I enjoyed reading the recent McKinsey report entitled, “Catalyzing the Growth of the Impact Economy,” and agree with its premise that the impact ecosystem must grow and mature considerably in order to match the sheer scale of the world’s social and environmental problems. However, I feel the report dangerously overlooks a key component to the growth of the impact economy: the pioneers.
Impact investing as a practice and priority has evolved rapidly over the past decade – signaled by the now $228 billion in assets under management  – but still lacks the supportive infrastructure provided by public policy, reporting standards, and industry associations that disseminate best practices.
In our collective quest to build this infrastructure and progress towards maturity, however, we should not lose sight of the full set of actors, tools, and methods that are needed in concert to effect disruptive change. Namely, we should not overlook the earliest stages of social enterprise innovation, the so-called “Pioneer Gap” that still remains stubbornly under-funded.
EARLY-STAGE ENTERPRISES CAN SOW THE SEEDS FOR LARGE-SCALE IMPACT
According to the McKinsey report, in a maturing impact economy, “fund managers would devote less time and effort to seeding and nurturing early-stage impact models and more time to financing the expansion of organizations with large-scale impact potential.”
Yes, it is true that we must work hard to scale up social enterprises, so that the numbers impacted are in the thousands and millions, not just the hundreds, but this should not preclude us from also supporting early-stage ventures. After all, every successful large-scale business today had its start as a small business at one point, and if we shift our attentions only to the mature enterprises of today, we’ll be missing out on the stars of tomorrow.
SMALL BUSINESS OWNERS REACH THE MOST MARGINALIZED POPULATIONS
On the human resource dimension, the report advises, “social entrepreneurs [to] undergo a radical change in composition: away from the private-sector stars whom many investors and fund managers now hope to attract into executive roles, and toward proven ‘public-sector champions.’ These are seasoned government officials and civil servants who have firsthand experience dealing with environmental and social problems that are rooted in market failures and therefore resistant to market-based solutions.”
Yes, it is true that we must empower more public-sector executives to move into these leadership positions, but we must also groom the aspiring entrepreneurs and small business owners, especially those operating in overlooked communities, rural areas, and tier 2 / tier 3 cities to such roles. They are the closest to the most marginalized populations, understand their needs, and their upliftment and elevation to influential positions will naturally create a virtuous cycle of economic growth in their communities.
PHILANTHROPIC CAPITAL IS THE ULTIMATE RISK CAPITAL
Lastly, the report also asserts that, “a mature impact economy would feature a market-clearing quantity of solutions to social and environmental challenges. In other words, impact enterprises would crop up to address environmental or social challenges that might be profitably addressed, although there will remain a large set of such challenges that cannot be solved with for-profit models.”
Yes, it is true that we must grow the number and variety of financial instruments that invest for impact, but we cannot overlook the power of philanthropy. Indeed, many social and environmental problems will defy for-profit sensibilities, or at least a for-profit structure may not be readily apparent early on. Philanthropic capital is the ultimate risk capital, ready to absorb the uncertainty and patient enough to withstand a longer incubation for a venture that is putting impact first and experimenting with different business models. Philanthropic capital, in all of its varied forms (such as recoverable grants, zero-interest loans), is a fundamental and necessary part of the impact investing spectrum.
All in all, what we are advocating for is a harmonious blend and symbiotic evolution of both the philanthropic and impact investing methods, ensuring availability of capital – in all its appropriate forms – to support ventures at every stage of maturity, and run by entrepreneurs and leadership teams of all stripes. Focusing our energies only on growth-stage social enterprises, leaders with already-proven track records, and return-seeking impact instruments leaves out the rich and diverse other set of tools and people that are needed to tackle the most pressing issues of our time.