April 3rd, 2013

The Pioneer Gap and Philanthropy

April 3rd, 2013

Approximately one year ago, the Monitor Group (now called Monitor Deloitte) published a report titled, “From Blueprint to Scale: the Case for Philanthropy in Impact Investing.” The research they conducted painted a clear picture that “impact capital alone will not unlock the potential of impact investing.” They declared that in order to address the current challenges, “philanthropic support” would be required to obtain the necessary returns and demonstrable impact. The report concluded with six recommendations, of which four are for philanthropists and two are for investors:

Recommendations for Philanthropists

  1. Consider moving into enterprise philanthropy through a range of approaches
  2. Create and back new specialist intermediaries
  3. Embrace risk and acknowledge failures
  4. Expand perspective to encompass markets and ecosystems

Recommendations for Investors

  1. Collaborate with funders on new models and markets
  2. Align investment strategies with aims and expectations

These recommendations are symptomatic of the overall culture of impact investing today, a culture where philanthropists are perceived as bottlenecking the progression of impact investing. My primary concern with this culture is that impact investors see it as the philanthropists’ responsibility to fill what the Monitor Group refers to as the “pioneer gap” (which is essentially a lack of startup capital for high-risk triple-bottom-line entrepreneurs and social enterprises). I would be more inclined to accept this assertion in the context of emerging markets and developing countries, but impact investing is equally being framed in the local context to address local issues. Under this pretense, I disagree that philanthropists need four recommendations and investors only need two.

Why is the push for “enterprise-philanthropy” but not for more “charitable-investments?” The language surrounding these terms is indicative of the emphasis on philanthropists acting more like investors, and not the other way around. Why are philanthropists being told to embrace risk and acknowledge failures, but not investors? The obvious answer is because that would be considered irresponsible fund management on behalf of investors, but then why are philanthropists being situated to make irresponsible investment decisions masked as charity? Essentially, investors want philanthropists to bear the brunt of absorbing the initial risk associated with impact investing so that they can safely enter into the market.

Now before going any further, it is important to remember that impact investing is a very neoliberal concept; the idea of economic liberalization in emerging markets and decreasing the power of the public sector while increasing the role of the private sector in modern society are all very prominent in the discourse on impact investing. This is not to say that there is not some blended-value as well, but impact investing would certainly not be considered an instrument of libertarian socialism to say the least. So, if we are going to work within the sphere of neoliberalism, we need to respect the role of the private sector and the significance of free-markets. Therefore, the pioneer gap is not a problem for philanthropists, but a problem for the private sector (i.e., angels, venture capitalists and investors).

However, this is not intended to reduce the role philanthropists have to play in impact investing. Impact investing has brought demonstrable, outcome-focused metrics to the forefront of charitable and social causes, which has always been a challenge for funders to effectively implement and monitor. By introducing monetary incentives to the notion of social good, impact investing has the potential to catalyze the change that charities, nonprofits and other traditionally philanthropic supported initiatives have needed to embrace for too long. Moreover, philanthropists recognize the value of empowering markets in developing countries, but it is for the social good those markets produce, not the returns that matter. Philanthropists do not care to buffer the risks for investors so they can muster the nerve to make nontraditional investments, especially in the local context. Investors need to start caring more about the social impact side of impact investing and less about the profitable investing end. Once this has been emphasized, the market for impact investing will establish itself and consequently be more appealing and open to traditional investors.

Special thanks to Ivy So and 6esm for their informative feedback and support during the writing of this article.