Five Approaches to Impact Investing

The idea of impact investing and how to allocate capital based on different approaches have diverged over time. Asset classes can be clustered according to the way investments would deliver financial return by the approach that they take. As illustrated by the below frameworks, impact investments are intended to align with an investor’s preference.  In the impact investing spectrum, one end has the traditional investing mechanism and the other philanthropy and can compare the extent of impact and risk in an impact portfolio. The categories in organizing impact portfolio to determine level of impact, moving from less to more integral impact, are the following:

  • Responsible: Also known as Socially Responsible Investing (SRI), this approach involves the negative screening of investments due to conflicts or inconsistencies with personal or organizational values, non-conformity to global environmental standards, adherence to certain codes of practice, or other such binary impact performance criteria. ‘Responsible’ captures investment activity that may proactively contain a social or environmental component in its strategy.
  • Sustainable: Sustainable investments move beyond a defensive screening posture, actively looking for investments that are positioned to benefit from market conditions by integrating Environmental, Social and Governance (ESG) factors into core investment decision-making processes. This can include corporate engagement, innovations, and new markets that are recognized as a path to growth, with positive social and environmental benefits, such as, for example, alternative energy.
  • Thematic: Thematic or mission investments have a particular focus on one or more impact themes, such as clean water or deforestation, and work to channel investment allocations in those particular directions. These are highly targeted investment opportunities, in which the social or environmental benefits are fully blended into the value proposition of a commercially positioned investment.
  • Impact-First: Investments that seek to optimize a desired social or environmental outcome, without regard for competitive return. They are open to trading off financial return for more impact where a more commercially oriented return is not yet available.
  • Non-Impact Investments: Investments made for the sole purpose of financial return, without any explicit consideration given to the social impact of the investments.
  • 100% Impact Investment: The intentional commitment by asset owners of 100% of their assets to positive social and/or environmental impact.

To navigate the following strategies, the report recommends adopting an incremental philosophy to explore opportunities in the program that builds upon the internal capacity, investment functions, and existing relationships. For instance, mission related investments are “financial investments made with the intention of furthering a foundation’s mission and recovering the principal invested or earning financial return.”  Socially responsible investing focuses primarily on (negative) social   screening and proxy activity in public equities, while mission-related investing is a proactive approach in use across asset classes.[7]

Impact investing is no longer a niche market. As more investors are interested in exploring impact, they are seen as a simple mechanism with expected financial return and an approach to impact.

Impact investing can offer the following opportunities when pursuing impact investing:

  • Banks, pension funds, financial advisors, and wealth managers can provide client investment opportunities to both individuals and institutions with an interest in general or specific social and/or environmental causes.
  • Institutional and family foundations can leverage significant assets to advance their core social and/or environmental goals, while maintaining or growing their overall endowment.
  • Government investors and development finance institutions can provide proof of financial viability for private-sector investors while targeting specific social and environmental goals[8]

McKinsey & Company looked at financial returns for impact investments on 48 investor exits between 2010 and 2015 and found that they produced a median internal rate of return (IRR) of about 10 percent. The top one-third of deals yielded a median IRR of 34 percent, clearly indicating that it is possible to achieve profitable exits in social enterprises. The below figure shows some evident relationships between deal size and volatility of returns, as well as overall performance. The larger deals produced a much narrower range of returns, while smaller deals generally produced better results. The smallest deals had the worst returns and the greatest volatility.[9]

            Source: McKinsey & Co., 2018

Learn more:

[1] Jacen Greene, An Introduction to Impact Investing https://impactentrepreneurs.wordpress.com/2012/04/16/an-introduction-to-impact-investing/

[2] Jane Finkelman, Kate Huntington, Impact Investing: History & Opportunity, https://www.athenacapital.com/wp-content/uploads/Impact-Investing-History-and-Opportunity.pdf

[3] GIIN, 2018 GIIN Annual Impact Investor Survey,  https://thegiin.org/assets/2018_GIIN_Annual_Impact_Investor_Survey_webfile.pdf

[4] GIIN, What you need to know about impact investing, https://thegiin.org/impact-investing/need-to-know/#core-characteristics-of-impact-investing

[5] J.P. Morgan, Impact Investments: An Emerging Asset Class, https://thegiin.org/assets/documents/Impact%20Investments%20an%20Emerging%20Asset%20Class2.pdf

[6] NPC, Investing for Impact: Practical Tools, Lessons, and Results, 2015. https://www.thinknpc.org/wp-content/uploads/2018/07/KLF_Investing-for-impact_FINAL.pdf

[7] Heron, Expanding Philanthropy, Missionrelated Investing at the F.B. Heron Foundation, https://www.heron.org/sites/default/files/Expanding_Philanthropy_Mission_Related_Investing_at_the_FB_Heron_Foundation.pdf

[8] GIIN, Impact Investing Guide, https://thegiin.org/assets/documents/GIIN_impact_investing_guide.pdf

[9] McKinsey & Company, Private Equity and Principal Investors, https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/a-closer-look-at-impact-investing

So You’re Interested in Korean Startups?

