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Creating A Moneyball Approach To Impact Investing

Most organizations can’t afford to do detailed evaluations on the effect they’re having, which makes it hard for impact investors to find undervalued projects and make smart judgments about where to put their money.

For every championship team or hall of fame athlete, there are thousands of teams that didn’t go all the way and millions of dedicated but not-so-talented athletes that never got past high school. Despite all that failure, professional sports teams continue to convince fans to buy ever-higher-priced tickets and the sports world continues to discover future hall-of-famers.

Venture capitalists have long accepted that they too must deal with such high failure rates. As the first generation of impact investments reaches maturity over the coming decade, I wonder if impact investors are prepared to admit 50% or more of their portfolios are likely to fail before ever reaching the big leagues.

Learning from failure when it inevitably happens is one thing, but embracing failure up front as a strategic reality means more than that. It means accepting embarrassment when it comes—at a team level as well as the individual level.

As enshrined in the book-turned-Oscar-nominated film, Moneyball, Oakland Athletics General Manager Billy Beane’s radical, game-changing approach to determining which players would field the best team was not without early embarrassment. Similar to investing, team success in baseball goes through characteristically unpredictable ups and downs around some reasonably discernible average. In the long run, Beane’s approach proved so successful after just one year that every other team in baseball began incorporating some or all of Beane’s approach to player scouting and selection.

I may be wrong, but impact investors still seem to me like that old grizzly scouting crew that Beane fired for not accepting his new way of doing things. They preferred to stick to their own gut instincts about which players to pick, based on personal networks and years and years of "experience" giving them some sacred knowledge about what matters and what doesn’t. Little did those scouts realize that the statistics they ignored, wittingly or not, ultimately determined which teams would be most likely to succeed in the long run, and which players ended up in the hall of fame. I won’t deny there is promise in initiatives like the Global Impact Investor Network’s Impact Reporting and Investment Standards (IRIS) and the Global Impact Investing Rating System (GIIRS). But so far, most social enterprises listed on GIIRS or IRIS are already impact investees—the grizzly old crew has had the most say in who got there. That limitation is partly due to IRIS and GIIRS selling themselves to impact investors as tools to demonstrate the impact of their investments; it’s also because of the time and money it takes to be IRIS-compliant or GIIRS-rated—time and money social enterprises may not be able to commit out of revenues alone. We don’t ask athletes at any level to pay for their own statistics, but that’s just what impact investors and philanthropists ask of social enterprises that aren’t already part of their portfolios. So even though IRIS and GIIRS help impact investors measure the impact of their investments, they don’t quite allow impact investors to build their portfolios the way Billy Beane built his now-legendary 2002 Oakland Athletics: using performance information on players that he hadn’t yet considered as part of the team.

In fact, all across the global development or the "citizen sector" space, organizations are under pressure to pay for metrics on their own performance. While some organizations such as GlobalGiving are working on ways to make evaluation vastly less expensive, the fact remains: unless they’re blessed to have already attracted a funder willing to do so, organizations at the margins of development must foot their own bill for evaluation.

And that’s a problem, because it’s often at those margins where the most radical, disruptive innovations emerge.

In 2010, Results for Development Institute launched the Center for Health Market Innovations (CHMI), an initiative meant to provide a platform to document and exchange information on innovative market-based health care models—for-profit and nonprofit—whether associated with a large external donor or not.

Working as a network of 16 partners—mostly think tanks based in developing countries—CHMI literally maps out who’s doing what, and where, without asking for any form of payment or compensation from the organizations it finds. If they do happen to have the time, organizations can build their own profiles and add self-reported results on key impact areas like quality, cost, and sustainability, subject, of course, to due diligence from the network.

Moreover, CHMI is not planning to invest in or run any of these programs itself. The focus is on the information and getting the right people to see it and use it, be they impact investors, researchers, or policymakers interested in supporting better quality health care provided by market-based models. Neither Results for Development Institute or CHMI make any guarantees about the impact, sustainability, or scalability of any of the organizations in the long run. But a tiny percentage of them will be ready for the big leagues, that much is certain.

To be more like Billy Beane, impact investors could start by building portfolios using more performance information like CHMI’s, which includes publicly available information on enterprises outside of their existing portfolios that those enterprises haven’t had to pay to produce themselves.

While that path will lead to plenty more failures, and perhaps some embarrassing situations when portfolios aren’t doing so well one year or another, that broader radar means more success over the long run, and discovering more hall-of-fame worthy innovators along the way.