An underdeveloped market for risk

So much of the conversation in impact investing is about returns: what are they, what should they be?  Now and in the future?

Not so much talk about risk, though.

It strikes me that in traditional investing, people are rewarded for risk-taking and the most successful investors are those that become good at taking the right risks, good at discovering information asymmetries, good at making the well-placed bet early.

My hypothesis is that our biggest ability to create impact is going to come from finding the “next big thing” business models, the ones that solve problems that haven’t been solved yet – whether in energy distribution, sanitation, water, education, healthcare, etc.  And it feels to me that it’s unlikely that, in most cases, betting on new, untested business models – meaning creating new markets with huge amounts of friction (bad roads, poor ports, unreliable distribution, corruption) serving customers who are, by and large, new consumers of whatever you’re selling (so high acquisition costs, etc.) – is going to fully financially compensate investors and entrepreneurs for the risks they’re taking.

[To be totally clear, I’m differentiating between “good” and “astronomical” returns here, and arguing that if we’re clear-eyed about the risks you have to take to solve problems that have never been solved before, then “good” financial returns aren’t good enough, if your yardstick is a simple financial risk/return analysis.]

Of course the whole point is that there are funds and investors that are willing to accept lower returns because they DO value social impact.  And I hope that space continues to grow.  But what keeps me up at night is whether there’s a strong reinforcing mechanism that rewards risk-taking in that part of the capital curve?

Meaning: are the kinds of people who place real value on social returns, by disposition and in terms of feedback loops in the marketplace, likely to be rewarded and culled and selected for their ability to take big, well-calculated risks?  Or is it easier to soft-pedal on risk when the upside is mostly non-financial?  And, if that’s true, are we systematically under-investing in the highest-potential opportunities, because we shy away from risk?

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2 Responses to An underdeveloped market for risk

  1. Pingback: An underdeveloped market for risk | turnings :: daniel berlinger

  2. gastonbilder says:

    Sasha,

    Excellent questions. As you know short term thinking is prevalent among investors. Nevertheless I have been reading about many funds and PE investors who have now included sustainability criteria into their investment goals as a way to reduce long term risks of investing in unsustainable business. In the same way I am starting to see more and more startups and even crowdfunding sites focused on them, that attract companies willing to take those big, well calculated risks without necessarily looking to leave money on the table.

    @gastonbilder

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