The one I think most VCs outside Korea might start looking into might be Crunchbase— like this site here on VCs. It shows some acquisition history and the overall landscape, but not much.

Where Korean VCs and startups look into who invested into where is called thevc.kr. Yes, it is in Korean, but with a Korean speaker, you can look up any fund, who invested into where, and who are the hottest VCs are, and even filter by the technology, geography, and the stage of startups to get the latest funding round news. This is the site I recommend. This is a nice map to view the listings of angel clubs, communities, and foundations. Another place you can view a list of recent funding investing news is at Venture Square, run by a media startup.

To look other thematic funds in Korea, check out FundFinder. If you need contact information to the fund managers, here is a list of directory on KVCA. In Korea though, cold call or messaging almost never works. It is usually done through mutual connections or introductions.

Okay, now you need some templates and forms to begin.

  1. Korean Venture Capital Association guidebook for both startups and VCs. It’s an amazing resource. Definitely bookmark it.
  2. START Docs for early-stage Korean startups. Co-written by 500 Startups. You can log in your numbers, and you’re good to go. It’s been reused and vetted many times, so they’re pretty standard.
  3. ModuSign These are docs for between investors, MOUs, you name it. It also has a quick explanation next to it, so it’s quite good.

Bon Voyage.

How Venture Capital Impacts Defense: Conversation with Peter Thiel and Josh Wolfe

Harnessing and Securing American Innovation: How Venture Capital Impacts Defense

Josh Wolf is a co-founder of Lux Capital to “support scientists and entrepreneurs who pursue counter-conventional solutions to the most vexing puzzles of our time in order to lead us into a brighter future. The more ambitious the project, the better—like, say, creating matter from light.” Peter Thiel is a co-founder of PayPal, Palantir Technologies and Founders Fund. Plantir is an In-Q-Tel and Founder’s Fund-backed company.

Peter: By my count, there are only two companies that have been started since The Cold War, that are (1) focused on national security, and (2) have reached a billion-dollar valuation: SpaceX and Palantir. [4:00]

Peter: A lot of innovation gets driven by smaller companies. This is absolutely critical. When not many people are doing it— if you are one of the few who do it— there is a lot of opportunity. [4:25]

Josh: Strength comes in part from technological dominance. Technological dominance comes from brilliant engineers that are inventing cutting edge technologies. [6:20] 

Josh: Palmer Luckey, Trae Stephens, and Brian Schimpf [founders of Anduril Industries] are authentic engineers that are obsessed with technology. 

They are constantly thinking about: 

What does the warfighter need? 
Where is the white space? 
Where is the gap? 
What is China developing? 
What is Russia developing?
How can we put them [US warfighters] with the most cutting edge technologies out there?[6:35]

Josh: Many of these people [those inventing new technology] were inspired by Science Fiction. They are literally going back— 20 years into the annals of comic books and sci-fi movies— and saying it would be amazing if we had that. [7:00] 

Peter: If you can’t create a business that is worth a billion or more the venture capital model does not work that well. If you start a company that is worth $30 or $100 million that can be quite successful for the person who started that company. For a venture fund if that is the best we did we would be out of business. [9:40]

Have Palantir and SpaceX created a template for other startups to follow with the defense space? [Peter]: Well there is certainly proof that it can be done. In both cases, it took a wickedly long time. Close to a decade to start getting significant contracts from the US Military. In some ways, they were not conventionally venture fundable. [10:20] 

Josh: It helps to reduce market risk. You will have a lot of venture capitalists that say you are focused on the defense industry. The stereotypes of the defense industry are that the defense industry is slow-moving, bureaucratic, very political, they might not pick the best technology, they might instead give the contract the company they have been working with for the past 20 years, etc…So whatever you can do to eliminate that risk [is good]. [If not] It is like we are fighting with ourselves by not equipping the warfighters with the absolute best technology that is coming from some of these early companies. [14:30] 

