Impact Investing on StartEngine: Investing in a Better World
One of the joys of investing in startups is that you can choose from a wide range of companies and invest in those with mission statements or ideas that really resonate with you. You can invest in B2B software tools, an electric car company, an up-and-coming social media platform, and so much more. Of course, as an investor, your primary motivation is making a profit, but you can select the types of companies you want in your portfolio and pick those that match the subjects you are passionate about.
One area of investment that has become popular in the last decade is impact investing. Simply put, impact investing is any investing that’s motivated by social responsibility as well as profit. It’s investing that’s expressly for a prosocial purpose.
That purpose can cover a wide range of sectors, from green technology to social welfare solutions, and more. In other words, impact investing is a way to make a difference and improve the world (while hopefully growing your bank account in the process).
What Is Impact Investing?
The term “impact investing” was invented in 2007 by financial and philanthropic leaders at the Rockefeller Foundation’s Bellagio Center, a think tank that exists to promote the good of humankind. Since then, the Global Impact Investing Network (GIIN) has more clearly defined impact investing as investments that have the following characteristics:
- Intentionality: This is the heart of impact investing and what sets it apart from other types of investing. It is defined by its focus on contributing to measurable social or environmental benefit.
- Use Evidence and Impact Data in Investment Design: Impact investments are based on evidence and data that support the investment contributing to social or environmental benefit.
- Manage Impact Performance: With the intentionality mentioned above, impact investments need to be managed and the performance of the investment (how impactful it is) tracked and measured. That performance should be relayed back to the investors.
- Contribute to the Growth of the Industry: Impact investors share learnings with each other to find what types of impact investing actually provide value and contributes to social and environmental benefit.
How Fast Is It Growing?
GIIN reports that in 2020, over 1,720 organizations are managing over $715B worth of assets under management in the impact investing space. GIIN also reports that impact investing has shown growth in both sophistication and depth over time, and that most organizations participating in impact investment today believe the space is growing steadily.
Why is impact investing becoming more popular? Among other factors, a generational shift in investing attitudes may be responsible for this increase. Millennials are a socially conscious generation, as evidenced by a 2018 Spectrem Group Research Report, which said that “more than half of Millennial investors (52%) see the social responsibility of their investments as important selection criteria”. Today’s generation of new investors are thinking about how their investments impact more than their bank account, but the world at large.
While traditional investments can have some social benefit, such as promoting economic growth and support of business, it’s not the primary focus of your average ETF, for example. By focusing on impact investing and leveraging different types of investment platforms, such as StartEngine, you can focus your investments on opportunities with an explicit social or environmental purpose.
Is Impact Investing Profitable for Investors?
Some skepticism of impact investment is perhaps understandable. It sounds good on paper to do social good while also making money at the same time—who could disagree with that? But is it too good to be true? Can investors actually make money through impact investing?
In fact, McKinsey says it’s a “myth” that impact investing isn’t profitable. Looking at the success of impact investing in India, McKinsey reports that: “58 percent of the [impact investment] deals either met or exceeded the average expected market rate of about 7 percent…the top one-third of deals yielded a median [Internal Rate of Return] of 34 percent, clearly indicating that it is possible to achieve profitable exits in social enterprises.”
This is not to say that impact investment is a surefire way to see a return on your investment. There is always risk, and particularly when it comes to investing in startups on platforms like StartEngine, that risk is high, and most startups will ultimately fail. However, McKinsey’s report does reinforce the idea that you can make money via impact investing, and the possible returns you could see are not categorically different from what you might see via a more traditional approach.
Interested in Becoming an Impact Investor?
Maybe you’re now convinced that impact investing is a good thing and something you want to explore. How can you participate? On StartEngine, you can invest in dozens of different industries, and you can filter by industry to find investment opportunities that meet your interest, whether it’s clean technology, education, healthcare, and more.
And if investing in diverse businesses is part of your investment thesis, equity crowdfunding is a good way to deliver impact there as well. Venture capital has well-cited biases, both in the geographic background of the companies they invest in (84% of VC investments occur in the states of California, Massachusetts, and New York) as well as the racial and gender background of the founders (2% of VC funding goes to women-led startups and 3% goes to black or Latino led startups).
At StartEngine, we pride ourselves on helping companies from all over the US from all different backgrounds, and you can interact with those founders and ask them questions directly on their campaign and start a dialogue to learn more about the company. Head over to StartEngine to explore our investment opportunities and see how you can make an impact today.
