Impact Investing

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To Be or Not To Be (a Social Enterprise)
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I really enjoyed a recent piece by Daniel Pianko, co-founder and Managing Director at education-focused venture fund University Ventures, one of our investors. In it, he discusses the tricky no-win decision faced by would-be impact investors:

Make the impact argument to potential limited partners (the groups that invest in venture and private equity funds), and risk being pigeon-holed into a tiny fraction of capital reserved for impact investments. Make the case on returns only, and lose out on the small pool of limited partners eager to anchor impact funds.

Instead, Daniel hopes we all can move past the bifurcated lexicon of social vs. commercial enterprise. (And he’s certainly not the only one; see here for another example…) After all, Daniel believes that the companies out there solving the world’s biggest challenges should end up creating above-market returns for funds, regardless of whether they’re called “impact investments” or not. In UV’s case, this means investing to accelerate positive trends in education and employment pathways, and measuring success in terms of metrics like learning and career outcomes.

I think this is right on. This kind of thesis-led investing is the right way to build a fund — and the right way to build a business.

I couldn’t help but recognize a choice similar to Daniel’s when a company like ours decides whether to identify as a “social enterprise” or not. I feel a certain tension, knowing that for many people the term social enterprise has become code for loss making and non-commercial. That sucks!

When I first discovered the concept of social enterprise in law school, working on a startup bank that aspired to double-bottom line returns, I was inspired. At the time, the existence of a band of people and a coterie of companies aspiring to do well while doing good was thrilling and stoked career aspirations to channel the power of business to solve important global problems.

At Shortlist, I feel like we’re doing just that.

We are guided by our mission to unlock professional potential, to create a level playing field where everyone can be considered for opportunities on the basis of merit, not pedigree, and to help companies build the best teams they can. This feels important and worthwhile, and if we succeed with this we think we will also succeed financially in a big way.

So I hate it when labels like “social enterprise” get reduced to an impact vs. commercial dichotomy. Instead, for me, the label social enterprise should signify a values commitment and a thesis on how to build a successful, money-making business.

We want to wear on our sleeve our commitment to mission, not over or instead of profit, but as a multiplying force of our profit.

Why a multiplying force?

  • Because we believe that our commitment to solve a big problem is what attracts and motivates the best and brightest — and we’re awed by the talented team we’ve assembled.
  • Because we believe that pursuing a positive vision of what’s possible is the best way to secure a broad base of support that goes beyond pure capitalists to include philanthropists, foundations, and governments.
  • Because we believe that many of the biggest problems facing humanity are also the hardest and impact the most humans, suggesting that the rewards can be massive for the folks that figure them out.
  • And because we believe that aiming for impact is the most personally motivating, and after all, Achievement = Talent x Motivation.

So at the end of the day, I believe that whether we call Shortlist a social enterprise will always matter less than our shared vision of the better world we’d like to help create.

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An exciting milestone in the Shortlist journey…
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We’re thrilled to announce our recent seed investment, an exciting milestone that will allow us to continue unlocking professional potential across India and East Africa.

When we started the fundraise process, we sought to partner with investors who share our passion for smarter hiring and who represent the global diversity of our business and team. The group we assembled includes institutional and individual investors from India, Kenya, and the US, each who bring deep expertise from their respective markets. We believe this gives us an incredibly strong foundation on which to grow, with insight and networks in all the places we want to be.

We want to thank each of our investors — University Ventures, Samir Shah of Sattva Capital, Zephyr Acorn, Farm Fund at Impact Assets, Bodley Group, and a handful of individuals who wish to remain private. We are humbled by their faith in us and their excitement about Shortlist’s potential. We have already benefited so much from their tough questions, thoughtful suggestions, and helpful pushes throughout the process — and we’re eager to continue getting their ideas going forward.

So what lies ahead?

A lot! We’re going to use the money we raised to take our data-driven talent screening product and technology to the next level. We’ve learned so much working with nearly 100 employers in the last 18 months, and want to build these insights into a brilliantly intuitive screening platform that will help growing businesses hire even better. We have a rich product roadmap encompassing new and improved assessments, a model for easy assessment customization for each job, and more features for both employers and job-seekers. The end result will be even easier and more targeted hiring without the pain, and with the promise of higher quality, better-fit candidates and employees.

