Impact Investing that Maximizes Impact
Several people I respect asked about my views on impact investing recently.
Background. Even though we aren’t defined by our past, we are influenced. I grew up with nothing, but somehow was always a do-gooder. Even as a new immigrant speaking zero English, at age eleven I volunteered at the public library, the Intensive Care Unit and the Emergency Room of the nearby teaching hospital. In high school, I got a few fellow do-gooders together, sold candy to raise enough money to put a recycling bin in every classroom. I delivered meals every Thanksgiving for Meals on Wheels, and wrapped gifts every Christmas season to raise money for the Red Cross. Normal teens hung out at the mall and swooned over the Backstreet Boys. Neither interested me, so volunteering was what occupied my time. Working 30 hours a week putting myself through college put a temporary damper on my do-gooder tendencies during the school year, only to have it channeled to cancer research during the summers.
Charlie Munger has lamented several times the travesty that is the brain drain of our society’s best engineers and scientists to Wall Street. I feel a twinge of guilt every time I hear it: I majored in the math track of economics, took enough courses for a minor in electrical engineering computer science … and went straight to the trading floor after college to pay off my tuition debt. Having seen how hard my immigrant parents had to work to put food on the table, I wasn’t going to ever ask them for anything. A full scholarship to business school solidified the happenstance track.
Once my career no longer necessitated working 100+ hours per week, the do-gooder urge returned. I fostered cats and dogs out of surgery at the local animal shelter, started a grassroot organization to deliver kids toothbrushes to orphanages in developing countries (minimizes corruption), and mentored for Big Brothers Big Sisters.
The economist in me though, saw a problem: although I loved what I was doing, I wasn’t necessarily better at it than the next good hearted person. In other words, I had no comparative advantage. What I was doing also didn’t scale: I was limited by the number of hours in a day.
You might be laughing at me now, but the above is what happens when an idealistic do-gooder kid gets an education from eight Economics Nobel Laureates and Bates Clark medalists (Gary Becker, Eugene Fama, Richard Thaler, Robert Shiller, Lars Hansen, Joe Stiglitz, Steve Levitt, Kevin Murphy). The heart-brain meld results in a do-gooder who thinks about maximizing the quantity of good returned per unit of effort and capital. Sprinkle on top a love for data, algorithms and engineering, you get the monstrosity typing this post now :-)
Approach. With that background, you might now be able to empathize with my unconventional approach: data driven with a strong entrepreneurial bent.
(1) maximize impact per dollar and per time,
(2) track every metric that can be measured,
(3) iterate quickly with incoming data,
(4) every entity must have a plan for self-sustainability and leverage from day one.
I’m more application than theory. So here are a few real life examples:
1.Be creative with structure. One donor was particularly passionate about the environment and the zero-emission Nissan Leaf. His $300k would have bought 10 Nissan Leaves. By working with a dealership, the same amount of money was able to act as guarantor to 40 car loans, putting 40 Nissan Leaves on the road. Hindsight is 20/20: an even better structure would have been to guarantee low income borrowers that intend to be Uber or Lyft drivers. Forty cars that would have seen the most amount of driving, and generated the most pollution, are now zero emission.
2. Reason from first principles. The example above highlights the importance of reasoning from first principles: the end result is minimizing emissions, not maximizing the number of Nissan Leaves on the road. As operators, we are so busy with the day-to-day that we get lost in the trees. Once in a while, taking a step back to look at the forest helps to course correct, and I find reasoning from first principles to be an effective way to step back for a second.
3.If you can measure it, you can improve it. The data geek in me is revealing herself. I bought my first stock at age eleven, and read about Buffett at age fifteen. The inoculation happened early here. When Buffett announced that he was donating his wealth to the Gates Foundation, I took notice and read as much as I can. What stood out about the Gates Foundation is its quantitative approach to philanthropy. The most effective tools in business are applied to philanthropy. It made immediate sense to me: instead of maximizing profit, the same tools can be used to maximize impact if we define impact and track all the intermediary steps. Data on the intermediary steps allows for iterations and quick course corrections, which minimizes wasted capital.[side note: the quotation “if you can track it, you can improve it” comes from Sami Inkinen of Trulia]
4. Bridge loan between grants. I recognized early in life that I’m not all that smart, but I can help the smart ones make a positive impact. One of my ridiculous smart friends figured out a way to turn biowaste into clean hydrogen … because you know, what else do you do with a Ph.D. in aeronautical engineering and chemical engineering, except work with poop? He was surviving on grants while bringing down the cost to be comparable to solar and wind. In 2015, he had a lapse between grants, and needed working capital to keep his lab open and one part-time lab assistant. I gave him a six-month personal loan because his startup wouldn’t qualify for any bank loans: no bank would take clean-tech IP as collateral, nor look at his track record of successfully getting grants. This is where impact investing should come in, with the tech knowledge to evaluate IP as collateral, and the financial structural flexibility to make working capital loans to these asset-light companies.
