Impact investing, or the funding of non-profit and for-profit social enterprises, is transforming the philanthropic sector. Individual donors, family offices, and foundations are evaluating impact investing as a tool to align a sustainable capital deployment strategy with their missions of generating measurable social benefits.
However, many of these institutions set aside limited funds for investment and employ a small number of staff. These constraints have potential to limit the size, and thus impact, of investments as well as in-house knowledge and expertise necessary for sourcing and investment decisions. My experiences leading and managing student-run impact investing teams highlights similar obstacles and best practices applicable to foundations seeking to pursue impact investment.
Lessons from the Field: Haas Impact Investing Network (HIIN)
Run out of the University of California Berkeley’s Haas School of Business, the Haas Impact Investing Network (HIIN) provides MBA students a first-hand experience in impact investing. Every year, six Haas MBA teams are selected as impact investors to source, perform due diligence, and pitch a social enterprise for the a potential to win a $50,000 investment.
Over the past two years, I have participated as an impact investor, leading the healthcare team, as well as a Managing Fellow, guiding the student teams throughout the investing process. In both of my roles, I witnessed teams struggle in sourcing early stage social enterprises. As a result, the Managing Fellows have conducted a series of workshops for this year’s impact investing teams to identify common sourcing challenges and discuss best practice responses.
Developing an Investment Strategy
Challenges: Prior to researching organizations, our team developed an investment thesis. Our thesis evaluated macro sector trends to drive our company outreach. However, the development of our thesis demanded a large time commitment and sector expertise that our team did not contain. Our resulting thesis was restrictive, and filtered numerous companies that may have been deserving of additional diligence and research.
Best Practice: A thesis-driven investment approach requires time and expertise. Although the result may produce strong niche investments, it may also result in missed opportunities. For investors without the luxury of time or sector expertise, a bottom-up approach is recommended. The bottom-up approach is an opportunistic and generalist approach to investing, relying on strong company diligence rather than a indiscrimate screening tool for identifying potential investments.
Evaluating Teams
Challenges: Faced with a limited understanding of the factors that make social enterprises successful, our team focused our analysis of the founding members on their passion for the product and sector experience.
Best Practices: A deep analysis of the founding members is critical to investment decisions of the highest-performing impact investment firms. In addition to passion and sector experience, impact investors pursue social enterprises whose leaders demonstrate the following key elements:
- Multiple Founders: Multiple founders with complimentary skills that fit the product and market. Sector expertise, technical know-how, and charmisa are essential skills that the founders must possess.
- Smart and Scrappy: Founding members should have a demonstrated ability to overcome obstacles and redirect in reaction to a barrier.
- Relationship: Founder strife is on of the top reason top reason for start-ups failing. The strength and duration of the founding members relationship provides good indicators of team success when faced with adversity.
These critical lessons from HIIN can be transferred to small-staffed foundations seeking to enter impact investing to align their mission and capital deployment strategy. When developing a sourcing strategy for early-stage social enterprises, small-staffed foundations should evaluate sector expertise, existing network, and founding members.