its own. Moreover, it understands that its patents could discourage others from entering the market. The company is betting that by removing the threat that it will protect its patents, it will accelerate the growth of the market and the infrastructure of charging stations needed to support it. (See "Tesla's Gambit: Aligning IP Strategy with Business Strategy," BCG article, August 2014.)

Characteristics of Impact Investors and Innovators

Impact Investors and Innovators not only run better, more ethical businesses, but they harness innovation to work across the entire ecosystem and affect all stakeholders. What better way to improve on ROR-return on relationship then to make use of technologies that ease the burden of costly and timely transactions for the investors?

Innovators also differ from their competitors in three distinct ways.

Impact Innovators will generate new product ideas from almost all of ten different sources than either energetic or other disruptive innovators. One primary differentiation is that Impact Innovators are interested in fundamental business model innovation more than their laggard competitors are. Many of them accomplish this by moving from selling products to selling products embedded in a service. This key difference offers greater differentiation and higher returns. By successfully shifting from product to a service mindset holistic changes to the underlying business model are achieved with greater ease.

Markets, Good Intentions and Positive Outcomes

Impact Innovators eschew pure financial return and contemplate longer-term effects and competitive advantage. Impact Innovators track the number of new products and the success ratio of those products. Innovators think long and hard about hiring and retaining the right talent and prioritize ideas for development. Laggards are more concerned with funding ideas and moving them through the process without conscientiousness and due diligence and often spearheaded by the wrong people for the role.

The notion that capital markets are themselves morally reflective is absurd. The markets, of course, reflect much about the humans that operate in them. The question is 'What moral imperatives do we want them to reflect?" This presents a challenge, as pragmatism must balance idealism, especially in this area.

Perhaps it is best to pose the question with this in mind: If the power of the capital markets can affect change, and we accept the premise that every investment decision has an impact, what kind of impact can we seek?

Most of us have come to believe that technological innovation creates business value. Disruption does not automatically translate into success, and neither does charitable giving. For Impact Investment to work, change needs people. Return on Relationship can only happen when all parties are in agreement about the kind of impact being sought out. When those changes have taken enough hold to influence economic behavior, sufficient scale, favorable economics and timing will coalesce, and the impact community will have made sufficient inroads to permanently disrupt market paradigms. That time is now. The advances made by impact investors and innovators today will shape the future of the real estate industry.

We are realistic, foremost. Investors have been practicing impact investing in one form or another for decades. These attempts at innovating the investment culture--particularly that of investment banks and private equity funds presented a fragmented, inefficient, and challenging environment. Early innovators had very little knowledge exchange among themselves and were natural to proselytize. A small, committed group of investors willing to learn from each other and collaboratively built a market to solve some of the world's most pressing challenges. In just seven years since these first conversations were percolating, very few would have characterized the impact investing community even a "market"-individual investors were operating as pioneers in mostly uncharted territory.

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