What You Need to Know About Impact Investing

Impact Investing is here to stay. Here is why.

Impact investing is a phenomena that should be reckoned with. A field not as young as one might think - arguably its history begins with the social unrest of the 1960s - impact investing came to prominence only a couple of years ago. Nevertheless, this newcomer at the intersection of financial and social sectors already has success stories under its belt. Take for example, Blue Orchard, a financial institution successfully investing solely into the microfinance organizations or Acumen Fund that has invested $83 million in social enterprises across multiple countries around the world, or Omidyar Network that has committed $611 million to both for-profit and nonprofit companies since its inception in 2004. But there are more drivers contributing to the success of impact investing besides a few financial figures and well-known nonprofit brands.

Much more important are the broad social changes that the world has been experiencing for a past decade or two. Today not only we are faced with ever increasing environmental, humanitarian, and social problems, but today we actually can do something about it. Technology, widespread and almost instantaneous access to information as well as rising incomes across the board (so called "flattening"of the world, the term coined by Thomas Freidman) turned many silent observers into philanthropists, volunteers, social entrepreneurs, ever demanding and conscious consumers.

Investing for Social & Environmental Impact

Business as usual rarely works now. You can attribute these changes to Generation Y-ers and their particular outlook on life, unprecedented numbers of young people single-handedly creating fortunes from scratch, or to the relative political stability the world has experienced since the breakup of Soviet Union. There are pragmatic reasons for the rising popularity of impact investing as well: the global financial crisis has shown just how ineffective and destructive traditional financial instruments could be. The subsequent need for minimizing risks made investors look outside the box. As it turns out researchers at NYU have found evidence that investing in microfinance institutions can help portfolio diversification. No matter what the reasons are, the point is that the world now has time and resources to effectively solve global problems and impact investing is one of the most useful and promising tools to do so.

1) Impact Investing will be worth $9 billion in 2013 according to JP Morgan industry report and could be worth some $500 billion in a decade by Monitor Institute's estimations.

2) Impact Investing is Data & Performance Driven, at least much more so than the nonprofit sector. As the formal definition of the sector is still in the works, practice remains extremely diverse, with some funds positioning themselves along their traditional financial-sector counterparts and others self-identifying as inherently pro-social. Intermediaries between financial and social sectors, impact investment funds have to produce both financial and social returns. It's easier said than done, however. "For the most part, evidence does not always look like that of conventional investing." Yet the large portion of the market still expects equity-style returns. (A Market Emerges: The Six Dynamics of Impact Investing.) In fact, majority of impact investment funds rated by GIIRS target 11-25% rate of financial return. Are these rates realistic? We just have to wait and see.

GIIRS Quarterly Analytics Report: Q3 2012

3) Impact Assessment is based on Social Impact Metrics. IRIS (stands for Impact Reporting and Assessment Standards) social and financial metrics seem to be the most widely used ones, some are industry-, some are company-specific, all can be implemented and tracked by nonprofit, for-profits, and social enterprises alike. Nevertheless, there is certainly no industry-wide acceptance of any standard.

4) Main challenge: aligning risk and returns (both financial and social). You thought you had it bad in the financial sector. Add a third unknown into the already complicated equation and you have a good picture of the impact investing field. So far we have talked only about the providers of the financial instruments, but what about the people and companies on the ground that put the money to work? It turns out that social entrepreneurs and nonprofits have the most difficulty raising funds from impact investors at the seed-level. There are simply too much risks involved. Time-horizons of potential investment returns are too long. There is so much more uncertainty in building a business in a developing country, much more so in a poor, underserved community! That is why the work of an impact investor never ends with writing a check, it is a much more involved, intricate process, like Acumen Fund's patient capital, for example. An excellent article from Stanford Social Innovation Review, Closing the Pioneer Gap, discusses this issue in much depth and is a read I highly recommend.

As you can see, there is a great deal to be done to make impact investing a long-term success. Yet, despite its young age, the sector has already disrupted both financial and nonprofit industries and challenged the status quo. Is it not a good enough reason to watch the industry closer, join the discussion, and maybe even help shape a financially-sustainable and powerful tool for social change?

What makes a microloan work?

In the past couple of weeks the microfinace debate has picked up again with the release of David Roodman's new book "Due Diligence: An Impertinent Inquiry into Microfinance". Even though I haven't yet read the book, I can almost surely assert that it is an excellent and well-researched work, as I have been following Mr. Roodman's Microfinance Open-Book blog for more than a year now.

One of the most heartbreaking things you can tell a microfinance practitioner goes something like this: "On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero." (TIME Magazine) But this is exactly what David Roodman says. And this is ok, since he is a researcher and this is his job: to look for best practices in international development, criticize whenever he sees something wrong and start a dialogue, so that we - international development practitioners - see our mistakes and improve them.

