Uncorrelated Impact Understanding

Not long ago, I was speaking to a group of sophisticated impact investors from across the spectrum: everything from fully liquid, market-beating financial return expectations to market builders focused on creating social impact who are open to a broader range of financial returns.

The focus of my talk was Acumen’s work on Lean Data, which is our industry-leading approach to gathering customer data at scale. We’re cracking the nut on using technology to give voice to tens of thousands of customers in ways that allow companies to serve them better. I believe that this will, over time, help the sector as a whole deploy more capital to more opportunities that have more social impact. It’s exciting.

But before digging in to the details of Lean Data, I started the talk with an assertion:

The seriousness with which you work to understand impact should be uncorrelated with your expectations around financial return.

I actually said this twice, because we’re so used to talking about correlations (positive or negative) between social impact and financial returns that I wanted to be very clear what I was, and was not, talking about.

My point is, if you say you are in the business of creating impact, then, irrespective of the instrument you use, the financial returns you expect, and the risk you’re willing to take, you’ve got to be serious about understanding impact.

Interestingly, I heard some resistance on this point. The resistance mostly took the form of “I know impact when I see it” or, “why would I waste time on this, it will just distract me from doing the real work?”

I believe there are some cases in which we really understand impact, but I believe those are the exception. Indeed we are so quick to say “we know enough” in a world in which we know shockingly little.

For example, take the $800 billion spent annually by the U.S. government. Peter Orszag, and Jim Nussle, who successively ran the U.S. Office of Management and Budget, write in Moneyball for Government that “Less than one dollar out of every $100 the federal government spends is backed by even the most basic evidence that money is being spent wisely.”

Less than $8 billion of the $800 billion spent annually by the U.S. government is backed “by even the most basic evidence?” Wow. Color me unpersuaded by the argument that we generally know enough.

I think what’s really going on is that we:

Overestimate how much we know

Overestimate the cost of getting great data – because approaches that came before Lean Data typically cost 100x as much

Create an artificial distinction between “creating customer value” and “creating social impact”

Assume that, no matter what anyone says, this is about marketing and dealing with funders, not about learning

Underestimate the value of what we can learn.

On top of this, I worry that we say too lightly that we’re in the business of creating social change, or we assume that this “caring about impact” stuff should be left to the folks who are on the frontiers of solving tough, challenging problems in innovative ways.

The truth is, we are quick to celebrate and advocate for more money walking through the “I (also) want to create social impact” door and then get awfully timid talking about whether that impact is getting created or, more broadly, how much we understand about the connection between the investment, the intervention and the impact it creates.

Caring about impact doesn’t mean you don’t understand how to make money. It doesn’t mean you’re not a serious investor. It doesn’t mean that you’re giving something up.

It’s simply saying: this is who I am, this is what I do. I’m in the business of creating massive positive change in the world. And I know how to do that better than anyone.

You can say all of those things and not blink for a second when someone asks you what your financial returns are going to be.

If we are in the business of change, then we have to be in the business of understanding how change happens.

Building our impact intuition

I was speaking to an impact investor recently, and he was saying that investment decisions are ultimately based on an intuitive sense the investor has about the company: the deal, the team, the market opportunity. And shouldn’t we just use our intuition to assess impact?

This is the most common unspoken premise used by impact investors to justify not collecting impact data.

So, where does this intuition come from? And is there such a thing as good and bad impact intuition?

Intuition is subconscious pattern recognition. And patterns are the sum total of the information we’ve taken in. If that information, and our ability to understand and process it, is of high quality, then we develop good intuition. If not, not.

A good investor is awash in quantitative and qualitative data that inform her investment intuition. For example, on the quantitative side, she’ll know what she expected gross margins to be, the predicted length of a company’s working capital cycle, and how many years she forecasted it would take for the company to get to profitability.

But that original financial model will have a very short shelf life: after the investment, she’ll get reams of data to show whether her predictions were right or wrong.

But in the world of impact, she’ll handle things differently.

She’ll look at research and benchmarks to develop a thesis. And she’ll stop there and multiply products sold by those benchmarks [e.g. 10 lights sold * X predicted impact/light = 10x impact].

This is like creating a pre-investment financial model of a company and then, two years later, when asked how the company is performing, using the model’s original variables to answer that question.

Not only would this answer not be any good, but her impact intuition would never improve.

Why do we accept the idea that we can understand the impact we are creating in people’s lives by looking at comparables? Why do we nod when told that it’s hard to get better data (it’s not)? How can we say that “we know impact when we see it” if we don’t gather data to understand actual performance?

The only explanation is this: we are not the people whose lives are, or are not, improved by a given intervention; we are not personally affected by a positive or negative ROI on a “better” solution; and the difference between potential and actual impact doesn’t land on our doorstep, or in our pocketbooks, or in our child’s cough or the quality of the education he receives.

