“Impact Investment is on the rise”, says Justin Fox in a Harvard Business Review article from September 2014. And according to the report on Impact Investment Trends carried out by thegiin.org, with numbers and data as recent as December 2016, Justin Fox was right!
But what exactly is impact investing? Impact investments are investments made into companies, organizations, and funds with the intention to not only generate financial return but also a visible social or environmental impact. On June 22nd and 23rd, Impact Hub Vienna will host the CEE Impact Day. A conference that brings together Impact Investment players to inspire, connect and enrich the impact ecosystem within Central & Eastern Europe.
Rodney Schwartz, an impact investment expert and the CEO of the UK based company ClearlySo, will not only be a speaker at the CEE Impact Day, he will also host a masterclass and be part of the panel. I had the pleasure to chat with Rod on a few of the impact investment topics and here are his thoughts on the matter.
What was the first job you had out of college? How did that shape you to get where you are now?
It’s not such a great story. The truth is that ever since I was young the expectation in my family was that I would go into the family business, so I had no expectation my whole life of doing something else. However, things don’t always go as planned and in December of the last year of my business school, on the 31st of December 1979, I remember vividly, I woke up and said “What the hell am I doing? I can’t do that, that would be crazy!” so I went back to business school and I said “I need a job!”. By that time almost all the interviewing had finished and there were only 3 interviews left: one was Marine Midland Bank and I was terrible in the interview. The second interview did not go well either (a chemicals firm) and then the third interview was with an investment bank called PaineWebber and I really liked the guy and I wound up working there. I hardly knew about the firm or the sector—investment banks were not as well-known as today!
My first job was very interesting though. It was a job in the finance department of PaineWebber, where I was essentially a spy for the department: I was looking into different businesses we were involved in. I didn’t realise at the time, but PaineWebber was falling apart. I knew very little about the company, so I had no idea about what was going on and what they were trying to do. The way they were trying to get back control of it was by sending young MBAs like me into different divisions to get some information about the company and report back and make some suggestions as to how profitability could be improved. So my first job was kind of an internal spy at PaineWebber. And because I didn’t know anything about what I was doing, it was really fun. I think nowadays people just have so much information, they know so much about things, and they have such high expectations…. I was only expecting to work for my dad and I was just relieved to have any other job anywhere, doing anything, but the thing that was most important to me was the person I worked for and he turned out to be somebody who was kind of an alternative father figure to me throughout my career.
Why did you choose impact investing?
Yes well, a combination of guilt and age.
Having been successful. I guess it was 1999 when I first started getting involved into impact investing, so I was 42. I have 4 children, and when your children get to be a certain age they ask better questions about why you do what you do and my answers were, you know, incomplete. Like every parent, you tell your kids things about life that you think are important and then they would ask, “OK and what do you do?”. I worked at Lehman Brothers, I worked at Paribas etc. And the growing gap between what I did and what I said was important was just getting to be very painful, so I wanted to do something that made me feel better about what I was doing–something that would make my children proud of me. There wasn’t impact investment as a field so it’s not like I chose to do “impact investing”, I just chose to leave investment banking and do something more socially useful and what happened in the process was that I came upon, and in some respects helped with the early creation of the impact investment community in the UK, together with many others. It wasn’t an industry yet, but I just had a strong sense that I was getting to an age where I wanted to do something that was more meaningful.
Would you say you were there right from the beginning? From when impact investment started?
It depends when you consider impact investment starting, but my journey began in 1999. And I know that the phrase “impact investment” was only developed in 2007 by the Rockefeller Foundation, because they claim credit, rightly so, for having invented the term. The reason is that Americans hate the word “social investment”. They couldn’t live with the word “social” so they had to create a new phrase. You know Americans have to own things, so they wanted to own this concept and the only way they could live with “social investment” was to re-brand it as “impact investment”. I wouldn’t say I created this field and anyway, you could say that high-impact enterprises go back to the Body Shop as the first very visible modern “social business”. You could also say the modern impact investment movement started with the steps around boycotting South Africa in the late 1970s – early 1980s when people did not want investment capital to support activities that were supporting the regime in South Africa. So that is really when it started and I have no responsibility for that.
Can you tell me about your most successful venture? Your biggest successes and failures in the industry? Biggest challenges?
The biggest success: The most successful high-impact business I got involved into was also the first. It is a company called JustGiving and they had a very simple idea, which was that they would help people to give money to charities online. In the old days you had to write a cheque and that was very expensive for the charities, because they would have to take the cheque and process it, send it to the bank. It was just a messy bureaucratic process and JustGiving would enable you to do this online…and that was really quite revolutionary. And I thought “Oh this is a really interesting thing, using the Internet to help charities.”
Unlike a lot of other businesses at that time, it was, and still is run by 2 women (that is unusual in and of itself—there are too few female entrepreneurs): one was born in Pakistan and one was born in Belgium and they came together in the UK and started this great company. It started with about £5 million and now it is probably worth over £100 million, so it is very successful financially- but most importantly it changed the whole way charities raised money, it massively reduced their cost to fundraise – from 23% to 5% – and in the process they’ve raised over $5 billion for charities and that makes it the largest crowdfunding platform in the world.
The biggest failure: In the early days of ClearlySo we wanted to create a business like JustGiving– that was our Motto, but the one thing that I didn’t want to do was investment banking- it was something I’d done my whole life and I thought I’d like to do something different. So I put a lot of my own money into raising funds and starting a company and all that- and there was just one failure after the other: we couldn’t raise a fund, it was just too early, nobody understood what impact investment was about, nobody would accept the idea that you could make money AND create some good, they thought you would either have to do one thing or the other, that you either had to do good or do well but you couldn’t do both at the same time. It wasn’t just one failure but a series of failures, trying to figure out how to help companies, that wanted to change the world, be successful.