As I said I have yet to read Due Diligence, nevertheless, I already know that I will be disagreeing with some of the book's main points. I, of course, am no expert as Mr. Roodman, but from what I have heard, read, and learnt in the last two years about microfinance and - most importantly - from my work at Color Me In! I would argue that microfinance does work when done right.



"Done right" is, of course, an oversimplification of a very complicated process. For developmental workers like Sarah, CMI's Founder & Executive Director, this process includes years of hard-work on the ground, talking and listening to people, and genuine desire to help people. For people on the other end - microfinance clients - it's also a lot of hard work and a deliberate choice to empower him or herself instead of just living off donors' handouts for the rest of their lives.

So you see, for microfinance to work and stand up to it's main promise of lifting people out of poverty, there is no place for multi-million-dollar banks, corporate-heads, and traditional investors. When Muhammad Yunus gave his first microloan, he didn't envision Grameen Bank to be headquartered in one of Dhaka's skyscrapers. For if he did, that microloan would have never worked. When any company grows so rapidly, top-management always loses its connection with the customers. That's exactly what happenned with SKS Microfinance, Grameen, and Compartamos. And microfinance clients are no ordinary customers: they are much more vulnerable, limited with their resources, dependent on a microloan and in need of fair treatment. Many clients of big microfinance banks are not getting such treatment.

Because microfinance clients are often extremely-poor, giving them a loan can also be very risky (despite all the impressive rates of return reported by many MFIs). That is why loan officer to client connection is so important: microfinance agents cannot just go and handout microloans to any poor person in need. If there is no group lending scheme involved, officers have to access person's willingness and ability to start an income generating activity and repay the loan. In order to do this, a loan officer has to care about his work and about his/her clients. In case of huge MFIs it is often not the case.

To sum up, microfinance takes heart and hard work. Both on the part of a microfinance organization and a loan recipient. And in microfinance, as maybe nowhere else, small is big.

P.S. To learn more how microloans work for the clients of Color Me In! check out Sarah's blog that she writes from Zambia and some of the photos with interesting stories behind them.

Muhammad Yunus: How Success Really Looks Like

Last week one of my dreams came true: I met Muhammad Yunus, my biggest inspiration and a social business guru, who travels the world, preaching social business to some of the most powerful people in the world (i.e. Obama, Clintons + corporate heads) and anybody else who would listen (people who actually start social businesses later on). This is how he reached a land far, far away, a city that for some still lays behind the iron curtain. I am talking about Moscow, of course, the capital of The Tsardom of Russia.

Anyways, sorry for the overflowing irony. The fact, however, remains that I am deeply thankful to Professor Yunus for visiting my country, where - let's face it - social business is not widely known. Ok, let's really face it - there's maybe 1000 people in Russia who know about social business and what exactly it is. Nevertheless, he comes to Moscow, advises our economic development minister, gives our famous TV hostess a "social business contest for youngsters" idea, patiently explains our journalists and financial heads what exactly social business is and why would it ever make sense for an entrepreneur to create a social business and for investors to fund it. Just to make it absolutely clear: Social Business Forum in Moscow does NOT look like any social business forum in US or Europe, there were maybe 100 people tops at the main, plenary session when Professor gave his speech.

So, let's cut through the chase and get to the point. When it comes to Q&A session, I raise my hand and ask a question about... You guessed it! Failure! I really think that all development peeps should be proud of me. Because, clearly, there are very few (if any) people in Russia who knows about the whole admitting failure idea. Actually, there are no such thing as development or foreign aid peeps there, except for those who work in the Ministry of Defense or Russian Diplomatic sector.

That is why Professor Yunus unfortunately did not give a detailed in-depth gazillion-hour long lecture on failure and how to deal with it, which he would totally be able to do, by the way. He created a huge number of social businesses both in Bangladesh and abroad. Clearly, it could not have been all success stories? I know of at least one real failure story that Professor Yunus could have shared with the audience: Grameen Phone, which was supposed to be owned by the poor - as in one of the two social business models described by Professor himself - but is now owned by the Norwegian company Telenor. According to Muhammad Yunus, Telenor heads didn't not want to satisfy their genteleman's agreement to transfer owndership rights to the poor. Failure with no happy ending so far, but a very important lesson-learnt:

Trust, but verify. Always.

Nevertheless, Grameen's latest venture is with Adidas, whose geniuses are working on a sneakers model that will cost only 1 Euro. Isn't that something?

What Professor shared with the audience was sort of obvious, but no less valuable because of it: his path to success was not an easy one, there were many mistakes made, many times one or the other venture was not working as it should have been, frustration was definitely a part of the process. Professor Yunus said:

"You can never start with a perfect social business model, you have to start with a tentative model and then build on it."

