In the Impact Investing industry we have been agreeing-to-disagree for a while now. The debate tends to take the form of investment priorities: financial-first vs. impact-first. Do you prioritize financial impact or do you prioritize social impact? I will argue that this debate is irrelevant and is an example of what Jed Emerson calls bifurcated thinking.
“I coined the term Blended Value (in 2000) to reflect what I felt was the reality that value was whole and that what all of us were bumping up against was a bifurcated world which asked us to accept that one had to be either for-profit or non-profit; an investor or a philanthropist. In contrast, I felt what we should really be focused upon was maximizing the total value of our companies, communities and capital.”-Jed Emerson, BlendedValue.org
So what are the implications of a shift in perspective away from bifurcated thinking (financial vs. social) towards total value? To answer this we must understand the resultant value we seek and how maximizing total value differs from maximizing profit. A good place to start is the language we have used to make our social impact peg fit into a financial impact hole.
“Do Well by Doing Good”
…is the moral equivalent of “have your cake and eat it too”. The suggestion is that we don’t have to make any sacrifice, that there doesn’t need to be any trade-offs, that we can focus on profit (do well) and ‘good’ will just happen. Except, there are trade-offs.Doing good means creating ‘good’ and creating ‘good’ has cost and therefore cuts into profits. Anyone who has run a business of any sort understands this. Examples of these trade-offs are reducing a focus on the lowest-income level customers because reaching them costs too much or, in the other direction, ignoring the degraded water quality in streams around your production center so the negative externalities don’t appear as cost on the balance sheet. In both cases the idea of cost and profit drives the decision making. Of course, not considering cost and profit in decision making would be stupid. But so is this idea that you mustfirst ensure that you are profitable; that you must first keep-the-lights-on. Instead, we must first create a better world. In order to create a better world, we must keep the lights on. The slogan we need to evolve to is: “Do good over time.”
Social Return On Investment
…is similar in that it is an attempt to apply a financial investment template over a social investment goal. ROI is an essential measurement for a financial investor to understand the success of her financial investments. This is the foundation of SROI. SROI endeavors to understand the financial value of the social return in order to express the total return (financial and social) in terms of the same measurement units. However, the process of assigning a dollar amount to a unit of ‘good’ is like reverse alchemy, turning gold into lead. The truth is that there is no financial equivalent for a unit of ‘good’ nor do we need there to be. We often hear the argument that investors need one number so they can assess and compare investments. That is not true. Good investors gather extensive data on potential investments. The only thing a singular number will give us is the opportunity to commodify our work. To be clear, we must run effective and efficient (social) businesses and we must continue to get better at quantifying and communicating the value of our work but that is the polar opposite of obscuring the unique and differentiating value of a (social) business by burying it in a single, base and meaningless number.
Double Bottom Line
(and triple bottom line and quadruple and …) is the most enlightened of the three because it recognizes a fundamental difference between quantifying profit and quantifying ‘good’; however, it also enforces a false accounting. As with SROI, when doing accounting, it is best to stick to financial numbers. On any business’ ledger lives the financial profit and loss of the enterprise. ‘Good’ does not live on the ledger. ‘Good’, or (social) impact, lives in the lives of the beneficiaries. Our problem is not a need to understand ‘good’ in the context of profit. Our problem is to understand profit in the context of humanity. A social enterprise must be guided by the metaphorical meaning of “bottom line”: that which is the highest priority. An enterprise cannot exist over time without a positive financial bottom line, without a profit. But existing over time is not enough. Not having a social impact is failure. The latter trumps the former.
Impact investors and financial investors operate the same way: they both provide capital to build successful businesses. The differences arise in terms of the definition of success. Financial businesses and financial investors use money to make money. Social businesses and impact investors use money to create ‘good’. Profit is necessary but insufficient. And there’s the rub. We strive to create market based solutions to social problems but we have not done the necessary introspection to understand to what extent financial markets are part of the problems that we are trying to solve.
Coronating Value (Dethroning Profit)
Here’s the real tension in impact investing: we must fight against the design of the very system we use to create positive change. Social enterprise and impact investing start from a premise that is capitalist sacrilege: that there is something more valuable than money. In my most hopeful moments, I see social enterprise and impact investing as disruptive innovations.
“A disruptive innovation is an innovation that helps create a newmarket and value network, and eventually goes on to disrupt an existing market and value network (over a few years or decades), displacing an earlier technology.” – Wikipedia
This is complicated – disrupting our progenitor. However, I think we are seeing the beginning of this process. The idea ofcustomer capitalism is gaining traction against shareholder capitalism and as part of this evolution, rigorous methodologies for respecting and designing for the customer have been developed. These methodologies include the rise of human centered design and lean startup principles.
Human Centered Design (HCD)
Human centered design can be seen as an evolutionary stage of product and service design …
“from a closed value chain (i.e: we punched out a product we tested on some monkeys and know it works so we can forget about it) to understanding how and what the user does with a product (or service); including their journey and experience.” – Stephanie Di Russo
Perhaps the greatest contribution of HCD is to bring “design thinking” into the broader lexicon of (social) business. This has enabled us to move to a broader mindset that accounts for how products and services are consumed within the lives of the user. This context of the lives of the user is essential to the process of building products and services that explicitly intend to solve (social) problems because (social) problems are also defined in terms of their impact on the lives of users.
Lean Startup Principles
Where human centered design focuses on products and services, Lean Startup principles focus on management. At the simplest level, lean is the process of creating the most possible value for customers with the fewest possible resources. You can see why this methodology in particular might be well suited specifically to social enterprise where resources are scarce, margins are small and customer value is uniquely… valuable.
“A core component of Lean Startup methodology is the build-measure-learn feedback loop. The first step is figuring out the problem that needs to be solved and then developing a minimum viable product (MVP) to begin the process of learning as quickly as possible. Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect question.” - Eric Reis
Case studies for the successful use of lean principles can be found at large organizations like Toyota as well as scrappy Silicon Valley start-ups like Dropbox.com. And now social enterprises like Grameen Foundation are getting in on the trend.
Management Is Measurement
Brought together, Human Centered Design and Lean Startup give us a paradigm where management is measurement. We don’t have to toil under inaccurate metaphors like those that this article started with. We just need to manage our (social) businesses and – little by little, one iteration at a time – will create a better world not because we are able to earn a profit but because we are able to provide value to customers over time. Management is measurement. If we design products for the problems that our customers face and we manage our businesses to constantly iterate against the behavior of our customers, then reporting on the activities of our management is our proxy for reporting on the success of our business.
A focus on profit is inherited from the tools we use. And, as I have said repeatedly, profit is critical to success. A social enterprise needs profit to exist over time. And the reason why a social enterprise needs to exist over time is to make a better world. We know that financial markets can do amazing things, some of which are clearly good. Some of which are clearly not good. Creating ‘good’ is not a necessary output of a successful financial enterprise. The disruptive innovation of social enterprise and impact investing is to dethrone profit as the goal of enterprise. The nice thing is, you can’t create ‘good’ over time without profit. Profit is actually a necessary output of social enterprise. I guess we can have our cake and eat it too after all. Just got to get our priorities straight.