From Impact Investing to “Impact-First” Investing—What Is the Field Learning?

What does impact investing—that is, investing with social benefit in mind—demand of investors? Many in the field have long held it demands virtually nothing, that an investor can have a social impact without sacrificing a penny of their own. As one firm states, investors “do not have to choose between doing good—i.e. generate social or environmental return—or doing well—that is: make a financial return.”

This analysis, offered by Triodos, a firm with over $6 billion (€5.9 billion) in assets under management and a 30-year track record, isn’t wrong per se. There are indeed many investments where social or environmental goals don’t harm earnings (and, arguably, even improve earnings). An investment portfolio that limits energy investments to renewables, for example, may well outperform a portfolio that includes fossil fuel firms; holding on to fossil fuel stocks is arguably riskier.

But if the goal is to build a solidarity economy or foster a structural shift in the economy so that US business owners of color have the same ability to finance and develop thriving businesses as White business owners, then investor willingness to sacrifice some degree of financial return for social impact is required. That is the central conclusion of a new report released last December by Boston Impact Initiative, a nonprofit place-based investor in the Boston area and a promoter of the field nationwide.

The report, Fearlessly Funding Economic and Racial Justice, is a 42-page study that draws on survey data from 15 funds from across the nation and calls for developing a field of “regenerative, solidarity” funds whose purpose “is to deliver economic, social and ecological benefits to the communities they serve, not to maximize financial returns to investors” (25).

“The average level of start-up capital among Black entrepreneurs is $35,205 compared with $106,720 for White entrepreneurs.”

But while the report makes various calls to action (for foundations, donors, donor-advised-fund sponsors, lawyers, and policymakers, among others), it also offers a snapshot of the state of the field today, highlighting initial successes and indicating where further change in the field is required.

A Call for an Impact-First Approach  

Boston Impact Initiative (BII), besides authoring the report, is itself a place-based impact investing fund. Since 2013, the group has placed roughly $15 million in investments in over 85 firms. Of these, people of color own 72 percent, women own 40 percent, and women of color own 36 percent. As for firm employees, of the combined 962 workers at these firms, 80 percent are workers of color, 58 percent are women, and 46 percent are women of color. An estimated 31 percent of the firms are worker-owned, in whole or part.

The numbers give a sense of scale. But what about how BII invests? A few principles define the group’s approach.

First is the principle of limited financial returns. This means a commitment, as the authors put it, to offering only “a small financial return to investors” (8). Financially, in terms of the support provided to invested businesses, there is an effort to combine traditional investment tools—debt (loans) and equity—with grants. Finally, there is a commitment to providing additional nonfinancial support, such as coaching and networking. The team at BII refers to this combination of traditional investment tools, grants, and nonfinancial technical assistance as “integrated capital.”

As to why this kind of grant and technical assistance approach is needed, a study cited in the report noted that “the average level of start-up capital among Black entrepreneurs is $35,205 compared with $106,720 for White entrepreneurs. (2382)” It’s a dramatic difference, and it should be no surprise that addressing this difference effectively requires either a BII-type integrated capital approach or something similar.

An impact-first approach to investing requires [investors who are]…willing to accept below-market-rate returns.

Five years ago, BII launched a cohort-based approach to help organizations in other communities set up similar funds. To date, 69 fund managers from 38 organizations have participated in one of the first four cohorts, resulting in 18 funds (or pilots of funds) being launched nationwide (9).

Each fund is unique. The report notes that in their design, “the funds vary greatly in terms of asset classes (small business, growth enterprises, real estate); sectors (agriculture, reproductive health, affordable housing, technology); and the size of individual investments (from a few thousand dollars each, to $1 million or more for a single real estate project)” (16). But the funds all share BII’s focus on addressing their communities’ needs by providing integrated capital.

To date, the buildout of these funds has been modest. As of January 2024, the 15 surveyed funds, many of which had just started, reportedly had collectively deployed a modest amount of $8.6 million. However, in their ambition, these combined funds aim to ultimately raise and deploy $378 million (5).

What will it take to get there? Effectively, an impact-first approach to investing requires raising investment capital that aligns with integrated capital. In other words, for these funds to work, a large enough number of investors must be willing to accept below-market-rate returns. That money must be complemented by foundations or donors (or possibly government programs) that offer matching grants and technical assistance to the investment fund and/or the supported businesses.

Activating these funding streams will be challenging but not impossible. For instance, this financing structure that combines earned and grant income does share some features with the community development financial institution (CDFI) sector, which is now nearing a half-trillion dollars in assets. BII itself received a CDFI designation and recently won a $300,000 technical assistance grant from the US Treasury’s CDFI Fund.

Developing the Ecosystem

In the report’s survey of fund managers, three primary areas of need were identified—raising sufficient levels of capital, support for operational needs (including bookkeeping, accounting, tax filing, legal compliance, and marketing), and fostering network building and connections.

In response, the report authors propose recommendations in each of these areas:

• Capital: One recommendation in this section is to create “structured funds with different risk/return profiles” that can help attract investments from different sources—in essence, creating multiple entry points for investors with varying levels of willingness to accept lower rates of financial return. Other recommendations include supporting networks of mission-aligned investors (like New England Impact Investing Initiative) and simplifying due diligence requirements to maintain basic standards but make it easier for smaller funds geared toward investing in entrepreneurs of color to raise capital.
• Operations: The report recommends developing and sharing templates for various operational tasks, such as deal flow management, portfolio monitoring, impact measurement, investor reporting, and legal and regulatory compliance. “Centralized resources for human resources, payroll, marketing, communications, impact reporting and investor relations would allow fund managers to focus more time on investment activities that support their clients and local communities” (27) combined could reduce operational costs by up to 25 percent, according to the report authors.
• Network Building: The report authors emphasize the need for professional development to “foster experiential learning and collaboration…as well as sharing of best practices” (29), and recommend investment in developing new leaders. They additionally emphasize relationship building and call for creating a more developed shared database of industry information to “house research findings and market analyses that help funds understand industry trends and opportunities” (29). And they noted the need to develop “clear standards that recognize the unique characteristics of impact-first investing.”

The Road Ahead

As this report lays out, a core challenge in developing an impact-first investment fund is that the traditional investment fund model—namely, a venture fund—is ill-suited for the type of investment that funds like BII aim to achieve. Venture funds are self-sustaining, with management fees on large investments more than covering expenses. But as the authors point out, many of the loans being made to start-up entrepreneurs of color by funds in BII’s network by design offer “below-market interest rates to enable under-resourced entrepreneurs to succeed, and that translates into less loan interest and fee revenue” (26).

Grants, in short, are not simply desirable, they are a necessary part of the model. That grant support could come from philanthropy—the authors highlight “technical assistance facilities”—or from public policy or some combination, but the resources need to come from somewhere.

Public policy, too, the authors note, can help shift capital flows in other ways, including through tax incentives or regulatory changes that “streamline compliance processes” (32).

At a public event held a month before the report’s release, Y. Elaine Rasmussen, who led research for the report, noted that far from being cost-free, building impact-first investment infrastructure is hard work. “The background work is overlooked. The humans behind this work get overlooked. The mental capacity it takes to do this is very trying on the soul.”

Leveraging and accessing existing funder and investor networks, Rasmussen added, is critical for the success of the impact-first investment vehicles she and her colleagues are developing—to be able to create viable systems for entrepreneurs of color to access the support and capital their businesses need.