To find clarity we return to our mission, which is to make the very poor a lot better off. We don’t care whether an organization is a for-profit or non-profit. What we want to know is whether it will have a big impact on our target population.
When we look at the world of impact investing through this lens, we find remarkably few for-profit ventures that both reach our target population and have the potential to become viable business enterprises. Cash flow projections are wildly unrealistic, management teams untested, and market failures unacknowledged. There’s 10 times the risk profile of a standard US venture deal without the same potential upside.
All of this does not mean that market financing is not playing a big role in creating social impact. In emerging markets like India, Mexico—even Ghana—global investors (without the impact label) are driving big gains in livelihoods, healthcare, education, and access to energy. If impact investing is merely laying a social screen on money that is already targeted for investment, more power to all.
But there’s an elephant in this room.
Impact investing, and its seductive message of doing good and making money, is having a profound impact on philanthropy. The role and impact of grants is being questioned. Social enterprises with revenue models are having unrealistic economic expectations imposed on them. But most of all, impact investing creates the illusion that traditional business models can solve big problems in places where poor governance and huge market failures are the rule. In our experience, this is simply not the case.