Lessons in Impact Investing

I arrived at UC Berkeley’s Haas School of Business last summer with the goal of exploring impact investing. Despite enthusiasm, impact investing remains a tiny portion of all invested capital. Based on my experiences, I believe that foundations can play a pivotal role in making impact investing the norm rather than the exception, and in this article I lay out how and why foundations should engage more in impact investing. Text: Amanda Eller

My interest in impact investing began during my time at the solar energy startup SunFarmer, where I worked with foundations, corporate donors, and investors to raise money for energy projects in Nepal. For many communities, especially those beyond the reach of existing electric grids, distributed renewable energy is the most affordable and reliable source of electricity. But construction of the necessary infrastructure requires massive capital investments that exceed what the public and nonprofit sectors can raise.

Entrepreneurs working on world-changing ideas

This spring, in order to gain more exposure to impact investing, I completed an internship at a venture capital fund called Better Ventures. Better Ventures invests in early stage companies that generate positive impact in the areas of health, sustainability, and access to opportunity. Their investments range from a company that helps mothers return to the workforce after parental leave, to a business that provides working capital financing to solar energy entrepreneurs in East Africa. One of my responsibilities was sourcing; I scoured the UC Berkeley startup ecosystem to find entrepreneurs working on world-changing ideas, and then proposed those companies as potential investments.

Impact investing has tremendous potential

Funds like Better Ventures are at the forefront of scaling high-impact business models, but they also face limitations. Venture capital funds raise money from investors called Limited Partners, who expect returns within 10 years. Because early stage investors usually come in when a company is in nascent stages, they prefer innovations like software that can scale quickly. They typically avoid products that require long research and design (R&D) cycles or regulatory approvals, and are less likely to fund organizations serving the most vulnerable groups like the homeless or refugees. Nevertheless, impact investing has tremendous potential and offers unique opportunities for foundations.

Foundations that adapt to the shifting landscape of impact finance will maximize the additionality of their philanthropy by filling in gaps that the private sector leaves unaddressed. Foundations can also play a key role in shifting perceptions about the profit-impact trade-off.

Foundations can invest where the private sector will not:
Not every solution to social or environmental problems can generate market rates of returns. High return requirements also push social enterprises away from serving the most vulnerable populations, in favor of those with an ability to pay. Foundations can maximize the additionality of their capital by investing in initiatives that the private sector is unlikely to touch because they do not generate enough revenue to return excess profits to investors.

Foundations can unlock opportunities where the private sector wants to invest: The volume of impact investing capital is increasing, but investment opportunities are often difficult to find. Foundations can leverage “patient” capital to unlock large-scale investments. For example, at SunFarmer, local banks were unwilling to lend for commercial solar energy projects because they were unfamiliar with the technology and uncomfortable with the long financing terms. Foundations could offer loan guarantees to de-risk the projects, offering banks the opportunity to gain familiarity with renewable energy lending.

Foundations can activate their endowments to further their missions: The lingering misconception that social impact lowers financial profits makes it difficult for mission-driven private sector funds to raise money. While it is true that some social solutions are incompatible with profits, there are significant opportunities to pursue profits and impact simultaneously, as documented by industry leaders such as Cambridge Associates. Foundations can support the entire ecosystem by investing their endowments in funds with the proven ability to generate profits while furthering environmental, social, and governance goals.

Many foundations have been reluctant to apply their mission statements across their assets because of the fiduciary responsibility to protect funds for future generations. But this long term view is precisely the reason to align investing with mission-related goals. Problems like climate change and political strife pose significant long terms risks, and investments that mitigate those risks are important for the protection of the fund’s future prospects.

By following the above suggestions, foundations can help strengthen the ecosystem for impact finance, and help create a future where impact is considered in every investment decision.