|The need for failure in impact investing|
|by Jelena Djurkic|
|on November 22, 2012|
Social Finance Forum 2012 failure panel
Nobody likes failure. The associations aren't pretty: loss, disappointment, bankruptcy.
Admitting failure in social finance is particularly taboo. In a space still fighting to establish legitimacy, few social entrepreneurs or investors want to publicize their bumps and scrapes. Yet impact investing is inherently linked to failure. Organizations trying to bring social change are likely to encounter more problems than a regular investment. Some will thrive. Most will fail.
The 2012 Social Finance Forum addressed the need for a new shift in thinking about failure, with a session exploring the benefits of saying, “I screwed up.” Scott Gilmore of Building Markets, Erica Barbosa Vargas of the J.W. McConnell Foundation, and Ashley Good of AdmittingFailure.com were on hand to explore the uncomfortable topic. Here are three lessons learned from the panel:
1) Defining failure
How do you define failure for an aid organization trying to reduce malaria in Ghana? Or a not-for-profit raising funds for a community garden? There is no clear solution. Social and environmental problems are not only complex, they're also dynamic. But as buzzwords like "measurement tools for success" make the rounds in social finance, so should measures of failure.
“The context is constantly changing. Whatever you prepare for your 'solution,' by the time you implement the project, the context around you has changed,” Vargas says.
Setting clear parameters around failure is key. These will vary among organizations based on their individual needs, but it's a step missing from most business models. Good, who heads a website launched by Engineers Without Borders Canada for flawed venture stories, agrees. She says accounting for what constitutes a mistake can help organizations (and investors) recover more quickly when they hit a bump in the road.
“When you lose your return on investment, the only return you can get is learning,” Good says.
In the same way investors accept risk to get returns, impact investors need to accept failure to reach innovation. The point of definition is to maximize the learning return.
2) The need for transparency
Approaching investors with failure is hard. Hearing about it is even tougher. Most would rather stick to topics of success and glossy annual reports in their investor-investee relationship. Gilmore, however, says transparency about failure needs to be engrained in impact investing.
“Everyone thinks if we have a failure, it will tarnish the reputation of the entire sector. It's one thing for you to admit failure and have someone else who calls you out on it.”
Leaving pretenses behind and capturing transition moments is essential to any good “failure report.” Tracking when things shifted from good to bad (and then to good again) is a way to seize knowledge of how an organization has evolved over time.
Investors also need to become partners in learning. Learning what didn't work allows for the creation of organizational strategies that can then be shared with the entire field. When you up the failure report, you up the ante for success across multiple sectors.
3) A range of investors
While this all makes sense, the reality is investors don't like the concept. At least not yet.
What's needed then is a range of investment behaviours and practices. Traditional funders likely won't want to hear sob stories. They are often responsible to different stakeholders and their funding model may need to be more rigid to serve their purpose.
The market requires bold investors who aren't afraid to embrace the bad as well as the good. Not only will investments see better returns in the long term, but social innovation will thrive, says Gilmore.
“We have to go a step beyond tolerating failure. We need an innovative process that requires failure to get to that 'a-ha moment' that leads to a breakthrough.”
Want to read more on the Social Finance Forum?
Check out: Forum for Thought and Impact
Jelena Djurkic is a writing and editing professional currently in the midst of a master's in professional communication at Ryerson University. She has worked at a number of publications, including Bell Media, Transcontinental Media and SocialFinance.ca. She completed her Bachelor of Journalism at Ryerson University in Toronto.