Impact investing as a sector is still very, very young, according to Sean Foote, Managing Director of Labrador Ventures (a venture capital firm), syndicated lecturer on microfinance at the University of California Haas School of Business, and member of the Center for Financial Inclusion’s Faculty Council. I recently heard Foote make the following assessment of the sector, speaking, as he noted, with his venture capitalist’s hat on.

First challenge: Impact investing is not yet mobilizing much funding from the true private sector. By far the majority of the funds currently counted as impact investing are coming from development finance institutions and major foundations – very much like microfinance investing 15 years ago.

Second, and related challenge: Foote noted that the size of most funds is often too small for mainstream investors to be able to handle. While the average impact investing fund is perhaps near $40 million, and the median is smaller, the average venture capital fund is closer to $200 million. Not only are the sizes of impact funds not commensurate with the scale of the social challenges they target, at this scale the cost of fund management takes a relatively big bite out of returns to investors.

Third challenge: Impact investing does not yet have the kind of “ecosystem” needed to support companies as they move from initial idea testing through to scale-up. The venture capital world involves multiple funds that specialize in specific slices of the business growth process, from pre-commercial angel investors to later stage funds that can invest and then supply expansion capital. In addition to the money, such an ecosystem provides tailored mentorship to entrepreneurs, contributing to the rate of business success.

Fourth challenge: The “impact” side of impact investing means different things to different funds. Some funds position themselves closer to the social end of a spectrum, with an acknowledged lower financial return, while other funds position themselves toward the financial end. While it is entirely appropriate for funds to set their own social and financial objectives, for mainstream investors the effect is a confusing splintering of an already tiny sector into several nano-subsectors.

While these points may sound like criticisms of impact investing, they are Foote’s brand of tough love. There are investment-worthy businesses that offer social benefit and financial success, he believes, but if impact investing is ever going to scale up to serve those businesses and help them grow, it will have to overcome each of these four challenges.

Image credit: LONDON+acumen

Have you read?

International Impact Investing: Findings from the 2011 Virtual Volunteer Project – Part 1

Why Are Some Countries So Far Ahead in Social Impact Investing?

Microfinance – The Next Horace Greeley Moment

Courses featuring microfinance can be found in most colleges or universities, and the development of the syllabi for these courses has begun to create a sort of “microfinance canon.” As the next generation of microfinance professionals enters the market, there are a few things that many of them have read, and a few questions that many of them have been required to consider.

I took 10 syllabi (a small sample size, admittedly) and looked for trends in what is being taught, what is being read, and what is being assigned. Here are a few things I found:

• Students are reading Collins et al., Armendariz and Morduch, and Rhyne more than any other authors (Helms was a close fourth). These three authors represent a nice diversity of method and emphasis. Collins et al.’s Portfolios takes more of a client perspective, Armendariz and Morduch explain the more technical nuances, and Rhyne offers a more practical business approach.

• Guest speakers are a major part of class time. Given that microfinance is still very much practitioner (rather than academic) oriented, it is no surprise that guest speakers are used quite frequently in class time. Most, if not all, of these speakers are in top positions at well-known microfinance institutions.

• Assignments range from case study examples, to policy briefs, business plans, and product designs. In a few of the syllabi, students were required to make presentations, including one that assigned an investor pitch in lieu of a final exam.

Beyond these content-related observations, I noticed that microfinance classes don’t seem to have an agreed-upon disciplinary “home” in academia. Classes are typically hosted in business, economics, public policy, and international relations departments. In addition (and this is probably related), professors tend to not be tenure-track academics. Often, they are involved in microfinance as practitioners in some way.

Despite this lack of an academic “home” or identity, however, microfinance classes are increasingly common. A simple Google search brought up dozens of publicly available syllabi. Compared to the offerings as early as five or 10 years ago, this prevalence is quite encouraging.

To explore these syllabi for yourself, head to the following sources:

• Harvard University John F. Kennedy School of Government: Microfinance in Theory and Practice, taught by Guy Stuart

• New York University Stern School of Business: Building and Financing Microfinance Institutions and their Financial Products, taught by James B. Carlson

• Carnegie Mellon University Heinz School of Public Policy: Microfinance, taught by Tayo Fabusuyi

• University of Michigan: Introduction to Microfinance, taught by Michael Gordon

• Georgetown Public Policy Institute: Introduction to Microfinance for Development, taught by David Roodman

• Berkeley Haas School of Business: Introduction to Microfinance, taught by Sean Foote

• Denver University Josef Korbel School of International Studies: Microfinance and Sustainable Development, taught by Janney Carpenter

• Johns Hopkins School of Advanced International Studies: Microfinance and Development 1, taught by Elissa McCarter and Kate Druschel Griffin

• Johns Hopkins School of Advanced International Studies: Microfinance and Development 2, taught by Victoria White and Isabelle Barres

Image credit: Justin Sullivan/Getty Images

Have you read?

5 Great Books About Microfinance and How the Poor Use Money

Center Advisory and Faculty Councils Meet in DC

Microfinance in Academia – The Center’s Faculty Council Reports on Their Activities