Measuring Impact

August 16, 2017

Much progress has been made in the impact measurement arena in the past few years.  In addition to widely-adopted metric sets and frameworks (GIIRS, IRIS, etc.), entrepreneurs and fund managers have begun to develop their own sets of impact tools to articulate the impact of their work.  


With a lot of attention and conversations happening around impact measurement, it's easy to get lost in the noise.  With more metrics and frameworks proliferating, investors need to stay disciplined in asking how such tools help inform their personal view on the progress of impact.  


I find myself asking the following two questions when plowing through ever-increasing impact metrics:


1.  Is ‘more’ always better?

2.  What is the appropriate benchmark to evaluate impact?




1. Is ‘more’ always better?  


Scale often comes to the forefront of investors’ mind when evaluating impact investments.  Creating a solution that can serve as many people as possible is a good thing.  However, investors often times fall into the trap of using scale as a primary barometer to gauge the progress of impact.  A few reasons contribute to this behavior.  One, scale is easy to quantify and simple to understand.  Simplicity becomes especially important if there are a lot of investments to review.  Two, ‘more is better’ is a widely-adopted point of view among investors.  Investors often equate scale to larger and deeper impact.  Three, other attributes such as ‘quality’ or ‘level of need’ are harder to quantify and therefore assess.  All three are good and legitimate reasons. 


But, what if a business model intentionally focuses on reaching a few or a local town to focus more resources on quality?  What if a business model is to focus on rural areas where it’s difficult to reach scale as one may be able to in more-dense urban areas?  More Micro Finance Institutions (MFIs) are moving their focus away from rural areas to urban areas to strengthen diversification through scale.  This results in an imbalance of supply and demand for impact capital in rural areas where a need is still great.  It’d be a shame if impact capital doesn’t flow into communities in a dire need because scale takes precedence over other impact attributes like 'quality' and 'level of need'.  Entrepreneurs and fund managers serving communities in most pressing need should be rewarded for doing so, not penalized because it's not reaching scale like other opportunities in investors' portfolios.


Truth of the matter is...most investors will agree that scale is not always the most important impact attribute (although it may be the easiest to measure).  But, the challenge becomes balancing the need to consider several impact attributes for an opportunity with investors' desire for simplicity in understanding impact.  While we can easily summarize financial performance, summarizing (or may be even quantifying) impact performance is much more challenging.  This remains one of the challenges in the impact measurement space.



2. What is the appropriate benchmark to evaluate impact?


When evaluating financial performance, investors use relevant benchmarks (i.e. S&P 500, Preqin, etc.) within a specified period of time to assess if investments outperformed or underperformed.  However, there is no such benchmark when evaluating impact.  If an education company served 50 students in a low-income community in the past quarter, how would investors know if such an outcome is ahead, in-line, or behind the outcome of other education companies in a similar environment?  In essence, how can investors evaluate the impact performance of a company against its peers?  


Similar to the way financial benchmarks are determined, impact investors can gather impact performance data of ‘comparable’ companies and assess how one particular investment performs compared to the rest (i.e. IROI = Impact Return on Investment).  Identifying a basket of ‘comparable’ companies can be somewhat subjective, as it is in the financial valuation process.  At a minimum, these ‘comparable’ companies should be addressing a same set of social issues in a similar macro and geopolitical environment.  Investors go through this type of exercise all the time when evaluating financial performance.  Why not apply the similar process and level of rigor to the impact evaluation process?


After defining a benchmark, investors need to be mindful of the time frame in which to apply the benchmark.  For illiquid investments (i.e. real estate, venture, and private equity), investors should not rush into making a conclusive evaluation on impact in the first several years.  In fact, most illiquid investments have a 10-year fund life cycle.  To take it a step further, I'd argue that desirable outcome may not come to fruition until long after the 10-year life cycle.  Most of the social issues impact investors care about are complicated in nature and take years if not decades to see change.  For example, many American missionaries who served in South Korea after the Korean War never got to witness the great impact they made for the nation.  70 years after they served the generation of my grandparents in the peninsula, South Korea is now second only to the U.S. in sending out missionaries abroad.  What an amazing impact!  Good things come in time.

While impact measurement issues are complicated, I’m encouraged to see many of my peers with amazing heart and minds collaborate to shape the conversations.  Measurement is important because it sends signals to entrepreneurs and fund managers on what's important to investors.  I’m excited to see how God will inspire minds to help direct His resources to love on those in need in meaningful and powerful ways.


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August 16, 2017

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© 2016 by Robert Kim.