Josh: The origins of Silicon Valley were in electronic warfare and defense. There is an aversion for people to want to work on defense-related things. That is a zeitgeist that is growing. [21:30]

Josh: I think there is a job society can do —and that is the retelling of a narrative that can galvanize some of the best and brightest to work on American defense. [23:10]

Peter: There is always this danger for a tech company to become overly bureaucratized. [29:49]

Josh: The one real edge you can have as an investor is a behavioral advantage. For us [at Lux Capital] that means having a longer time horizon than the average investor. We call this time arbitrage. If the average investor is looking for a signal of success in a year or two— and we are looking at something that might not give us a signal for 4 or 5 years —then by definition there will be fewer investors looking to fund what we are funding. 

The valuations will be lower— and if we are right —the returns for us and our investors will be higher. So we like to look at things that are further out which means they are riskier and more improbable to work. But when they do they work in a really big way. [30:46] 

A Chat with Team8, a VC from the Israeli Intelligence Unit

I was fortunate to tune into a conversation with Liran Grinberg the Managing Partner of Team8 Capital, a global cybersecurity VC. He founded Team 8 in 2014 with the former Head of Israeli intelligence unit, 8200, Nadav Zafrir.

Team8’s company-building Foundry model de-risk process to venture investing, which is a process of “co-founding and serial-investing.” This led to serial investing into enterprises such as the creation of Sygnia ($250M exit with x60 return in 3 years) and Claroty, the world’s leader in Industrial Cybersecurity, backed by Rockwell AutomationSiemensSchneider ElectricGeneral MotorsBMW Group and more.

Here are three main advantages to having 8200 as the backbone of Team8.

So what is Unit 8200, and how does it contribute to the success of Team8 Capital?

  1. Level of talent is high. In Israel there is a mandatory service, and Unit 8200 is an elite military Israeli unit. The Team 8 leadership had access to the 1% of the 1%, those who had can new companies or can help build new companies. They were security entrepreneurs, cyber operating partners, and top talent from the largest unit within the military.
  2. Training is high. They start practicing leadership at a young age in the military and in technology. Under Team 8, under the Cyber and Data division, they build products and services to protect from cyber threats for data at scale.
  3. Culture is failure-tolerant and bottom-up. As 18, 19 year olds, they military entrants have their first year, second and third year to experiment with their new ideas each year. The graduates of the 8200 naturally fuel the tech ecosystem and the “startup nation.” 

Another really interesting aspect to the model of Team8 was the venture-building model and the formation of the “Team8 Village,” a critical mass of mass of talent through which a platform- they built out a process for entrepreneurs, engineers, and the investors.

Instead of focusing on commercial innovation, Team8 geared attention to the VC world and the intersection of academia, inventions, and startups and how to enable the backbone of startups to be more influential. As incumbents, enterprises have a lot of resources and access to the markets like understanding of the customers, they are bureaucratic and it is hard for them to innovate. Startups solve very concrete problems. They don’t have much resources or any research capability, and the success rate is very low. So Team8 chose to ask –  how can VCs act as a platform to solve difficult questions?

Team8 helps enterprises digitally transform. The companies or LPs become strategic investors.They don’t often have the muscle power to build something from scratch. So therefore, they passively help build the model to impact the type of problem to invest in the company.

For a gate of four hours, Team8 brings a challenge and companies together with engineers and the leadership. They bring together companies without lack the technical domain expertise from different geographies with a similar problem. For instance, they brought together data scientists and enterprises that 2 entrepreneurs usually would do in the garage. Team8 then conducts technical due diligence to help them grow.

If the problem is big enough, they build the company from scratch. They have 12 companies so far. This whole model – the platform team, village, the process – the investors, and everyone – has de-risked the investing process. 

Liran began working closely with founding teams on the ideation of Team8’s first companies, including Sygnia which was acquired by Temasek for $250M, and Claroty which is backed with $100M in funding, alongside Illusive Networks, Hysolate, Curv and more. Liran then transitioned to build and lead Team8’s Go-to-Market Group across its marketing, business development and market research functions, alongside the formation of a tightknit community of hundreds of C-level executives from the world’s leading enterprises. Combined, the two initiatives have become a powerful and differentiated advantage of Team8 in accelerating the success of its portfolio companies. 

His venture-building model with Israeli’s top talent is not only tackling the world’s greatest cyber security challenges, but also the backbone of the startup nation Israel is today.

