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Editor’s note: This post is part of a broder series of articles focused on the role of impact investing as part of The BIG Idea Page for July, where posts can be found.

Nilima Achwal recently detailed a conversation with Felix Oldenburg of Ashoka Europe in an article titled “The Dangerous Promise of Impact Investing” on Next Billion. The post was billed as a “radical critique of the current hype surrounding impact investing” in which Oldenburg not only attacks the hype, but the industry as a whole. As impact investors, we welcome such criticism because it will help clarify the role of impact investing within the space. That said, we disagree with many of Oldenburg’s assertions and hope that sharing our perspective will help move an important conversation forward.

Stringent Requirements

Throughout the interview, Oldenburg argues that impact investors outnumber investable social enterprises. He says the imbalance creates a hype that damages, limits, and diminishes the impact of social enterprise by “shifting many organizations to strategies that limit their impact.” Although he touches on several issues, he focuses in on impact investors’ financial return expectations and “stringent requirements.”

In regards to financial return expectations, Oldenburg assumes that impact investors focus on returns over impact, and that we are “sitting at the end of an oil pipeline, waiting for the riches to gush out.” The truth, of course, is much less dramatic. In fact, a recent report by J.P. Morgan and the Rockefeller Foundation found that impact investors’ reported financial “return expectations vary dramatically.”[1] A different report, funded by the Harvard Business School, found that most impact investors “argued that the only way to properly incubate social enterprises is through patient and flexible capital which sacrificed economic returns for maximum social impact.”[2]

Regardless of the return expectations, Oldenburg believes that impact investors are “damaging the investees with their stringent requirements.” However, he fails to mention any requirement other than focusing on revenue generation, which he claims creates a “fundraising trap by focusing everything… on generating revenues.” However, to rely on the alternative – grants and donations – can distract from impact generation as well. In fact, Oldenburg’s own colleague made a similar case against donor-supported organizations in a report for Ashoka’s Citizen Base Initiative (emphasis is ours):

“Most [NGO’s] are forced to survive entirely from donated funds… This revolving door traps organizations in a cycle of fund dependence, not only minimizing efficiency but also distorting the [NGO’s] priorities and social mission. In desperate attempts to receive funds, [NGOs] often ’realign’ their programs or resources to conform to donors’ desires, thereby diverting themselves from their true social purpose. Ultimately, it is a lose-lose scenario-organizations are exhausted, overcommitted, and derailed, while funders are often unsatis?ed with performance and tempted to look elsewhere.”[3]

Limiting the Idea

As a major theme throughout his statements, Oldenburg proposes that we “fund the impact, not the organization” and recognize that “an organization may fumble, but it is a tragedy if the idea dies with it.” We agree with the sentiment, but not the implication that investment and revenue generation somehow limit the expansion of ideas.

In fact, the business world is filled with innovations that have outlived their creators and flourished despite catastrophic collapse of the organization. For example, take theGlobe.com, an early venture-backed social networking site that collapsed miserably only one year after posting the largest first day gain of any IPO to that point. Despite its well-reported demise, the idea of social networking is flourishing and has created a highly competitive space that is not only driving user adoption, but also innovation (look through this list to see just how expansive the “idea” of social networks has become).

Room for Everyone

The truth is that for-profit social enterprise and impact investing do not limit social impact by taking away dollars from the “idea.” Rather, impact investing is a new asset class with conservative estimates predicting $400 to $500 billion worth of new impact investments over the next ten years.[4] This does not take away from charitable giving, which tends to hover near required minimums. In fact, from 1975-2009, the percentage of “giving” or assets used for grant donations by U.S. foundations averaged 6.3 percent [5], just 1.3 percent over the legally required minimum.

Traditional philanthropy, serves areas where there is great need, but little market demand. Impact investing finds the places where great need and market demand overlap. It is not here to change the global economic system, as one SOCAP panel declared. Viewing it as something far grander than simply an existing financial instrument applied to the problem of poverty leads to a misunderstanding of the role impact investments should be playing in this environment.

Clearing the Air

To be fair, some of Oldenburg’s assertions can be blamed on the echo chamber created by the excitement of this emerging field. Rather than overhyping impact investing or criticizing the concept by theorizing that money could be better used in other ways, we need to accept that a spectrum of funding tools is required to create lasting social impact. Oldenburg stressed the need to understand what is best for the system as a whole, and we agree – but finance is the lifeblood of the economic ecosystem and, much like biological ecosystems, health is a measure of diversity.

A Final Thought

“Social entrepreneurship has come up literally in the last 30 years. Business was the first to make the jump to this ’everyone a changemaker’ world…Basically it started saying, which was very radical, anyone with a better idea, if you implement it, we’re going to make you very, very, very happy and we’re going to copy you … So, business took off over the last three centuries. Around 1700, there was no growth in per capita income…In the last three centuries it was 2,200 percent, 700 percent, and 40 percent. Something happened. What happened was this ’everyone a changemaker’ revolution got started by business and it created wealth and the change in the energy and freed us all up from being serfs, basically.[6]” – Bill Drayton, CEO and Founder of Ashoka

[1] O’Donohue, Nick et al. Impact Investements: An emerging asset class. J.P Morgan & The Rockefeller Foundation. November 29, 2010.

[2] Hui Wen Chan, Vera Makarov and Sarah Thompson, Beyond the “Tradeoff” A New Analytical Framework for the Impact Investing Industry. February 27, 2010.

[3] Meredith Lobel, Creating a Citizen Base for Sustainability, Ashoka’s Citizen Base Initiative, 2005

[4] Investing for Social and Environmental Impact – Monitor Institute

[5] Based on data provided by The Foundation Center’s Statistical Information Service

[6] Transcribed from the Stanford Discussions podcast