Liam Black on impact, failure and other peoples’ money

26th January 2016

Liam Black

I spend a lot of time mulling about impact measurement, unintended consequences and the effect of pressure, complexity and ambiguity on the behavior of leaders – especially those who say they are “social entrepreneurs” and are driven by a passion to change society.

I sit on the investment committees of two impact funds  –  Ignite and Impact Ventures UK. *  Over eighteen months I have given the thumbs up to investment worth around £20,000,000. The portfolios include everything from hydroponic farms to homes for vulnerable people, from high tech energy monitoring devices to apprenticeships for long term unemployed young people .

The pipelines of potential deals is good for both funds. We are agnostic about ownership models and we invest in privately held as well ‘non-profit’ companies. Verifiable sustained social or environmental impact is what interests us most.

Of the 19 investments we have had one successful exit, one has gone into liquidation , one is in intensive care, two are exceeding plan and the rest are doing okay or it’s too early to tell. All tell us that the mentoring, supply chain access, technical support and connectivity between the portfolio companies are every bit as important as the money.

All of these investments are high risk. Due diligence is longer and more complex, close ongoing support is vital. That is the nature of the game. If they were straightforward slamdunks they could get the money cheaper from a bank.

The failure of any enterprise is absolutely gutting . I should know.  In the 20 years I have been running and creating businesses I have caused my fair share of car crashes.  But no matter how noble the cause or pure the intentions the time comes when any business which has not got enough customers or cash hits the wall.

As an investor using others peoples’ money – in the case of IVUK £10 million of Big Society Capital moolah – there are many interests to try and align. The beneficiaries and clients of the business , the leadership and staff, customers,  investors, regulators and lawyers. In times of crisis agreement between them all is rarely possible. The truth is that the ending of any relationship between investor and investee is likely to be messy if the company faulters and fails.

For a struggling business – crashed by poor leadership or unforeseen market developments – follow on funding will always be dependent on hard cold facts and a convincing strategy for sustaining the social impact. Appeals to emotion or how heartbroken some people will be if they lose their jobs or what reputational damage will be done to the principals just won’t cut it.  If there is one arena where data smacks emotion driven opinion senseless it is this one.

Some of the founders who enter into our due diligences processes are taken aback by the comprehensiveness of what happens to them. For all it is the most in depth analysis of the financial health of their enterprises they have ever had. It is a social investment colonoscopy. And it is the first time for all of them that such an intense light is shone on their leadership and management capabilities.

On both the investment committees most of our time is spent interrogating the social impact claims. It is the ‘impact’ in ‘impact investing’ which is the hardest bit. I would say that 60% of refusals are down to us not being convinced about the social impact case.

Some founders have dropped out of due diligence because they find the process too much and don’t like us poking around in the attic and cellars!  Some others drop because they like other investors more than us or they get better offers. This is great. We all want to see a thriving competitive market where social entrepreneurs have real choice.

The level of accountability which comes with having other peoples’ money in the business which must be paid back takes some getting used to. Social entrepreneurs like doing their own thing and often have weak governance when we first meet them. Taking investment (real investment not free money dressed up as investment) involves a level of control by investors which does not sit well with all social entrepreneurs. But that is part of the deal.

In terms of our development as impact investors IVUK and Ignite are at the end of the beginning. We have great teams and good portfolios . But there is still much to learn and there will without doubt be messy failures as well as triumphant successes ahead – and probably everything in between

* this blog reflects my personal opinions and I am speaking for myself only. It would no doubt probably be better if others’ opinions were included but there we are.

By Liam Black @LiamABlack