This Impact Investing Platform Was Set to Be a Game-Changer. So Why Did it Fail?

Jan 2018
Global, January, 24 2018 - In order to scale, impact investing needs a platform that will make it easier for investors to connect with vehicles for their funds. ImpactUs promised to do that–but its failure shows that the space wasn’t quite as ripe for innovation as its founders had hoped.

Launched in April last year, the ImpactUs marketplace was supposed to open up impact investing to new organizations and new funders. It was meant to be a major development in the emerging–but still limited–field of investing for both financial, and social and environmental, benefit. But, little more than eight months later, it has closed. “The ImpactUs Marketplace was formed with the goal of simplifying the impact investing process,” reads a message on the group’s website. “Unfortunately, we have had to make the difficult decision to cease operations.”

By making it easier for investors and mission-driven organizations to find each other and do business, the Kickstarter-like platform was set to spur major “new deal flow,” according to its founders. They hoped to be doing deals worth $100 million by now, and to have $3 billion in assets under management within 10 years. But apparently it didn’t have enough startup funding to become a sustainable operation, according to groups that used the marketplace to raise capital.

Impact investors often complain about a lack of ready-made opportunities for their capital. ImpactUs took on a screening role, defining what was on offer and laying out minimum investment levels and expected returns. Purpose-focused groups like B-Corps and community development financial institutions (CDFIs), meanwhile, say they lack the capacity to market themselves to investors and manage complex legal and tax paperwork. ImpactUs offered to take on those roles as well, providing an approachable website, online transaction processing, and back-office support.
“We were very interested in an online platform that facilitated investing for us–to automate some of the processes associated with on-boarding investors and managing communication,” says Kevin Egolf, chief financial officer at Iroquois Valley Farms, an agriculture company making investments in sustainable farming that was one of the original organizations to use ImpactUs. “Doing private investment is time-consuming on an administrative level. To do that efficiently and reach more investors, personally I think you need a technology solution.”

Growing numbers of investors are willing to invest for below-market returns as long as they’re also compensated with evidence of social and environmental benefits. ImpactUs hoped to help B-corps, CDFIs, and microfinance groups reach such people. When Fast Company reported on the initiative last May, opportunities on the site included restorative farming, micro-finance projects, and affordable housing. Expected returns ranged from 0% to 5%. (By comparison, the long-term average return for the S&P 500 is about 12%).

ImpactUs was founded by a handful of CDFIs, including Enterprise Community Partners and City First Enterprises–financial institutions that support projects from affordable housing to small business development in lower-income communities, which often struggle to access loans from big banks. CDFIs work by leveraging philanthropic dollars–either from a foundation, or from the federal CDFI Fund, which supports the financial institutions–to bring in money from big banks or private lenders. CDFIs have a proven track record of success and consistent, if not huge, returns on investment, which de-risks investing in impact projects for big investors.

It’s clear that in the beginning, the CDFI and philanthropic communities had high hopes for ImpactUs. The platform had received hundreds of thousands of dollars from the MacArthur Foundation, Ford Foundation, Kellogg Foundation and the Open Road Alliance as well as the CDFIs to get off the ground. MacArthur alone had put in $400,000 while Kellogg invested $350,000, according to their websites. ImpactUs was aimed at “accredited investors” who earn more than $200,000 a year, or have a net worth of more than $1 million. But it had hoped to broaden its base to less wealthy individuals once it was established.

ImpactUS’s founders declined to comment on the closure, citing legal formalities around winding down a broker-dealer organization. But it is understood that financing was a big factor. The platform couldn’t attract private capital to go with the philanthropic funding–which is core to the way that CDFIs function. At least four issuing groups–Iroquois Valley Farms, Low Income Investment Fund, CommonBond Communities, and Coastal Enterprises–were listed on the platform when it closed down.

ImpactUS had delivered “a handful” of new investors, says Egolf at Iroquois, which finances organic farming. He thinks the marketplace failed to attract enough impact investors to inspire confidence about its future. “It’s a chicken and egg problem. You need investors on the platform to attract issuers. And, to attract investors, you need issuers on the platform. It’s not easy to do,” he says. Iroquois looks after about 300 investors currently.
The ongoing question is whether ImpactUs demonstrates a general problem with aggregating impact investing online, or whether it’s a more particular failure. Similar projects like Mission Markets have also closed down. Enable Impact, a matchmaking impact investing marketplace founded by fintech entrepreneur Philip Berber, has faced problems as well.

Egolf says online impact investing can reduce costs on all sides, but getting an entrenched industry to move to an internet exchange may be a challenge. “The impact investing world is big enough for these solutions, but the way it is right now, it’s largely organized by existing institutions–financial advisers and mutual funds. You are trying to aggregate people who already have their own systems,” he says. Which may explain why online crowdfunding platforms like Kickstarter, for instance, have succeeded where ImpactUs failed: Before Kickstarter launched, “there was no pre-existing ecosystem,” Egolf says.

The lesson for any future impact investing marketplace may be to have more funding lined up beforehand and for more investors to be primed to join the platform once opportunities are available. ImpactUs seemed to lack both. If other types of crowdfunding are any guide, two-sided platforms take time to balance themselves between sellers and buyers and ImpactUs didn’t manage to strike that middle ground. Eight months isn’t much runway for any startup to be successful.

Debra Schwartz, who manages impact investments at MacArthur Foundation, argues ImpactUs’s failure would at least be instructive. “One of the strengths of American philanthropy and its grant-making is the ability to take risks that other institutions cannot,” she writes via email. “Therefore, we consider this outcome an opportunity for shared learning that will inform many other future efforts.”

Source : Fast Company

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