5.Buy the first batch of units to lower per unit cost of production. One of the best things about Singularity University is its global reach. The Denmark 2019 cohort, out of 48 founders, only one was born, raised and residing in the U.S.. This global perspective forces us out of our fishbowl, and once out, we can never see the fishbowl in the same way again. One founder from South Africa figured out a way to make a sub-$1 solar lamp, that charges sufficiently in the African sun to last 4 hours in the evening, sufficient for a small family. The ingenuity here is not a new type of lightbulb or energy, but removing extraneous items to bring down the cost sufficiently for the consumers that need it most. He needed an order of 1k units in order to scale manufacturing and bring cost down to sub-$1. This is also where impact investing can come in: taking the inventory risk and making a working capital loan with interest in arrears.
6.Facilitate adoption. The above two examples segue to another view I have on impact investing: sometimes it’s about creatively facilitating the adoption of an existing or developing technology, rather than creating a fancy new technology. E.g. Making clean energy cheaper than gasoline, making autonomous driving safer than human drivers, would both hasten adoption. In the startup world, we call this UI and UX: it’s all about the users. If we make our solutions more attractive and easier to use, we facilitate adoption. In economics terms, it’s called “choice architecture”: if we make our choice the easiest choice for our consumers, they are more likely to make that choice.
7.Invest in data that can be shared to lift the entire society. Even in the caveman days, data and lessons learned, when shared across the village saved more lives and ensured the survival of the village. Nowadays, emerging market microfinance loans are made to a group in the same geography and business type. These groups mandate monthly meetings among the small business borrowers, which facilitate knowledge sharing and dramatically lower loan defaults. If this is the local analogue version of data, just think of how much we can do with big data in the cloud, 5G connectivity for fast iteration, and the problem solving speed of quantum computing. Data is at the heart of the Digital Revolution, touted as the Third Industrial Revolution. The value of data lies not merely in predictive analytics and forecasting, but in its scale to upgrade the entire system. E.g. an autonomous car crashes once, this data is updated across the entire system, so that the same exact accident will never happen again in the system. This is leverage. This is scalability. This is what technology can do for social impact.
8.Fund mentorship, and software to facilitate it and track it. The adage is, better to teach a man to fish than give him a fish. I say, best to build software that continuously adapts and teaches the latest fishing techniques. Mentorship programs, when done right, engage and strengthen a sense of community. We feel more committed to a common goal when we’ve pitched in. In addition to Big Brothers Big Sisters, I’ve also seen many other success stories: when returning veterans are paired with tech executives, when current NFL players are paired with finance executives, when paroles are paired with local businesses. Mentorship only take a few hours a month for the mentors, but can dramatically chart the life course of the mentee. The return on time is huge when the people factor is right. Digital learning and MOOCs get 90% of training done very efficiently, but the last mile delivery of insight often needs to be tailored to the individual and the situation. More can be done with technology in both training and mentoring.
9.Eliminate corruption and decrease friction. This should be the baseline of impact investing. One recent study showed that the best-in-class nonprofit only allocates 86 cents of every donated dollar to the stated cause. Impact investing needs to aim for 100%, and we have the technology tools to get there. E.g. Instead of the 10% sales commission paid to raise these donated funds, can we use technology to galvanize the donor base and convey the most up-to-date accurate information on the problem and solutions?
10. Monopsony. Monopsony is an economics term where there is only one buyer. Most free market economists have a cow with this because it’s the other side of monopoly: monopoly is one supplier, monopsony is one buyer. But there is an area where a monopsony is absolutely necessary: during an outbreak or pandemic. The reason why China was able to provide test kits by January 13th 2020 and meet sufficient demand two weeks after that, was monopsony. I’m not advocating for one supplier, because multiple suppliers is a good thing to minimize supply disruption. But that one large order ensured no lag in production.
My Why. My first exposure to a grassroot nonprofit was Shin Shin Educational Foundation. Three retired Chinese Americans scrimped and saved from their social security checks, to go back to rural China and build a free elementary school. Twenty-two years later, not only has Shin Shin built a free school in almost every province, it has expanded into e-learning and leveraged the power of technology. Maybe because my first exposure was to donors who had so little themselves, I’ve always felt a sense of responsibility. Just because the money was given, doesn’t mean it was free. We owe it to them, to everyone who’s mentored us and believed in us, to stretch that dollar and maximize its positive impact.
My goal is to open source these ideas to hopefully raise all impact investing. Stay tuned for more ideas in Part 2.