We’re also starting to harness the power of our data. Each candidate who applies on our platform (and several hundred thousand candidates have engaged so far!) shares great detail about her professional experience and aspirations, while the competency-based assessments we deliver allow us to gauge skill, knowledge and potential beyond a CV. We are starting to use this data to better predict who an employer will select to interview, who they’ll hire, and who will actually be great in the job. We’re also starting to look at where candidates might be happiest. These predictive loops will get stronger and stronger as we increase our “hiring reps” with particular roles and particular employers.

It’s an exciting time for our business, and once again we thank our investors for their faith and support. Now: back to work!

Be sure to check out our new website, www.shortlist.net, to learn more, and follow us on Twitter (@Shortlisthires) for hiring tips and other updates!

 

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Human Capital: The Other Capital in Impact Investing
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Why Human Capital May Matter More than Money, and What Investors Can Do About It

human capital

Impact investing, in the words of Mugatu, is “so hot right now.” More than $15 billion a year is flowing into impact investment, fueled by a growing appreciation for the ways business and market-based mechanisms can drive positive change in the world. This is great news! I’ve been working in the social enterprise world for more than a decade, from my early days as a wannabe begging for an unpaid internship in India, through stints at a fast-growing microfinance institution and a seed impact fund, and now co-founder of a social enterprise of my own. But money is not enough for impact businesses to succeed; they desperately need an answer to their human capital challenges to unlock their world-changing potential.

As an investor, I saw firsthand how deeply companies struggle to recruit and retain the best talent, cultivate senior leaders and define the right culture and values. This cross-cutting challenge is not confined to one sector, and deserves much broader attention and action, in a similar way that multiple sectors unified and rallied around impact investing over a decade ago.

There is definitely some great work underway in worlds beyond impact investment, with myriad funders, nonprofits and even companies dedicated to human capital issues around the world. Firms specialize in delivering leadership training, running fellowship programs as social enterprise on-ramps, providing all varieties of up-skilling to in-market talent, and promoting talent management best practices. But while impact investors have at times mobilized around cross-cutting ecosystem factors like capital markets, regulatory frameworks and distribution infrastructure (which is great!), most relegate talent topics to side conversations and suppose portfolio companies will figure it out on their own.

I hope impact investors can start to understand the many ways that human capital issues are worthy of more attention, lest all this money flowing into the space will not be leveraged to its fullest potential.

Why does human capital matter?

How do we dimension this human capital problem, and why should the impact investing world care?

Bottleneck to growth and impact

Entrepreneurs and managers consistently cite variations on “not finding the right people” as one of the biggest challenges and constraints to scale, ranked on par with or sometimes even higher than funding. One study recently found that once they’ve raised capital, 75 percent of early-stage entrepreneurs believe that the inability to attract and retain talent is a critical impediment to scaling. McKinsey has found that over half of companies the world over cannot find qualified candidates for entry-level roles. During my time at Accion Venture Lab, we surveyed 35 financial inclusion CEOs around the world and found that talent was the top issue facing their organizations and the single most important issue to them personally (above funding).

For companies, vacant positions stall growth and cause quarterly targets to slip. Making the wrong hire can be even more costly than none at all, given the amount of time and money invested in new employees. A recent global study found that 69 percent of employers reported that a bad hiring decision put a strain on their company, and other data reveals that up to 50 percent of hiring decisions were considered a mistake. Even further, if a company can’t effectively develop its team, the failure of employees to realize their potential directly impedes the company’s growth and impact potential.

Fixing a rigged opportunity marketplace

Beyond measures of enterprise-level underperformance, impact investors should care about fostering more fair and transparent job marketplaces as ends in themselves. More than just income, work for most people shapes identity, self-worth and personal fulfillment.

Unfortunately, today’s labor marketplace is rigged. Job opportunities are determined far more often by factors like pedigree, connections and bias than genuine ability and merit. Researchers from the University of Chicago and MIT have found that white-sounding names had a 50 percent better chance of being called for an interview than African-American sounding names, and similar biases exist globally around race, gender, religion and more. Further, in emerging markets, where access to opportunity is more often determined by “birth lottery” (the initial conditions into which someone is born) than ability, mindset and hard work, impact businesses need a better way to identify competencies and match talent to opportunity. We need to shift the recruiting paradigm from pedigree to potential.

