In the upcoming issues of Life Science Leader, you will learn more about impact investing, a subject I anticipate having increased interest among life science industries. Why? Because I heard about impact investing while attending a board-level meeting of biopharmaceutical industry executives, which spurred the idea to develop some educational materials on the subject. We kick off this three-part impact-investing series with our October issue and Catherine Clark, faculty director at the Center for the Advancement of Social Entrepreneurship (CASE) at Duke University’s Fuqua School of Business, where she founded and directs the CASE i3 (Initiative on Impact Investing). Involved with impact investing since 1992, Clark provides a primer on what impact investing is and why it’s becoming more mainstream. In part two we interview a retired medical device CEO who shares the how and why behind his building of an impact investment fund. We will conclude this series by exploring how two of the biggest of Big Pharma are investing for impact.
Now, when we originally laid out Clark’s article for the print issue, we found we didn’t have room for the accompanying sidebar. As such, we decided to publish it here. We hope you find this information useful.
6 Pieces Of Wisdom For Those Thinking About Becoming Impact Investors
Decide what kind of money you will be using and the rules around it. Will you be using investment dollars or philanthropic dollars? Your whole portfolio or a carve-out? In funds or directly into companies, and if companies, public or private?
Create an investment thesis that explains how you will make money. Create an impact thesis that explains how impact will occur and how you will measure performance. How do the two theses work together in lockstep?
Determine your investment targets. Will you be investing in by stage (i.e., early, middle or late), by geography (e.g., Sub Saharan Africa), or an interest area (e.g., non-communicable diseases, primary care) or by vehicle (debt, equity, etc). Or a combination?
Get to know the actual innovators in the space. Look at the ImpactAssets50 or the GIIN’s database if you are looking at funds. If you are looking at enterprises, look at ImpactAlpha or Social Venture Circle or other sources for deals. Many financial advisors can help you identify possible investments across asset classes now if you have thought about items 1-3.
Consider with the impact you are trying to measure and bring those into the diligence conversation with potential investee funds and companies. What are they tracking to be accountable to your goals? What is feasible?
Set up expectations about impact measurement and management with your investees. Review your investments on a regular basis and include both financial and impact factors. What are you learning about what is working from your original investment and impact theses? Review and adjust.
In her research, Clark and colleagues found some common themes between what made for successful impact investor funds. One, founders had a solid financial background. Two, someone within the team had strong training and connections in the nonprofit community and the ability to clearly convey their idea of change along with their impact thesis. Third, all had some policy or government experience. “That led to 75 percent of the first money received by these funds coming from government, which shows that funds can move from being mostly subsidized to being mostly, if not completely, independent,” she shares. In other words, government investment in initiatives that the government cares about can help de-risk certain funds. According to Clark, layered capital deals (i.e., someone goes in at market rate, someone at lower rate, someone at a loss reserve) are often favored by corporations because they can get to know an area of impact interest really fast. “Impact investing provides for many more ways of addressing some of the challenges in what a corporation can normally execute on, especially if you ‘open the hood’ and look for the innovators,” she advises.