Impact Investing: A Market Map
What does impact investing even mean?!
The term “impact investing” was coined only 15 years ago (by the Rockefeller Foundation) - and although it’s a relatively new term, the concept of “impact investing” has roots back in as early as the 1800’s, as a means for organizations to avoid those areas that directly conflicted with their values.
With increased appetite for thematic investments that address “ESG” or “impact”, we have witnessed a growing trend of both new financial products emerging and the re-labelling of existing products as impact investments (although some of this is very clear greenwashing). “Impact investing” has become a complex and rich ecosystem with more than 450 investors allocating $1.3 trillion.
However, there really isn’t a clear definition of what “impact investing” means today, given the wide breadth of the types of investors now engaging in this space.
Rise Together is often labeled as an “impact” fund - and we debate internally whether that’s appropriate (side note: we don’t love the word “impact” because it unfortunately is often tied to an incorrect assumption of concessionary returns; Obvious Ventures has coined the term “world positive” investments in lieu of impact investments for their portfolio, which I like). On one hand, we make philanthropic grants as part of our investment strategy to support a company’s impact or CSR program; on the other hand, we do not necessarily invest in companies with an “impact” lens. Flexport, a digital freight forwarder, and Paystand, a B2B fintech company (two of our portfolio companies), would not qualify as typical impact investments, for example. Yet both have capabilities for doing good in the world using their existing resources or unique capabilities.
To make sense of this growing ecosystem, we attempted to create our very own market map of the types of investors engaging in some form of impact investing (remember, we don’t love this word, but we are going to use it for purposes of this exercise). This was a surprisingly challenging area to “bucket” appropriately, but below we present our first iteration (note that this market map is by no means exhaustive) - thanks to our intern Johnny Meagher for help on this post (not ChatGPT this time)!
Definitions of the above “buckets”:
Generalist Impact: Investment firms using the traditional VC/PE structure to target impact (or world-positive) related endeavors across multiple industries. One example is Kapor Capital, whose mission is “gap-closing investing, identifying and investing in companies that provide both market and social equity growth”. Constant Therapy, which looks to improve access to neurological treatment, was a portfolio company of Kapor Capital prior to its acquisition. Note: the logos above represent market rate investors (while many impact investors are concessionary, such as Acumen Fund, which is a nonprofit).
Niche Impact: VC/PE firms that focus on a specific impact area. Reach Capital focuses on the edtech sector and Rhia Ventures focuses on improving maternal and reproductive health. Bloomlife, which is developing the first at-home, AI-enabled pregnancy wearable, is a portfolio company of Rhia Ventures, for example. These funds can range from concessionary to market rate.
Large PE/VC with Adjacent Impact Funds: Large traditional PE or VC firms which have impact related funds. Bain Capital’s Double Impact Fund has $800mm dedicated to healthcare, sustainability, education and workforce development. a16z’s Cultural Leadership Fund focuses on improving black wealth generation in the technology sector. These funds are typically seeking market rate returns.
Venture Profit Proceeds to Philanthropy: VC firms that pledge a % of their profits to impact causes. Transform Capital donates 50% of GP’s profits to philanthropic causes that are selected by their LPs (a wonderful fundraising tool btw). Legacy Venture is a venture fund of funds that directs all returns, both principal and gains, to charitable organizations. These funds are typically seeking market rate returns.
Family Offices / Foundations: Omidyar Network and Emerson Collective are examples of a business that is styled as a cross between a family foundation and an investment firm. They make grants through their 501(c)(3) entities towards philanthropic causes, as well as make equity investments in companies tackling societal and environmental issues. Investments and grants range from fully concessionary to market-rate.
Public ESG funds: Funds open to public investors that invest in companies with strong ESG performance. Vanguard has an ESG fund and there are numerous other ESG ETFs available for individual investors to allocate their funds towards. As of 2022 there are ~$300bn AUM for ESG ETFs. These funds are typically seeking market rate returns.
Impact Accelerators: Similar to traditional startup accelerators, impact accelerators provide support and resources to early-stage for-profits and nonprofits focusing on a social problem. Fast Forward is an accelerator for tech nonprofits. (Y Combinator is not in this bucket, but one of my favorite nonprofits, Recidiviz, which is focused on reducing incarceration using data, did go through YC).
Venture Philanthropy Funds: See my post where I defined “venture philanthropy.” tl;dr - bringing a venture mindset to philanthropic giving. Sometimes looking for both social + financial returns, other times only looking for social returns. Several community foundations, like SV2, sit in this bucket.
Blended Venture/Philanthropy: As Rise Together’s strategy of pairing venture and philanthropic dollars towards a single investment is unique, we decided to bucket ourselves in our own category; it might take years for us to land on the right term for our specific investing strategy (but I have an open suggestion box!). We seek market rate returns on the equity side.
In summary, while there are definitely examples of firms simply re-labelling existing products as impact investments and ESG opportunities (which is not always right), it is fair to say that the number and types of firms co-existing in the “impact investing” space is quickly growing. I consider this a good thing.
Let me know your feedback on our market map and your thoughts on the quickly evolving “impact investing” space.