Accelerating Tech for a Secure and Sustainable Future

When you think of working in the defense industry, you are right think about the arms – the military equipment, missiles, submarines, helicopters, etc. You’re quite right. So what it mean to be working in sustainable solutions in the world of defense tech?

The idea of working with the private sector for public applications is not new. In the past, most predominant forms of spending were through governmental entities such as DARPA  as R&D directorate and for weapons and military development – the Central Intelligence Agency’s publicly funded venture capital firm – In-Q-Tel or the Defense Innovation Unit.

Their sponsored research today became the technologies in our daily lives – the GPS, the Internet, the microwave, artificial intelligence, were all products from the State investments in technology.

Emerging technologies today have far outpaced the contracting model, where it now needs to move towards venture financing. The types of threats we are facing today including cyber – are outside the security contractor supply chain. The existing model’s ability to keep pace in future warfare is questionable.

The world of defense tech is an interesting one, where it extends beyond the traditional arms to encompass artificial intelligence (AI), quantum computers, cyber, robot, 5G (5th generation), urban air mobility (drones) mobile communication, and aerospace technologies.

At the current Center, we build a hub of: a) challenging technical problems; b) globally shared security challenges c) the intersection of commercial and public sectors, and d) with significant economic upside. We seek to work with venture capitalists accelerating dual-use early-stage technologies by facilitating technology transfer, and forming strategic alliances. 

We work with a network of highly vetted global advisors and partners, enabling us to map technologies to globally shared security challenges. We base our selection on performance, application of technologies to our partner’s mission capacities, and on complete alignment of interest. 

So how can defense tech serve as means for sustainability?

Aerospace and automobiles both rely on high technologies but are both major manufacturing industries relying on advanced materials, electronics, embedded systems, mechanical components, engines, and structures.

The basic idea is the same – you invest into new technologies that are more efficient, faster, smarter but to invest into clean technologies doesn’t also release toxic chemicals or with greater mitigation mechanisms to control GHG emissions.

The battery-powered electric airplanes are, believe it or not, already here. By investing into dual-use (commercial and public) technologies, clean technologies in the commercial sector could be bolstered with public sector investments. Through partnerships and their collaboration with domestic and foreign defense conglomerates, we can accelerate the progress of companies making a material difference in carbon emissions through increased incentives.

The vision is to invest into technologies to help advance the capabilities of the defense sector to have advanced technologies and to develop technologies that will enable the industry to shift from nonrenewable to renewable resources for energy and materials in a significant way – and thus will help to achieve a secure and sustainable future.

The How-to Guide on Harnessing Private Capital for Good

Generalities.
Technologies.
Networks.

VC Reads

Updated: 7/12/2020.

Korea

Asia

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And…more blogs here.

Thoughts on the Korean VC Ecosystem

I’m learning quite a lot since moving to South Korea and working within its startup ecosystem. I’m learning from the feedback and conversations about the ecosystem by thinking through how Koreans are positioning their market pivoting into Asia and beyond.

I had not realized when I was in the States or perhaps in DC that I was getting spoiled. I was spoiled with the sheer market size, scale, and the global scope of the work we could accomplish. Being in America meant you are able to scale to global operations with a very friendly operational and regulatory environment and being at the State Department meant you are going to work with the top talent and industry leaders at the forefront of global issues.

I’m learning though about opportunities here in Korea, and there is a lot to be catalyzed and leveraged here —

Korea as a bedrock for innovation

South Korea’s total GDP is listed 14th globally by the World Bank, and comes in 5th in Asia. In the last fifty years, the manufacturing, electronics, semi-conductor and cars, etc. have spurred the growth of its economy.

Korea is renowned for its rapid economic and social development. Korea’s growth
initially depended on a low wage, educated and disciplined labor force to produce
goods for exports from its predominantly agricultural state possessing few natural
resources. When the state prioritized economic development with a combination of
state planning and entrepreneurship, South Korea had set forth on a trajectory into a
prosperous, industrial society it is today.

A combined effort of state and entrepreneurs later became family-owned conglomerates, capital-intensive in manufacturing, construction, and steel. The conglomerates today including Samsung, POSCO, LG, and others became the foundation for the innovation and IT entrants.

$$$ Let’s talk about cash.

Korean government well understands the importance of investing into R&D for global competitiveness. It led to the incubation and concentration of money and talent in Korea.

South Korea is one of the most business-friendly environments to foster entrepreneurship. There exists government support with incubation, procurement, funding, policies, and incubation expertise with government grants on public-private partnership investments.