We tried to raise a fund and we failed and then we tried to raise another fund and failed, tried to offer consulting services and failed, we tried to do an online platform for fundraising- that failed, we tried to do a headhunting activity-that failed. From 2008 to 2011, we kept failing and finally I was running out of money so we met internally and started asking our clients (this was long overdue!), “Actually what do you really want?”. They said, “All this other stuff is great, but we won’t ever pay for it. We’d like you to help us raise investment”. The irony was that after years and years and years of not wanting to do investment banking, what ClearlySo became was an impact investment bank. So it was a series of failures because we couldn’t figure out what our clients, which are high impact enterprises, actually needed.
What does a successful venture look like for you and your firm? How do you define success for the ventures you take on?
Well, every venture that we take on has to generate a significant amount of social, ethical or environmental impact- this is an essential aspect of every firm we choose to work with, this doesn’t make it successful, it just means that if they aren’t about creating significant impact we don’t take them on as clients.
Success is then, I’m afraid, all about financial success. It doesn’t mean that they have to be immensely profitable, some are, some are not, but they have to be sustainable. So a successful business is one that generates enough revenue so that they can survive on their own, without donations, without grants and without further investment. So all our clients are impactful – they should be both impactful and financially sustainable.
What are the characteristics that you look for in the founding team?
Well, they should have, I think, 2 things:
A. One thing that a founding team needs to have is relevant track record in a relevant domain, so if they are in the consumer field they need to have had expertise in the consumer field; if they are in the alternative energy space they should have relevant experience in the alternative energy space. This isn’t a very sophisticated point to take, but they or some member of the management team or the board should have relevant domain expertise. If they don’t have that, it’s a bit crazy.
B. A second thing they need to have- and this is harder to judge, they need to be functional as opposed to dysfunctional. You can tell when a team is working like a team and you can tell when it’s just a field full of individuals. A good management team is one where the individuals all work collaboratively to achieve more than what they can each do as individuals. Many teams on the other hand are dysfunctional: where they work against each other, where there is tension, where they are arguing all the time…That isn’t likely to lead to success.
Can you identify any investor trends that have been developing in the last years? What do you see as emerging trends in the next years?
In the beginning, people were investing a lot in things that sounded great and inspiring. So they went more for the inspirational ideas, ideas such as feeding the hungry and clothing the needy, ideas that would inspire you to think the world would be a better place. In the beginning there was a lot of hope and things that largely appealed only to the heart. Seven-eight years on people see that many of these ventures have not achieved their ambitions—some have failed. So now there is much more attention to the viability of the organisation – “Will it succeed or will I be wasting money that I could just give to charity if I wanted to give it away?”. So I would say that the main change that I’ve seen is one from “Aww, aren’t they nice” to “I think they can really make a difference and I think they can create something sustainable”. So I think investors are shifting from things that sound nice to things that can really be sustainable and make an impact. I would say that that is the biggest change.
As more and more investors are getting into this, the businesses that offer good returns are easier to sell than businesses that don’t. Let’s be honest, if a company goes broke it doesn’t create any on-going impact. Many people used to think that impact and return were like a see-saw, so if you had more impact you had less return and if you had more return you had less impact – but that is baloney. The things that are most successful like JustGiving, generate the most impact, and the things that are less successful generate the least impact and why? Cause they went broke. So impact and return are positively correlated and investors are starting to figure that out.
How do consumers see the shift?
Consumers pay on average 27% more on fair-trade good than they do for other goods that are exactly the same from a value standpoint, e.g. chocolate or coffee. So obviously consumers are willing to pay even it if isn’t a better product, consumers are voting with their wallets and saying, “I care about demonstrating my ethical preferences”. The evidence is clear.
The point is that companies that are in sync with the way the new generations are thinking are going to do better and they will get into less trouble. Think of Volkswagen for example, it’s a perfect example of a company that behaved in the old world way and there was a time when people thought they were going to go broke. You have to adapt or you’ll die, no matter how big you are.
What is the one thing that you would like to tell every impact venture/ impact investor?
I’m just really trying to spend my time doing things that are useful and fun and I think frankly everyone should do that, because if you are not doing that you are just wasting your life. Really. Especially the fun bit. Some people care about making the world a better place, some don’t. That doesn’t bother me. I’d rather that they don’t make the world a worse place, but I think that you should do what is fun for you, what is in your heart, what is your passion. Probably if you do something that you are passionate about you will be doing it well and probably if you do it well you’ll be ok financially. But not to do something that you feel passionately about is tragic. Not as tragic as starving and all that, but we always have to get our perspectives straight.
Just because you are an impact venture does not give you the excuse to be incompetent, sloppy or lazy. You still have to be professional and commercial in how you go about things. It’s even more of a reason for you to be commercial and practical because you have much more at stake than just making money, you have beneficiaries at stake. So there is even more riding on what you do and a greater need to take what you are doing seriously and behave professionally. A lot of impact entrepreneurs torture themselves with questions like what is my carbon footprint and what about my supply chain and when they worry so much about everything under the sun they are going to let their businesses run aground. Instead, just recognise that with one venture you cannot solve all the world’s problems. Just think of the one that you are going to solve and solve that.
For impact investors, I really do believe that doing good helps you do well financially and that any extra angst that you have around things is offset by how much better you will do by doing well. I think you will get a reward for doing good things.