This isn’t charity, it’s just about leveling the playing field and giving talented people the chance to be considered for life-changing opportunities on the basis of what matters, rather than what doesn’t.

Why is human capital being under-supported by impact investors?

If focusing on talent is such a big opportunity, why wouldn’t impact investors be all over this? How can we account for this apparent “impact market failure”? Without belaboring the point, there are a few issues that might explain the minimal attention:

· No owner: Most funders are issue- or sector-specific, and because human capital doesn’t “belong” to a single sector, it often slips through the cracks.

· No comfort zone: When all you have is a hammer, everything looks like a nail — and at present, most impact investors come from financial backgrounds and are more comfortable talking money than people.

· No easy answers: Human capital is a many-headed beast, implicating structural issues like local education systems and globalization; individual differences in personality, circumstances and abilities; firm-level differences in organizational context and culture; and so on. It touches everything and resists easy fixes.

· No success stories: Most sectors become “a sector” when a successful new model shows potential. Microfinance’s rise gave birth to “financial inclusion” and solar pioneers gave birth to “access to energy” as fields with dedicated funding pools, in-depth research and dedicated convenings. There haven’t been human capital posterchildren yet, but I’m hoping the rise of impact-oriented talent players like RippleWorks, Omidyar Network’s human capital team, African Leadership Network, Spire, African Management Initiative, and my company Shortlist can start to change that.

· No convening body: Financial inclusion has CGAP (and others), solar lighting has GOGLA, cookstoves has the Global Alliance for Clean Cookstoves — and, of course, impact investing has the Global Impact Investing Network (GIIN). Unfortunately, the GIIN of human capital just hasn’t been created yet.

What can we do about it?

I hope more funders start to recognize the critical importance of human capital as the foundation for the success of the impact enterprises and initiatives we’re all supporting. A number of groups have started doing research and a small but growing body of literature is emerging on talent and human capital. But we need more to further diagnose the problem, understand the ecosystem, contextualize issues and ideas to local markets, and make recommendations for action (at both an ecosystem and firm level).

We also need more pioneering investors to see this as an area of great opportunity. Omidyar Network has been a leader here, setting up an in-house “human capital” team to help their investees attract, develop and retain top talent — but I’m not aware of other impact investors who have shown such commitment. Organizations like Argidius Foundation, Blue Haven Initiative and AHL Venture Partners (all funders of ours) have made human capital a focus area, but they are the exceptions (unless the broad bucket of “education” or “edtech” counts). At Shortlist, we just went through a fundraising process and heard a similar refrain from many impact investors: “Human capital is not within scope or is not a mandate fit,” or “human capital only counts as ‘impact’ if focused on people making less than $2 a day.” I’m hoping more investors and funders start to see this as an important issue with the promise of system-level impact, up and down the salary scale.

Even for investors who don’t start investing in human capital companies, I hope they can focus more actively on human capital issues within portfolio companies. When making an investment, go deeper than assessing the co-founder biographies: Spend time understanding the organizational structure, staffing plans, recruitment strategies, training programs and the company’s values. I’ve seen impact investors spend weeks digging through financial models, formation documents and board minutes, but not ask a single question about the culture and sub-C-suite team. If investors cared more about people, so would entrepreneurs — you can help entrepreneurs prioritize people just by asking about them.

We also have an opportunity to learn from mainstream global trends around the future of work and the evolving higher education landscape. It’s a heady time with many calling for the unbundling and disruption of higher education, the digitization of economic opportunity, and new tools to help companies find, recruit, manage and train talent. Let’s learn from the best and bring these new practices and technologies into our markets and investments.

Finally, let’s turn this into a sector, shall we? I, for one, would love to see a dedicated resource center focused on “talent for impact” that could bring together the best research, resources, brains and energy around the world to help impact investors and social enterprises alike. That’s a conference I’d show up for, and bring my friends.

This article originally ran on NextBillion.

Related: To Be or Not To Be (a Social Enterprise)

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