“TheMarker”, November 29th, 2015

Market trends show that the impact funds can generate a profitable return from investors. As additional private investors and venture capital funds enter the field of impact, it will be possible for associations to reduce their reliance upon philanthropic money, and apply large shares of business money to social change

Most of the young entrepreneurs, who are currently attempting to raise investments to develop their business from venture capital funds, are entirely unaware of the huge developments of the economic market in recent years – the field of impact entrepreneurship, whose scope of activities and investment was estimated at 50 billion dollars last year.

Unlike traditional venture capital funds, the impact investment funds seek out a dual bottom line: both the profit line, i.e. the return on investment (ROI) and the positive return for investors, as well as social change it creates (SROI).

The impact funds also differ from philanthropic funds in that, the latter usually measure the outputs (how many people encountered the project), while impact funds measure the results of the social change itself (i.e. whether the social gap was reduced in practice) and not the question of whether they tried to address it.

The research currently indicates that impact funds can generate market returns for investors, and that their performance does not differ significantly from the performance of the regular venture capital funds. The misconception that investment in impact projects are less profitable and have a lower return, is based upon regular funds aiming to achieve an internal interest return on the investment (IRR) of more than 15%. However, in the overwhelming majority of cases of regular funds (over 80%) the net returns for investors are far lower than 15%, not to mention the multitude of cases with negative returns.

A Global Impact Investing Network Report published recently, compared the performances of 51 impact funds to those of 705 private investment funds (private equity) over a period of more than a decade. The results showed that the average return in the world for investors in impact funds was 6.9%, while the average return of regular funds was 8.1%. This is a small and negligible gap.

Even according to a segmentation of developed countries alone, the average gap only consists of a very small percentage. The report indicated that among the impact funds, just line the regular venture capital funds, two thirds of the funds made a profit and showed a positive return, and a third showed a negative return. Considering the fact that this is new and developing economic area, these performances are impressive and bode well.

The great challenge of the investment bodies in the impact field in Israel is to present and establish the field, which is already working well in the world, both for the entrepreneurs and the investors, and to prove that it is possible to make investments that yield a reasonable economic return combined with effectiveness and measurable social change.

As additional private investors and venture capital funds enter the field of impact, it will be possible for associations and organizations to reduce their reliance upon philanthropic money, and transfer larger shares of business money to social change.

see article on TheMarker website