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The Pioneer Gap: impact investing's Achilles heel?

7 January 2013

Here's a revealing new report from the Stanford Social Innovation Review. The authors echo what we have been saying at WSFF for some time now.

"One of the most striking findings of our research is that few impact investors are willing to invest in companies targeting the poor, and even fewer are willing to invest at the early stages of the creation of these businesses, a problem that we call the Pioneer Gap....The reason this happens is twofold. The first is ideological, the belief that by definition anything that uses investing tools must hit market rates of return—without a clear definition of which market those returns are based on. The second reason is structural: Most of the money going into impact investing still relies on traditional fund structures with traditional return expectations."

"One way to attack this problem is to have more fund managers and more funders experimenting with fund structures that more directly and appropriately align fund partners with the fund’s impact objectives: rather than use traditional fund structures that provide incentives to maximize fund returns (through carry), create funds that explicitly aim to maximize social impact while requiring a lower minimum return on invested capital. For example, a fund could have a bonus structure whose sole payout mechanism is a function of hitting social impact targets, instead of specific financial targets."

The full SSIR write-up is available here: