What is Social Impact Investing?

During Milo Werner’s talk, she introduced the idea of social impact investing through this eye-opening statistic: “700 million people have a rich lifestyle … but 7 billion people want the same thing!” This idea of many people wanting what the few have motivated Khosla Ventures’ slogan of “reinventing societal infrastructure with technology.” [1] She talked about Khosla Ventures supporting companies that build medical gadgets, autonomous vehicles, robotic furniture, mighty small homes, and smart agricultural technology all in hopes of developing technology that will complement humans.

I was completely fascinated by this because prior to her talk I’ve hadn’t heard much about social impact investing. I’d always thought investors just simply put their money in companies they thought would make financial returns. So I thought I’d do a bit of research into exactly what is “social impact investing.” According to Investopedia, impact investing is “investing that aims to generate specific beneficial social or environmental effects in addition to financial gain.” [2] This definition was still a bit unclear to me — how is impact investing different than donating to charity? I came across a YouTube video from University of Virginia’s Darden School of Business, which explained the three key aspects of impact investing:

  1. Impact investing is not philanthropy.

The goal of impact investing in to allow money to flow to local entrepreneurs to solve local social problems in a sustainable manner.

  1. Not every socially inclined investment is an impact investment.

The core business goal is to have social impact.

  1. Expect financial returns.

Unlike charities, social impact investments need to solve social problems year after year and have a sustainable business model, not just raise enough money for a year (i.e some charities). [3]

Although Khosla Ventures is investing in companies that hopefully benefit the greater society, Khosla Ventures is not a donor – they expect significant financial returns and for these companies to have sustainable business models that can last for years on end (or at least before they get acquired).

According to CNN Money, impact investing is a $250 billion game-changer in the world of finance. [4] Michael Baldinger, head of sustainable and impact investing (apparently a new position) at UBS Asset Management said, “As an industry we’ve had to rethink everything we do — impact and sustainability is the Silicon Valley of finance and we want to be the Google.” [4] According to this article, 76% of millennials are entering the space as a way to show their social, political, and environmental beliefs. [4]

In an interview with Dominic Barton of McKinsey, Sir Ronald Cohen, a McKinsey alumnus and “father of social investment”, says, “the flows of capital within our whole system are going to be directed in a more purposeful way, from the point of view of society. Not just because people feel a moral imperative, as the millennial generation does, but also because it’s going to become the key to being a leader in your business area.” [5]

I stand with Khosla Ventures’ mission of “reinventing societal infrastructure through technology” and I truly hope what Sir Ronald Cohen says will become true – that we will direct more capital to ventures that better our society.

If you are curious to hear the Sir Ronald Cohen’s full interview with Dominic Barton, here is the YouTube video:

Here is the interview transcript: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/the-changing-landscape-of-social-impact-investing


[1] https://www.khoslaventures.com/

[2] https://www.investopedia.com/terms/i/impact-investing.asp

[3] https://www.youtube.com/watch?v=WBNAsvlnERs

[4] https://money.cnn.com/2017/12/18/investing/impact-investing-wall-street-banks-asset-managers/index.html

[5] https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/the-changing-landscape-of-social-impact-investing


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4 comments on “What is Social Impact Investing?”

  1. I really like your post Elauren! Just like you, I’ve hadn’t heard much about social impact investing and I really like the way you differentiated it from donating. However, I would like to argue that the impact investment models should be reconsidered to prioritize non-extractive venture capital that build equitable economies instead of high returns. If investors are not willing to fund impact innovation with lower returns in exchange of prosperity and equity there will never be a truly social impact. Having said that, I would like to leave a reflection: What would it take for impact investors to roll up their sleeves and truly partner with impactful entrepreneurs to enable their success rather than wait for deals to be “investment ready?”

  2. Hi Emily,
    This is a great post about how the nature of investing is moving from return driven to socially driven. Investors around the world are shifting their mindset as environmental and social issues are given greater attention. This post really opened my eyes to how, as an investor, you can still be extremely profitable while still making positive, purposeful change in the world. This relatively new concept of impact investing is pushing businesses to think less about profits and more towards positive impact as they will lose investors if they do not prioritize global benefit. This will become much more apparent in the coming years as millennials begin to assume more investor roles and use their money and influence to promote change.

    This is a good article: https://www.forbes.com/sites/toddmillay/2016/02/29/social-investing-the-good-the-bad-and-the-ugly/#743ed2338ba0

  3. Great post! Most of the time people don’t know the definition of social impact investing and their differences with philanthropy or charity . In fact, social impact has great potential because it stimulate good ideas and project providing economic resources that can lead in to big changes in the society. You don’t just give money for people, you invest in their ideas. Is not only about the money profit or expected return on short term, I think that the main point with this kind of investment it are the positives externalizes in the long term that they provide. Most of the time the investment market only focus in making money and maximizing the return with speculations that don’t produce anything new. Social impact investing is a way of using capital in a positive way for the role society.

  4. Thanks for the post, @elauren! I can absolutely resonate with millennials’ social impact believes. With all the social progresses, including economic levels, education coverage, and political stability, younger generations now have the capacity to embrace impactful social causes. Although money-driven is not avoidable for all kinds of investment, the progress we made so far is promising. I’d love to see more and more heartful projects get raised in the future!


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