The only way we’ll create better impact intuition is if we apply ourselves seriously to the question of learning what does and doesn’t improve people’s lives.

We don’t settle for “it’s too hard” anywhere else but here.

Impact measurement over the next decade

I had the chance to participate on a panel at SOCAP about the future of impact measurement, and was surprised how challenging I found Karim Harji’s framing question:

Where is impact measurement headed over the next decade? What is it going to take to get there? 

After pondering on this question for a while, I ended up at the conclusion that the future is very bright at the level of company-customer interaction.

I say this because in the coming decade, social enterprises, like all companies, will necessarily begin accessing and managing much more customer data gathered remotely through devices. It’s a bit easier to see this future when one is in San Francisco staying at an Air BnB and taking Lyfts everywhere: as mobile phones become both the communications and transaction platforms for nearly everything in everyone’s lives, companies, no matter what their specific business or the customers they serve, will have more data about us. While it’s true that poorer, more remote customers will lag millennials in San Francisco in terms of how soon they get on this conveyor belt, the direction this is heading, for everyone, is clear.

With that in mind, the only question at the company-customer intersection is whether and to what extent companies will incorporate data about social impact into their growing data flow. My thesis is that doing so will be a competitive advantage, allowing companies that move first to better understand how well their products and services are improving their customer’s lives, thereby driving greater loyalty, share of wallet, and share of mind and voice.

I believe this because, as our Acumen impact team has worked with companies on Lean Data projects, it’s become increasingly clear that value creation is impact when you’re dealing with critical goods and services like electricity or education or healthcare: if the customer who buys her first solar lamp stops using kerosene, uses the lamp to keep her business open later at night, and also uses a second lamp for her kids to study at night, then that lamp is creating deep and meaningful value (impact) for her. And all our data show that this same customer is nearly always a net promoter of the company, a source of positive word of mouth, and a high-value and loyal customer.

If this thesis plays out over time, then we’re about to be riding a huge, powerful wave that we’ll simply have to redirect slightly to incorporate thoughtful impact data capture and to drive towards impact management. Soon, even resource-strapped, impact-focused companies in the developing world will have no choice but to gather and utilize more data (including impact data) from end customers if they want to serve these customers effectively.

The question I find harder to answer, interestingly, is: What is going to happen to the capital market for impact? Here, things seem a bit muddier.

In order for capital to increasingly flow towards high-impact opportunities, there has to be some standardization in terms of how impact is measured and communicated, so that an investor looking to compare impact performance can compare opportunity A and B in the same way she compares financial performance for these same two opportunities.

I believe this evolution is a very important one, indeed it might be the most important development that needs to happen if the impact investing marketplace is to realize its full potential. However, unlike the evolution at the company-customer level, it’s less clear to me that there’s forward momentum pushing us in the right direction. It seems possible that we are due for a step-change in terms of how investors deploy capital for impact, and it seems just as possible that five or ten years from now things will be as bespoke and hard to decipher as they are today.

My best guess is that what’s needed to make a shift here is that a handful of highly influential and interconnected players – those holding large amounts of capital that they distribute through a large ecosystem of connected funders – need to establish their own higher, clearer impact measurement standards that they will use to deploy capital, such that their new standards flow all the way down the chain and slowly shift expectations for, and raise the bar for, everyone in the space. This was the role that the U.S. Government played with LEED certification through the GSA, which owns 9,600 buildings in 2,200 communities across the U.S., and I suspect it’s the pattern that needs to play out in impact investing too.

For more on this topic, here’s the link to the SOCAP16 plenary I got to do with Karim Harji, Jim Fruchterman, Kelly McCarthy, and Paul DiLeo.

socap16-impact-measurement

Live stream today – the future of impact from SOCAP 2016

I’m excited to be speaking today at 2:30pm Pacific at SOCAP on a panel about the future of impact measurement. 

The panel is being live streamed in case you want to tune in: click here to tune in to the SOCAP live stream. 

The panel is with Jim Fruchterman (Benetech), Kelly McCarthy (GIIN), Paul DiLeo (Grassroots Capital) and Karim Harji (Purpose Capital) and it starts at 2:30pm Pacific. 

I hope you’ll join us!

Lean Data Podcast

On Monday, Tony Loyd was nice enough to include me in his great series of Social Entrepreneur podcasts. We covered a lot of topics but dug in most deeply on Lean Data, particularly on how we are using it at Acumen to amplify the voice of low-income customers so our entrepreneurs can better serve them.  It was a fun conversation.

(if you’re not seeing the embedded link click here)

 

If this kind of thing is up your alley, you might want to sign up to receive the specialized newsletter we’ve created to share hot-off-the-press insights on what we’re learning through Lean Data. We send it out once every six weeks or so, so it won’t clog your inbox, and it’s full of great stuff.