Korea Venture Capital Associations projected that venture investment would hit 5 trillion won ($4.28 billion) over the next two years. And in January, the Ministry of Science and ICT set a record-high budget of KRW 24.2 trillion for R&D, upping the 18% from last year’s amount, for “domestic production of core materials and components necessary for R&D projects,” said Choi Do-young, director of the ministry’s R&D Investment Coordination Bureau. He also mentions the R&D projects will increase to about KRW 31 trillion by 2023.”

High amount of government funding is not always rainbows and butterflies. One of the biggest problems is that Korea has not fully embraced the venture capital culture of high risks and high returns.

The onset of investing from government funding has led to investments are thus defined by the social and local needs identified by the government. Venture capital funding also initially developed by the government as policy tools to promote small and medium companies. Therefore, when members of the public hear about failed investment attempts, they can be quick to criticize.

Korea as a testbed for new technologies

Here’s what I know to be true of the American market. America is a melting pot. It has a mix of demographics and consumer tastes and preferences. Tailoring a marketing strategy often entails to zero-nailing down on a specific race/age/and other varying degree of tastes.

Korea’s high population density further propels adoption of new products and services. The growth of ICT infrastructure over the past ten years also significantly expanded South Korea’s capacity for the digital underpinnings of the economy. The foundations laid the backbone for the advent of new technologies, such as mobile, internet, and platform-centered services. Korea enjoys the world’s fastest broadband internet speed and highest smartphone penetration rate. It naturally birthed its massive consumer base highly versatile with new technologies, media content, and digital technologies.

South Korea is also a relatively homogenous society. It is an incredibly communal and collective. People tend to be relatively on top of trends, so it is a wonderful market to test out new products and services for a specific segment of a population.

Korea as a content powerhouse

South Korea’s content market is incredibly strong as the fourth largest mobile gaming market in the world and a country fueled with a K pop craze from an international audience. 

The content industry is nonetheless backed with strong government support, as in September of 2019 announced a “content venture investment fund” for the country’s entertainment and content industry via an investment-loan guarantee project worth more than 1 trillion won, an equivalent of $841 million USD. It is aimed to provide loans for developers and producers of content in “K-pop, K-dramas, animation, online games and other digital media contents.”

Korea was the first country to introduce eSports on TV, and the top game players are Korean. With over 35 million smartphone users, the size of the Korean gaming industry exceeds 12 trillion won in total. Korea’s largest game companies, Nexon, Netmarble, and NC Soft generate more than 1 trillion won in sales; and ten leading Korean game companies generate more than 400 billion won in sales each year. The e-Sports market size is also rapidly growing, currently accounting for 13.1 percent of the global industry’s size.

Korean entertainment is a global sensation today, producing massive amounts of content, and the industry is quick to adapt technology to its playground. The K Pop sensation, BTS, continues to expand its global influence after toppling down the 1st spot on the Billboard charts in 2018. SM Entertainment, an entertainment talent agency embraced blockchain technology and released its own coin. The token economy backed with cryptocurrencies would allow artists to network into the ecosystem, allowing fans to invest in the artwork, and engage with the ecosystem.

The competition is hot here.

South Korea is also a very competitive market. Even in the F&B business where I’m starting to develop some market knowledge is that general baseline of product prices like how much a tomato or whatnot costs is well-known. The consumer competitiveness for Korea for F&B restaurants is 1:7 compared to Japan and 1:15 compared to the States.

The upside is that with the competitiveness, you learn how to do things right and well here. You often develop in-house expertise to build things and compete and do well here. To succeed in the Korean market, you learn how to brand yourself, stand out from the heavy competition and to be on top of your stuff. Because the market is small, your reputation will matter.

Should we pivot to Asia?

Due to Korea’s positive regulatory policy, or an environment where new businesses and services must comply with regulations listed in the system, venture builders or investors are increasingly establishing branches in San Francisco or in Singapore, where the investment rules are a lot more flexible. A market under a negative system minimizes pre-regulations but can penalize startups longer down the road. Startups and investors often experience many preconditions for financial companies in launching products and services that is new and unique. Take for example, think about the credit card/financing options in Silicon Valley for napkin-stage startups.

There is an increasing momentum to create a a regulatory “sandbox,” but it is going to take a complete and whole regulatory overhaul. The importance lies in the small wins and victories for types of investment/innovation rules.