Words of wisdom and experience, of course. But how will a social investor feel about it? I am not sure, but most likely he won't be too thrilled, especially if you are not Muhammad Yunus. Another thing Professor Yunus noted:

"I was working on a couple of projects at a time. It helped me: when I had problems with one project and felt frustrated, things were going well with the other one, and it kept me going."

I am actually discovering that working on many projects at once really helps me in the same way. Of course, we all know that sometimes life presents us with bad news on all fronts...But you still have to keep going. That was the main message:

No giving up if you want to change the world.

By the way, he also mentioned that he never wanted to change the world. He wanted to change a woman's life, then a village, then a country, and only then the world. In other words:

Start small, grow big.

Finally, Professor tried to explain how his path to success looked like, zigzagging his hands. Yes, his path to success looked like this too:



I don't know about you, but it seems to me that I am somewhere in the beginning of the middle. Not a terribly nice thing to find out, but knowing that Professor Yunus' path had the same trajectory definitely makes it easier to handle.

How does your path to success look (or looked) like? Do you have some failure stories or lessons-learnt to share?

Gaddafi's Death & Human Nature

When they killed Osama Bin Laden, I celebrated the death of terrorism he symbolized and was joyous as many others, because this man was the ultimate evil, at least for most Americans of my generation. Back then @penelopeinparis raised an important issue of morality and justice of Bin Laden's killing in her post Bin Laden’s Death: A Reason To Rejoice? and our opinions on the subject were different...

When yesterday they killed Gaddafi I celebrated Libya's freedom from a ruthless dictator, BUT the circulating video of his death and graphic pictures of his body ( I am not even going to link to those), this time made me think about human nature, justice, and morality. To me, there is no question that the guy deserved to die. Because of him thousands of Libyans died this year alone and were killed during his 42 years (can you believe this guy?!) reign. Even though, again, as in Bin Laden's case and any other one, trial would have been a better option. There are political reasons for his killing, of course, and Libyan rebels were very likely following NATO's or European directives. If Gaddaffi was trialed he could have said too many unflattering things about European leaders, as Sarzozy and Berlusconi (does anyone need to hear more unflattering things about Berlusconi?!).

But, to me, the worst part of this whole thing is the way "The King of Kings" was killed, these horrible images & video circulating all over Internet, TV channels playing it and showing them over and over. When I saw the video on Russian channel, I was like "ok, they never cared too much about feelings of the viewers anyways." But, American TV channels, usually so careful and considerate, when it comes to the "axis of evil" personalities, really don't give a damn. Now, I understand why photos of dead Osama Bin Laden were not made public.

In my opinion, the way colonel was killed really shows the true human nature: we can be both kind and cruel, there are no good and bad people, it's always a mix. Only in blockbuster movies good guys are generous and merciful, while bad guys are utterly vicious and ugly on top if things. Real life is very different and rarely follows a perfect scenario.

Update: Unfortunately in real life it all ends in a very inhumane way: Muammar Gaddafi's 'trophy' body on show in Misrata meat store


I would like to end with a quote by Keith Ellison, the first Muslim elected to the US Congress:

Libyans are safer now after Gaddafi's death and the Arab world is breaking free. But never celebrate death of anyone, even bad people.

How do YOU feel about Gaddafi's death and Libya's liberation? Share with me, it's amazing to see history unfold in front of us this year, and we definitely need to analyze it and draw some lessons from it, don't you think?

Clinton Foundation: Celebrity Brainstorm (Funny!)

Luckily enough I noticed @abmakulec's tweet in my overflowing feed.

The following video cheered me up in no time and made me wonder about brainstorming sessions in a typical nonprofit.

Would any nonprofit want its brainstorming sessions recorded, the painful process of "getting things done" revealed to the public? Probably not, because it's all just work and business, right? It might be true, but isn't it nice to see a human, smiling face behind all those reports, numbers, and fundraising appeals?

Aid, Nonprofit, Public: Who Defines the Rules of the Game?

I am a big supporter of the view that nonprofits should be run like businesses. Because aid has to be sustainable. In every sense of the word. However, through my experience in the field I have started to notice that some practices of many aid and international development organizations remind me of the corporate world. But not in a good way.

When nonprofit leaders are striving to streamline day-to-day communications and management within their organizations - it is excellent. When CEOs promote transparency and accountability within their companies, it is great. When nonprofits look for social investors instead of grant-makers to find their way to financial sustainability, it is superb! However, when nonprofits start paying more attention to their PR campaigns and fundraising, forgetting their original goals in the process, it is not aid anymore. A nonprofit is a business with mission. When mission is lost, nonprofit turns into a traditional business with a donate button on its homepage.

