I have previously written about my views on why donors and philanthropists should give greater consideration to funding first time managers. And similar perspectives have been shared by others in the field. But I rarely see investment managers openly exchanging ideas or thoughts about their fundraising strategies and I think this is quite unfortunate. As an impact investor and given the relative nascency of the practice, I think it’s critical that we learn from each other to ensure that directionally more capital is invested with intentionality into impactful projects and so that we don’t waste more time! From where I sit today, it really does feel like there are a lot of competing funds of which many are in fundraising mode, and honestly the space is actually feeling pretty crowded.
I thought it could be interesting for me to write with the objective of sharing my own experience through the fundraising journey. Of course, these insights will help some and be less useful to others, but it’s a good starting point either way to open up a dialogue.
Initially the focus was to seek partnerships with large development organizations and foundations. This changed over time as a convergence commenced in the requirements of impact investors more broadly. Just a few years ago, development organizations and traditional donors were more amenable to providing concessionary capital and in some cases patient capital. The landscape has since shifted and through many meetings it became clear that large or small, investors were focusing on a few key areas.
Risk-adjusted market rate returns. How familiar are these five words to you? If you’ve stood in a similar position to me, you will quickly be able to relate to how I have felt when a potential investor explains that this is their financial return target. I have yet to sit across from a group of investors who can give me clear guidance on what this means. And yes, it will be defined differently based on an array of different parameters, but without transparency and flexibility, I believe we continuously run up against this barrier of misaligned interests.
Some potential investors have noted that a fund’s scalability is critical, and I don’t disagree completely, but it cannot be the objective always. Some funds are established as pilots with the core mandate of providing demonstration value to the market. These relatively smaller funds do have a purpose, especially in developing economies where certain models haven’t gained traction yet and should be supported. It’s my belief that after a pilot fund is successful, that’s when we can start to discuss scale and to contemplate how we achieve growth for what some have described to me as their requirement for “billion-dollar size impact”. Many of us already understand why scale is important, but there’s a time and a place.
Fundraising momentum and track record
I recently listened to a very insightful panel discussion on ‘democratizing impact investing’. It made me think about the power dynamics that are becoming even more obvious in impact investing as institutional investors begin to integrate an impact practice into their existing business models. I think it’s a dangerous direction for us to take by only believing that the Goliaths of industry have the skill sets and experience to get the job done. We all needed support at some point in our lives to get beyond the first step. Perhaps what we should be thinking about now are more fund incubators and angel networks to support first-time fund managers.
There are other attributes that will come into question, notably geography and sector focus, but these have been easier to understand early on in the fundraising process, as impact investors are usually transparent about the causes that they wish to support. I’ve drawn specific attention to the aforementioned areas of financial returns, scale, and track record, because understanding the level of importance that these areas play in an investor’s assessment, especially in relation to how they may prioritize generating positive impact, takes much longer to understand. Now if our common goal is to positively change the world, then I would say we shouldn’t undervalue the power of knowledge exchange and we should be sharing more of these types of insights. We need to get better at finding and supporting the most promising of first-time fund managers to accelerate our pace of action.
Jennifer Louie is Executive Director for Nexus for Development