It’s called Impact Matters and you can sign up here.

 

A confluence of impact and scale

I spent last week at the annual meeting of the Global Impact Investing Network (GIIN), and I was struck by three trends that could take our sector to the next level.

The first is around taking impact seriously. The second is how different the impact measurement challenge looks depending on where you sit. The third is the acceleration of the rate at which mainstream financial capital is entering our space.

Throughout the GIIN conference, impact — the role it plays in defining our work and how to improve the quality of our impact data — was front and center in a way that I’ve not felt before. For example, one of the first panels kicking off this year’s event was on market segmentation. While segmentation is not a new topic in impact investing, the panel was titled “Market Segmentation through an Impact Lens.” The panelists — from Skopos Impact Fund, Tideline, Athena Capital Management and Omidyar — discussed their research and client-facing efforts to make sense of impact investing from the perspective of impact objectives.

This shouldn’t be brand new, but it is. An orientation to start segmentation with an impact lens runs against the natural tendency to segment investors by asset class or sector strategy, and it’s certainly a far cry from accepting that “intentionality” (as in: my intention is to make such-and-such happen with limited accountability on the data to figure out whether or not real change is happening) is a high-enough bar to set for the sector in terms of impact.

If we could pull off organizing ourselves, as impact investors, by the change we’re trying to make in the world rather than by the investing strategies we’re using to make that happen, that would be a big step forward.

Second, we need much better impact data AND we need to help people who are drowning in too much indecipherable, low-quality data.

I had the chance to participate in two panels focused squarely on advances in impact measurement. What I learned from these panels is that better impact data isn’t enough — there’s a huge desire for simplification too.

At Acumen, our Lean Data work has focused relentlessly on going directly to the low-income customers we aim to serve so we can understand what they have to say. Our objective is to improve the quality of impact data we have by scaling up our capacity to listen to the voices these customers, so we and our investees can better serve them.

While I’m convinced that this kind of listening must to be the foundation of everything we do as a sector, it’s not enough. Listening to my fellow panelists — from Goldman Sachs, Zurich Re, Abraaj Capital and Leapfrog — I heard that big institutions with large, diverse portfolios of impact investments not only desire better impact data but they also need help simplifying and clarifying the reams of impact data they already feel they receive.

Ironically, these large institutions have too much data coming in and most of it’s not very good. Our job is both to improve the strength of the signal and also lessen the noise.

Lastly, it was impossible not to notice that more and more big-name financial players are coming to the table.

The simple fact of having an impact measurement conversation between Acumen and Leapfrog on the one hand (two organizations that are essentially growing startups, with between $100M and $1B in capital under management), and Goldman Sachs, Zurich Re and Abraaj Capital on the other means that there are innovations in impact management happening across the spectrum of impact capital. That’s hugely positive.

Then, at the end of the day, we got to hear Former Governor Deval Patrick and Deborah Winshel discuss the impact investing strategies they began implementing in the last year at Bain Capital and Blackrock. Both articulated their goals to fully integrate impact into the global practices of these uber-blue chip firms, firms that collectively represent more than $4.5 trillion in assets. While it’s early in the journey for both Bain and Blackrock, it’s clear that their actions could have a huge influence with other mainstream financial players and beyond.

As I left the conference and made my way back to New York, I was struck with the feeling that we are entering a new phase in our sector. Having passed through the teething pains of our early days and our loud, sometimes impulsive childhood, we’re ready to start growing up a bit. This means harnessing — rather than just shouting about — the increased momentum building in our space, thanks to the entrance of major new players, while also taking a much more sober and serious look at the ultimate goal of this work, which is to make a real, large-scale and lasting difference in the well-being of people and the planet.

If, in this next chapter, we can find a way to have impact investing go deeper on impact and bigger in terms of scale and reach, we will truly be in a position to take this work to the next level.

[Note: you can also follow the conversation about this post on Medium]

#ImpactMatters Twitter Chat

Tomorrow, Wednesday, February 17th at 12 noon Eastern, I’m helping run a Twitter chat that Acumen is hosting to talk about Lean Data and measuring social performance. It’s all about the finding the next frontier in impact measurement, in a discussion with Acumen, Omidyar, Stanford Social Innovation Review, the Aspen Network for Development Entrepreneurs and Root Capital.

Here’s how it works: (aside: Twitter chat 101)

  1. You can follow the chat with the hashtag #ImpactMatters.
  2. Please submit your questions before the chat so we have good stuff to talk about.
  3. You’ll also want to follow @Acumen on Twitter and join the chat on Wednesday at noon Eastern.

I’ll be joined by a great group that of partners who have helped us develop and spread Lean Data, including:

Hope to see you there!