One of the articles that really inspired this post was tweeted by the mysterious @TalesFromthHood. AlertNews Can aid agencies afford to be honest? is talking about nonprofits' fundraising & PR practices that too often take general public (a.k.a. potential donors) for simplistic and narrow-minded people, pushing simple messages such as "a starving child" and forgetting to tell the not-so-pretty truth from the ground.

The article quotes OCHA's Mark Turner: "I still get the impression that the simple tale of 'give a pound save a life, here's a child with a begging bowl' is still by far and away the most effective fundraising exercise and I'd be interested see if there's any research to be done in terms of complicated messages and fundraising -- whether this public that supposedly wants a greater, more complex understanding of the situation gives money when you present it in that complicated way."

The question I want to ask is: Who started this myth that the public does not want the "messy truth"? Who defined the rules of the game that the nonprofit world is running by?

Correct me if I am wrong, but aren't the most educated people - traditionally the biggest donors? Then why do nonprofits need to simplify their messages so much? Why can't they afford to be honest? Since when fundraising and PR are more important than work on the ground? Since when is it acceptable for aid agencies to claim to "do good" without knowing their original mission or end results?

Is it because admitting failure is so hard in practice? Is it because we venerate success so much, but prefer to omit the "dirty details"? Or is it because monitoring & evaluation are legging behind, while PR machine is always on its high horse? When did nonprofit industry switched gears from need-based solutions to corporate-like, huge but unaccountable programs?

Now, I am not saying that fundraising and PR are not important. Many big nonprofits are able to receive grants namely because of the successes of their PR and fundraising departments. Working for more than 2 years for a nonprofit run by volunteers, I KNOW how important they are. However, I take comfort in that my organization is mission-driven, that it exists simply because it truly helps the people in need. THEY are our main focus, their needs is the base of our existence. Because aid is about helping others, not about my professional success, a CEO's self-promotion, or organization's ratings. Aid is about doing good, honestly, effectively, selflessly. A very idealistic view, I agree. But aid itself is by definition idealistic.

I look forward to your comments! Do you agree with me or not? Can nonprofits really combine idealistic and altruistic motives with business operations? Can aid agencies be grassroots-oriented and still financially sustainable?

What I Learnt from Steve Jobs: How to Handle Failure

Today I woke to a very typical morning in Moscow, but as soon as I opened my Facebook feed I realized that while I was sleeping something huge has happened: the world lost one of its biggest and the most fearless visionary, Steve Jobs.

Every single blogger in the world has probably written something about Steve Jobs today. Mostly good things, of course, because the man, no doubt, was a genius. I particularly liked an obituary by David Pogue on New York Times Opinionator: Steve Jobs: Imitated, Never Duplicated First of all, Pogue had a privilege of personally knowing Mr. Jobs - we all know about Mr. Jobs' peculiar yet admirable habit of calling Apple's reviewers and answering emails from customers. But most importantly, Pogue in his post concentrates not simply on praising Jobs, but on what made Steve Jobs so different, what made him a genius who we now compare to Leonardo Da Vinci (has anyone ever been compared to Da Vinci?), Thomas Edison, and Henry Ford.

However, what interests me the most is not the story of Mr. Jobs' success, but the way he handled his failure. We all know that at some point, precisely in May 1985, Jobs was fired from Apple. It sounds incredulous to us right now, yet this indeed happened. For most of us that would be the end of it. But not for Steve Jobs. Later on, already mega-successful Jobs said that "getting fired from Apple was the best thing that could have happened to him."

"The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life." (Life Lessons from Jobs)

In my opinion, the way a person handles failure truly defines who he/she is. It's not without a reason many MBA essays include "3 setbacks" question. Only true leaders are able to push through and not give up. It is the most dreadful part in everyone's life. Yet Steve Jobs was facing even a more difficult task: it is always harder to fail when one has already known success. If failure is handled right it is a step towards great new beginnings, but if it is handled badly it is the beginning of the end.

If Mr. Jobs couldn't handle his failure, the world would have never seen an iPod, iPhone, iPad, or iMac; a visionary would have never been born. “I’m pretty sure none of this would have happened if I hadn’t been fired from Apple,” Mr Jobs said in 2005 (The Economist). If not for his failure, Mr. Jobs' words of wisdom shared with Stanford graduates wouldn't be supported by the life story of continuous, unparalleled, and always daring innovation:

“Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.”

*Also, check out Fareed Zakaria's blog post on the very same topic: Steve Jobs' special capacity to learn from failure

*And, please, do watch the full video of Steve Jobs' Standford Commencement speech. It's remarkable, yet simple. Like an iPhone :)