Social impact investing: How doing good and ROI coexist

So, why this? Why now?

We live in a very interesting time in human history. The World Bank calls this the Industrial Revolution — 4.0. With all the powerful technological advancements, the world is in a position to wipe out global hunger and poverty in the next 15 years with less than 1% of GDP of the top 30 richest countries.

Technological progress has solved most of the problems of basic amenities in the developed world. Thus, global attention is now shifting to undertaking ventures not entirely for profit making.

This shift is said to be driven by millennials who prefer to invest and work for businesses that have a bent towards benefiting society and pursuing ethical practices. The new generation of millennial investors sees investment as a tool to express social, political, or environmental values.

The result is… a new form of impact investment. According to GIIN, it is a way of responsible or sustainable investing that produces financial returns as well as measurable social and environmental benefit.

Social impact investors seek market-based solutions to the world’s most pressing challenges like sustainable agriculture, affordable housing, accessible healthcare, clean technology, and financial inclusion of the poor.

And, unsurprisingly, startup technologies – and with them their VC backers – are coming to the rescue.

The myth of lower returns

The assumption about impact investment is that pursuing a social objective may require some form of financial trade-off. As the sector is maturing, a growing number of examples have demonstrated that, in some areas, social impact investment can generate both a financial and social return.

A 2018 McKinsey report on impact investments in India demonstrated how it can actually meet the financial expectations of investors. The report looked at 48 investor exits between 2010 and 2015 and found that they produced a median internal rate of return (IRR) of about 10 per cent. The top one-third of deals yielded a median IRR of 34 per cent, clearly indicating that it is possible to achieve profitable exits in social enterprises. Unlike popular misconception, it is not a losing cause at all.

Small investors are usually not invited to the party

From the beginning, any kind of VC investing – impact included – has been exclusive only to an elite league of the large private investor, mainly foundations, high-net-worth individuals and family offices.

Often, it is not enough to have good intention to make a positive social impact. One needs a very deep pocket too.

The main entry barrier was the cost: technical due diligence and other deal-related cost may run easily over the million-dollar mark for a deal to be viable financially. This makes impact deals prohibitively expensive and beyond reach for an average small-time investor.

The search for alternative forms of investment continued. And the public enthusiasm for supporting beneficial projects and social businesses have resulted in several crowdfunding platforms. They became the first choice for making socially beneficial investing.

Despite the noble intentions, crowdfunding is a very rudimentary form of social impact funding. It does not necessarily deliver both the quintessential product of financial profit for the individual small-time investor and measurable social benefit. Most often the type of crowdfunding used will offer rewards such as products or services, instead of financial returns. Or they raise funds from the crowd to run micro-lending schemes. In short, there’s typically not much scaling going on.

Breaking the entry barrier, while upping the game, with equity crowdfunding

Equity crowdfunding is a logical next step for small-time investors looking to get involved in social impact investment. It effectively levels the playing field between accredited and non-accredited investors. Besides that, equity crowdfunding doesn’t require a substantial amount of money to get started.

The boom in equity crowdfunding has the potential to strengthen the impact sector in important ways. This is an excellent opportunity for investors to invest in pre-vetted social impact startup or technologies at the seed and early stages of growth. This means that, for the first time, even small investors will now be able to engage directly in impact investing.

There’s the potential for a solid return if investors build a diverse portfolio of startup investments or invest in startup funds.

In this way, equity crowdfunding may provide the missing link that connects impact investing to the huge pool of capital held in private hands.

Again, the focus shifts to Israel

It is not trivial for Israel to assume the center spot in the impact investment scene. The genesis of the country, nicknamed the Startup Nation, has been an unprecedented entrepreneurial spectacle.

Israel has a glorious tradition, since inception, of making a social impact through innovative ways. The idea to solve irrigation woes around the world with drip irrigation was an idea much ahead of its time. The rest is part of the folklore.

Thanks to its religious-cultural background, innovation and entrepreneurship have become deeply ingrained in Israeli ethos. Tel Aviv has the highest density of technology startups in the world. Per capita, Israel is home to most engineers. Their talent in programming, marketing, and product development is second only to Silicon Valley.

All these make it a bustling hub of tech startups making a meaningful social impact.

OurCrowd, an example in enabling investment for social good

OurCrowd was started in 2013 by serial entrepreneur Jon Medved, driven by the idea to offer small investors and common people access to VC-level investment opportunities in impactful high-tech startups.

Today, OurCrowd is a leading equity crowdfunding platform for investing in global startups with investment of over $800M in 170 portfolio companies. OurCrowd is truly democratizing equity crowdfunding with a growing community of 30,000+ investors originating from over 150 countries.

Through mindful impact investment in relevant tech startups, OurCrowd is committed to leveraging innovation from Israel to improve the world. This can be seen through a quick look at a few examples:

enVerid offers revolutionary air treatment technology that increases energy savings and indoor air quality while reducing greenhouse gasses.

UPnRIDE makes an all-terrain electric wheelchair that paraplegics and handicapped individuals to stand up straight, walk and climb stairs.

Edgybees software adds augmented reality (AR) overlays to live or recorded video enabling drone operators to see more than what the cameras transmit. This makes it useful before, during and after a natural disaster.

See it live, with a front row seat

This year, the 5th annual OurCrowd Global Investor Summit, on March 7th in Jerusalem, is reflecting the incredible power of breakthrough technologies to make a real and lasting social impact in the world.

The OurCrowd Summit is one of the premier events in the tech industry, and the largest business event in Israel’s history, with 15,000 expected to register to attend this year. The scale of the conference befits the heart of Startup Nation and a place of great social importance, Jerusalem, arguably one of the most innovative cities in the world, combining history and tech on daily basis.

The Summit provides an interactive, front-row seat to the formerly closed world of startup venture capital, with exclusive exposure to cutting-edge technologies, the entrepreneurs behind them, and the corporate leaders deploying them.

The agenda includes sessions involving discussions and debates on real issues that people don’t talk about enough, including the ethics of genetic editing, how society should prepare humans for the robotic future, and how today’s technologies can address environmental crises.

Startups – and investors – making an impact for a better tomorrow

Despite the buzz around responsible or sustainable investing, many intelligent, well-informed investors have never heard of impact investment. Hence there is a need for many more events like the OurCrowd Global Investor Summit.

It is very important to unleash the huge pool of capital held in private hands to social impact investment. This new accessibility will benefit the whole sector.

If more people understand how impact works, it could mean that more innovative impact businesses will receive the much-needed finances.

For the investors, the satisfaction of knowing that they are backing businesses solving real-world problems is very rewarding. The OurCrowd Summit will inspire the common investor to become a social impact investor, and play his/her part to address social challenges in innovative new ways for a better tomorrow.

Registration for the 2019 OurCrowd Global Investor Summit is underway; register now at summit.ourcrowd.com.