It’s hard to say. The Korean market is small and saturated. Perhaps it is prudent for companies with unicorn potential to leverage each country’s competitive advantages – for instance, Korean startups can leverage hardware talent in China to build a model with global competitiveness. They can also register in Singapore and/or Hong Kong, maybe obtain a license or an approval as a launchpad to get into the China market. But this is a big step and also depends on each startup’s journey.

Korean startups will have to prove themselves in the market here domestically. A lot of good startups in Korea have parallel or similar startups in Taiwan, etc. At the same time, it is difficult for a startup to grow beyond the single market or a niche market to become a unicorn, so it makes sense that so many startups say they’d like to enter Asia/global markets.

Where we are and where are heading next.

True, South Korea is well behind United States and China in the number of unicorn companies in other words, unlisted startups valued at over US$1 billion. The United States and China have 201 and 101 unicorns, respectively, while Korea has only nine.

Foreign unicorn companies are showing tremendous growth in such areas as sharing economies, cloud computing, and artificial intelligence, while Korean unicorn companies invest mainly in independent business models such as cosmetics and games that are not subject to regulations and face less conflict with interest groups.

The emergence of various investment mechanisms such as venture capital, accelerator, and micro VCs is noteworthy. The influx of capital and the supply of money to the extent is slowly fixing the problem of information asymmetry and lack of deal sharing in the market.

It is also notable to look over the demographic shift that will happen over the next generation. There will be another billion people moving into the middle class According to Bernard Moon, about three times of 350 billion, the population of the U.S. will be moving toward Asia.

If we’re looking at Asia as a market, it is also important to look at geopolitical/external risks – like to corona virus presently or even Korean-Japan relations. There are many complications to be looking out for, and Asia is a complicated market to be working in.

Softbank Korea rebranded themselves and became Softbank Asia. Though now stationed in Singapore, they are equipped with a dedicated team for China as well.

Korea sits at the center of the Asian market. There are pockets of leadership around the world, but the level of competitiveness, talent, funding, and the trends in Korea are leading Asia. South Korea is an ideal testbed for technologies, as a rare global market with high digital penetration and an equally concentrated tech-friendly consumer base. Korea’s tech-friendly consumer market on mainstream platforms and acquired massive user base offers an opportunity for domestic companies to realize their synergistic potential.

What Makes an Investment “Impactful”?

Until early 2000s, investors have historically drawn a clear distinction between their investment activities and philanthropy. Recently, the impact investing industry is growing rapidly. The idea of impact investing came about from Christian ministries in the United States in mid-1700s when moral responsibilities of commercial enterprises came up against profiting from slavery, and boycotts.

Investors saw that “impact” based portfolios were much less affected by the 2008 financial downturn, and found that impact investment was a method to mitigate short-term risks for long-term value creation.

According to the Global Impact Investing Network (GIIN), a nonprofit organization dedicated to increasing the scale and effectiveness of impact investing across funders, it defines it as “investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.

Impact Investing includes investments that range from producing a return of principal capital to offering market‐rate or even market‐beating financial returns…Impact investors actively seek to place capital in businesses and funds that can harness the positive power of enterprise.”

Impact investing is quite simple. It attempts to solve our social problems by mobilizing capital. While traditional investments lie on the spectrum without regard to social impact, philanthropy does not regard financial returns.

Impact investing lays in a space where financial returns grow with impact. Impact investing can expect financial return or choose to accept a lower return. Investors and funders would have a range of expectations based on the risk continuum of financial and impact returns.

Impact investing ideally has the following mechanisms:

  • It is value-aligned: Transactions are mostly private debt or equity investments. There are publicly listed impact investments, but they are categorized under a screened socially responsible investment, in which investors seek to minimize negative impact than a proactive positive impact. An investor’s intention to have a positive social or environmental impact through investments is essential.
  • It has impact returns: The model of the business should be designed with intended effect on the target population may be much broader than the consumers. Values should be ideally integrated into the business model.
  • It has financial returns: Impact investments are expected to generate a financial return on capital or, at minimum, a return of capital. Range of return classes and expectations: Target financial returns that range from below market (sometimes called concessionary) to risk-adjusted market rate, and can be made across asset classes, including but not limited to cash equivalents, fixed income, venture capital, and private equity.

These investors operate across multiple business sectors, including agriculture, water, housing, education, health, energy and financial services. The impact objectives may vary such as mitigating climate change or providing assets for poor people. It can also take the form of different finance structures, such as debt, equity, or other like social innovation bonds. According to the Rockefeller Foundation and J.P. Morgan, they provide capital, expect financial returns to business designed with the intent to general positive social or environmental returns.

