This series is an abridged and revised version of a 5-part series originally published on GoodGeneration.org between Jan 15-23 , 2012.
In Part 1 and Part 2 of this “Impact Investing Career Checklist” series, we talked about the general job landscape, how to think of opportunities, understanding personality types and testing for how well impact investors know what they want to invest in.
The last two items in this Part 3 today deal with what you should know about your employer’s return expectations to know a little about how realistic and successful they will be. Finally, it concludes with some reflection on yourself to understand as well as possible your personality and what environment would make you happiest.
To review the original “checklist” one last time:
Impact Investing Career Checklist
- Identify the opportunities (Part 1)
- Assess your potential role (Part 1)
- Understand who runs the show (Part 2)
- Define target organizations they fund (Part 2)
- Clarify their return expectations (Part 3)
- Know yourself (Part 3)
5) Clarify their return expectations
Besides knowing what type of companies your impact investor wants to support, you absolutely have to understand their return expectations. While social return by definition is vague and will change over time in most cases, financial return is not. Thus, be sure to understand how much financial return investment funders are looking for given the type of companies they are interested in.
Despite all the literature explaining that social enterprises and similar organizations are very much unlike their traditional for-profit counterparts, not just in their mere orientation towards primarily socially beneficial missions, it still astounds me when I meet impact investors who do not really understand this difference on a deeper level. They do not understand this because they still demand what I consider a very, very high financial return, which not even the Top 5% of social enterprises can realistically yield. We do have plenty of companies with fantastically innovative social or environmental change models. But we have only a handful of companies that can also deliver good cash on cash within a shorter time horizon.
The high cost of failure
This is made more difficult because failure in social sector investing is not as easy to recover from, unlike failure in for-profit sector investing. In the latter, VCs take bets in many companies and don’t mind several failures because there is a large enough pool of firms to choose from, and one Facebook or Google will more than pay for all failures put together. However, in the impact investing space, quite frankly, there won’t be any Facebooks or Googles anytime soon. Ultimately, even if impact investors successfully reel in loads of institutional investors at this stage in the industry’s development, having those investors then witness (and feel) way below-market returns could be detrimental to confidence in the quality of impact investing deals. But there is a more significant issue at stake here.
An issue of values
I would argue that the key problem of impact investing today is that it attempts to play ball based on the rules of the traditional financial markets game. It has less to do with fund managers “selling out” than them trying too hard to speak a familiar language with capitalists, i.e., asset managers of “big money.” You can see hundreds of references and tips on the web about the importance for socially oriented firms to speaking “the language of business.” But I think it is not simply an issue of language. It is an issue of values.
This attempt to bending over backwards to meet the risk/return adjusted expectations of traditional investors misses an important opportunity to re-position their view on what the returns of investing could mean besides money. Persuading people that social/environmental return is intrinsically of value and utility is the key. Building up the pool of those who appreciate this is arguably a more important role than catering to the pool of those who still want their cake and eat it, in my opinion.
In practice, as an employee of an impact investing fund, depending on their return expectations, just be aware that you may end up turning down 99% of deals and spend most of your time writing investment memos with less than a handful of actual transactions taking place per year (globally).
6) Know yourself
Personality and paycheck expectations
At last, after assessing the impact investing job opportunities at hand, determining your potential role, and understanding thoroughly companies’ people, target investments, and return expectations, the final piece is to spend some time reflecting on how you and your personality may or may not be a fit with that company.
You have to know how you would like to feel your impact. That helps you choose between types of organizations (doers vs. advisers) in the impact investing space. Also, if you are attracted to VC/PE-like firms in the social sector and you are someone with investment or finance industry experience, be aware what type of cultural and compensation differences you may be facing. Did any of you ex-finance professionals hope for getting a good paycheck AND live with a cleaner conscience? If so, beware not to blindly expect this to be the golden opportunity to do “both good and well” for yourself. Just because the stereotype has it that this “new breed” of leaders brings in more passion for metrics, efficiency and processes, does not mean they will pay you for it the same way they were used to themselves way back when.
Training and development needs
Similarly, pay attention to your needs. Given the small size of these companies, training and development will mostly come on the job and you are expected to hit the ground running, which eliminates in a sense many would-be applicants without sufficient prior experience. If you are a transaction-oriented person, who thrives on execution, you may have to wait longer than you expected to actually do deals. This can be a combination of either being assigned to a region where the market is not developed yet, or because your firm has not internally resolved expectations between managers and funders/donors, or because there is generally inconsistent applications of investment principles on the fly.
In the final summary, for the person at the right stage in their career (junior entry level or senior level) with the right expectations (that is, very few), impact investing can indeed offer a very exciting place to spend some time and encounter an amazing array of great social enterprises. Of course, you may never know really what you are signing up for as in any other job, but at least by reflecting on these six questions in a diplomatic (or even indirect) way, by doing a little research and by paying attention to your needs, you should be reasonably well positioned to find the right opportunity that makes you happy.
I for one do wish you all the very best for your career search, and would be glad to hear about your story one day!