The Promise of Impact Investing

levslavin — Sat, 02 Jun 2012 14:07:48 +0000

Hey folks, I wrote this a few weeks ago for a short essay assignment. Thought I’d share. It’s a bit oversimplified, but (I hope) broadly accurate. I’d love to hear what you all think.

Markets can’t solve all our problems…

Financial markets are supposed to allocate labor and capital to where they are most needed. However, there are pervasive problems in the markets that result in deeply dissatisfied workers and chronic, unresolved issues in areas like education, healthcare, and the environment. Here’s (roughly) what happens:

Most traditional investments go into old-school for-profit companies, and many talented people follow the money to work at these companies only to find themselves stuck in unfulfilling careers.
Because investors are often overly focused on short-term financial returns, the companies, in turn, find it difficult to go after inefficient (but potentially quite lucrative) markets, such as science in American schools or clean water in Indian villages.
Such issues are left to governments and NGOs. While they are often staffed by talented and passionate people, the lack of business rigor at these organizations often results in solutions that simply funnel money from donors to beneficiaries without addressing the problems at their core. Because these organizations’ business models are unsustainable, their employees and volunteers, who are there to make a positive social impact, are instead forced to waste much of their energy on constant fundraising, making it even more difficult to focus on results.

…or can they?

Social entrepreneurship is a movement to create fundamental solutions to chronic problems and to design sustainable business models to deliver those solutions in the most efficient and effective way possible. Ultimately, this promises to change the culture of traditional business, by demonstrating that it is in a company’s best interest to achieve good financial returns not just as an end in itself, but as the byproduct of a more evocative vision that resonates with stockholders, employees, customers, and communities.

Impact investors are crucial actors in the process of reengineering labor and capital markets to support the efforts of social entrepreneurs. By giving social enterprises the resources that would otherwise have gone to traditional companies and philanthropies, they make it possible for talented people to channel their energies in a new and more fulfilling direction. By focusing on performance metrics that combine profitability with social and environmental returns on investment, they provide the rigorous business oversight lacking in many philanthropic institutions and create incentives for building more balanced, sustainable for-profit companies. Finally, by fostering a culture in which entrepreneurs can focus on meaningful work that addresses society’s most significant challenges, impact investing has the power to make lasting improvements in employee satisfaction, business as usual, and the wellbeing of people around the world.

So You Want to Have a Company

levslavin — Fri, 06 Apr 2012 02:54:31 +0000

Companies are people too…

Over the past couple of years, between finishing my MBA and launching a startup consulting business, I’ve thought a lot about what it takes to successfully build a company. While people speak a lot about their ideas, that’s just the sexy 1%. The remaining 99% is execution, where many good ideas succumb to a quiet, exhausted death. And execution largely depends on the founding team. This is why, at the seed stage, when the company hasn’t had much traction and all that exists is the idea and the team, investors focus primarily on the people that make up that team. So, as a company founder, what kind of person do you want to be?

AngelList <3 OkCupid…

The seed stage is like dating. It helps to be relaxed and to listen. Alcohol or coffee are often involved, and you’re making yourself look pretty to attract customers, partners, and investors. They must like your idea, but more importantly they must like you and believe that you’re the right person to make that idea a reality, the kind of person to whom they can say “I do”. (Ok, perhaps I should’ve picked eHarmony.) In short, you need to be both likeable and credible. Since likability is a rather fuzzy subject, I’ll cheat and focus on credibility. And to be a credible founder it is important to demonstrate passion, ability, and humility.

Passion: in good times and in bad…

There are a lot of ups and downs early on. Not just financially, but also emotionally and motivationally. Despite these ups and downs, you have to put in relentless effort to get things done, convince others to help you do it, and convince still others to eventually buy it. There are huge opportunity costs in terms of lost salary and the time that you could’ve spent watching Battlestar Galactica. To have staying power, you have to be in love with your idea. If you’re just in it to get rich, or because it sounds cool to be an entrepreneur – don’t.

Ability: let’s make a baby…

Beyond raw passion for your idea, it’s important to have to have the functional skills and domain expertise to carry it off. In terms of skills, most startups need people to build things, sell things, and keep track of the money. Figure out what you’re missing, and recruit co-founders to fill in the gaps. Domain expertise is like having a map. Knowledge of the industry and experience starting companies helps you figure out what to do with the functional skills at your disposal. (Note: This is why accelerators have become so popular. They’re like GPS, providing scalable platforms for sharing the experience of dozens of mentors.)

Humility: he never listens…

Humility? I know this might sound counterintuitive. Founders are supposed to have insane amounts of optimism and self-confidence. Perhaps. But know your limits. Know when you’ve reached them. And seek out and listen to the advice of others. Venture capitalists see it as a red flag when a CEO is unwilling to take feedback and coaching. And a particularly inexperienced founder might even be required to go through an apprenticeship phase under an interim CEO.

However, there is a more fundamental reason for humility than the exigencies of investors. Numerous behavioral science studies show that people are consistently over-confident in their decisions, and often base their judgments on limited, anecdotal and systematically biased data. People tend to use even ambiguous information to confirm their own preconceptions. In practice, this can result in solving the wrong problem for the wrong market in twice the expected time and at double the budget. Unless you’re Steve Jobs, listen to your customers, teammates, and experienced advisors. If you’ve chosen them right, they will help you avoid the really bad decisions…and then you can watch your baby grow up and get married (but we can take that up in Mergers & Acquisitions).

Venturesome Consulting