Impact investors could range broadly across sectors and objectives – private wealth managers, commercial banks, pension fund managers, boutique investment funds, companies and community development finance institutions. Essentially, there exist the funders (government, foundations, family offices, high net worth individuals, and other socially responsible investing) that fund impact investing intermediaries (microfinance institutions, social banks, social venture capital/private equity firms, and pension funds) that invest in social enterprises for beneficiaries.

Surveying Korea’s Impact Ecosystem

Korea’s growth initially depended on a low wage, educated and disciplined labor force to produce goods for exports from its predominantly agricultural state possessing few natural resources. When the state prioritized economic development with a combination of state planning and entrepreneurship, South Korea had set forth on a trajectory into a prosperous, industrial society.

A combined effort of state and entrepreneurs later became family-owned conglomerates, capital-intensive in manufacturing, construction, and steel industries. The conglomerates today including Samsung, POSCO, LG, and others became the foundation for the social innovation and IT entrants.

The government followed suit to ascertain its policy framework. The Social Enterprise Promotion Act (SEPA), which became effective in 2017, resulted in the establishment of the Korea Social Enterprise Promotion Agency (KoSEA), a state-run incubator for SEs. It followed suit with the establishment of the Korean Social Investment Fund (KSIF), a social consulting organization which promotes sustainability amongst businesses, the Seoul Social Economy Support Centre, as well as a range of SME financing products and preferential access to public procurement bidding.27

Areas of investments are thus defined by the social and local needs identified by the government. Social enterprises are defined as those that perform business activities of producing and selling products and services while pursuing such social purposes as providing vulnerable social groups with social services or jobs to improve the quality of life of the local residents.

Korean governments have made efforts to mobilize participation of the private sector and civil society in furthering social development. However, actual contribution of business and financial communities has been slow compared to other advanced countries.

In Korea, social investment has an impact-first orientation than as mechanisms for financial returns. Ventures that became interested in investing in social enterprises with social and financial returns came about with leading enterprise ecosystem with incubators and accelerators. Venture groups like D3 Jubilee and Crevisse Partners built awareness around impact investment opportunities by accelerating the operations, equity investing, and building capacities for shared learning. Social venture acceleration and incubation are also done by other institutions like MYSC, HGI, and SK Happiness Foundation.28 These incubators act as intermediaries for social entrepreneurs to build operations and secure external partnerships.

These incubators act as intermediaries for social entrepreneurs to build operations and secure external partnerships. Sopoong, which was launched by the founder of Daum, is an impact investing venture group. It invested in SoCar, a car-sharing company based in Seoul. SoCar obtained public parking spaces with the government support and then it obtained funding from the Seoul Social Investment Fund. And subsequently, the business secured funding from private investors Bain Capital and SK Group to exit.[9]

South Korea is one of the most business-friendly environments to foster entrepreneurship. There exists sufficient government support with incubation, procurement, funding, policies, and incubation expertise with government grants on public-private partnership investments, such as green finance, SIBs, and other investment mechanisms. However, despite the many approaches and investment opportunities, impact investing is still not as active in South Korea. There is a limited impact investment opportunities in public and real estate markets that would have competitive financial returns with impact. There is also general skepticism that impact investment could have high returns. The domestic laws also are not conducive for a more flexible impact investment approaches. For instance, nonprofits cannot keep more than five percent of its own equities.

Here are the recommendations for each stated industry.

Government

The idea of social innovation is considered as derived from the political left. This is due to the forefront advocate of social innovation was from Park Wonsoon, the Mayor of Seoul City.[10]

Social innovation is seen as a partisan. The main point of criticism is that a social innovation budget will be used to support many activists and practitioners, mainly from the civil society. Civil society organizations are seen as more progressive and often in opposition to those with conservative perspectives.

The word “social” is misunderstood, as traditionally, South Korea has been a government and corporation driven society. When the Korean government’s social innovation task force first talked about social economy, they found that the general public were uncomfortable with the word ‘social’ and asked “if it meant socialist.”[11]  

The most effective way to address these challenges is to create a public consensus and influence policy. By pursuing a blended finance model or large government-led funds, they can spread awareness of social investment opportunities and also pursue a mechanism where it shares risk with the other stakeholders.

From the government arm, it needs to lay the groundwork for the agenda to be embraced and embedded across the funders – institutional and venture capital. The momentum needs to also be balanced with political commitment, alignment with local cities, and the existing infrastructure to allow for the legal framework for impact investors and social innovators to flourish. 

Asset Management Funds

A well-constructed impact portfolio is globally diversified with multiple asset class and sub‐asset class allocations. The primary difference between an impact portfolio and a traditional portfolio involves the investment philosophy and process of the underlying managers and funds the portfolio invests with; asset managers that are integrating environmental, social and governance (“ESG”) criteria into their investment process and are transparently monitoring the impact of their efforts are preferred when constructing an impact portfolio. Furthermore, although portfolio risks and returns are compared against traditional benchmarks, impact metrics are also tracked.

However, challenges persist for social innovation sectors to participate in the global economy in South Korea, as there is simply a lack of public equity listed companies with competitive financial and impact returns.

In the United States, asset management solutions pursue a blended finance model with social goals integrated into the investment process. Adoption of corporate shared values, sustainable development goals, and global agendas are still nascent in the Korean social venture scene. For large asset management institutions in Korea without blended social objectives, there is a niche to invest in risk or growth capital for social enterprises. An impact-based portfolio could invest in market‐rate and/or below‐market‐rate investments, depending on the investor’s risk‐ return profile and impact intent.

Across geographies, sectors, or stages of market or company development, over-investment in impact practices may create a drag on financial returns. Whether this drag is an acceptable “tradeoff” for the level of impact return and/or level of evidence of impact is a choice each investor will need to make. It may be possible to surmise that certain investments with particular impact goals and standards for impact evidence are likely to have a wider range of potential deviations from “market-rate” returns.

Impact Enterprises

In South Korea, the idea of social innovation focuses on citizens leading the ideation, planning as well as implementation of projects. One of the existing obstacles is that there is simply a lack of social enterprises capitalizing on financial returns or have strong operational resilience. Korean institutional frameworks separate strictly the planning and implementation stage when funding social enterprises. Impact enterprises should be diligent to carve out a unique competitive differentiation in their respective markets to ensure sustainable financial viability. Similarly, they should be diligent to seek out collaboration opportunities to achieve the benefits that derive from size and scale.

For these social enterprises, they should proactively measure the social and environmental objectives as directly tied to the business model. Therefore, the measurement of these indicators may be no different from measurement of the business indicators. In addition, reporting of the impact and financial metrics will help to drive further accountability and transparency among organizations.

These organizations can also enroll in approval processes that help promote sector accountability and transparency. B Corp that evaluates the social and environmental impact of companies and funds and assigns them a score based on certain criteria. GIIRS measures the social and environmental impact of funds and companies and provides comparable and verified metrics and ratings. These ratings in such approval processes can help legitimize social enterprises and further its global potential applications.

A common language around social metrics and standards allows stakeholders to communicate more effectively, benchmark and compare investments, and evaluate social and environmental performance. Comparable metrics like using SDGs allow investors to employ different strategies on the social bottom line, and thus are important for mainstreaming impact investing. Intermediaries can play a key role in advancing this common language. South Korea can maximize its competitive edge in technologies and entrepreneurship, have them adaptable for SDGs to extend its global reach.

The funders generally are left to government, a program introduced by institutional investors, nonprofits, and other accelerators than from its value-driven institutional asset management model.

What South Korean ecosystem currently lacks is a mechanism to import knowledge of overseas impact investing trends. With strategic partnerships with global fund managers, the incubated companies can extend their reach and learn from best practices. Multi-stakeholder partnerships and collaborations will become increasingly important in realizing these shared value opportunities.


[1] AVPN, Social Investment Lanscape in Asia – South Korea

[2] Inter-American Development Bank, 2016, Study of Social Entrepreneurship and Innovation Ecosystem in South East and East Asian Countries: Final Reflections

[3] 뉴스프리존, 부산시, ‘CCVC 코리아임팩트 펀드’ 195 조성, http://www.newsfreezone.co.kr/news/articleView.html?idxno=88223   

[4] Ibid.

[5] Global Innovation Exchange, KOICA, https://www.globalinnovationexchange.org/organizations/korea-international-cooperation-agency

[6] KOICA, Guideline for KOICA to Utilize Impact Investment and Blended Finance, https://www.koica.go.kr/bbs/koica_en/717/317815/download.do 

[7] Ibid.

[8] 이철영, 임창규, 임팩트 투자, 투자의 미래,

[9] Ibid.

[10] Social Innovation Exchange, Conversation with the Social Innovation Task Force, https://socialinnovationexchange.org/insights/conversation-social-innovation-task-force-government-south-korea

[11] Ibid.