Thursday, October 30, 2014

New Tools for Impact Investor and Businesses Alignment

The Challenge of Alignment

Both impact investors and businesses seeking impact investments share a strong desire to see that businesses are tri-profitable.  Tri-profitable businesses create the possibility for human and other life to flourish on this planet forever by generating as much tri-impact as possible: financial rewards, social benefits and environmental regeneration.  This shared desire to maximize the tri-impact of business exists because impact investors and tri-impact entrepreneurs fundamentally share the same values and world-view about business: businesses will do best when they do good.

Based on their shared desire for tri-impact:
  • Tri-impact entrepreneurs are driven to choose strategies and design their operations to be tri-profitable,  and
  • Impact investors are incented to allocate capital (debt, equity or hybrid forms) to investments where they expect both to receive a financial return (ranging from return of principal to market-beating returns) and a defined additional social and/or environmental impact.  
In other words both are intending to act in alignment with their shared values. 

But, what we're learning in our conversations with impact investors is that despite their shared values and intention to act accordingly (and all the goodwill this engenders), there isn't currently an approach for the investor and the business seeking investment to efficiently and effectively carry  forward their shared values to the necessary next level of detail.  In other words there isn't a good way for them to:
  • Gain a shared understanding of the viability and quality of the action the business is planning to create its tri-impact
  • Report on whether the actions, once undertaken by the business, have produced the intended tri-impact.

Impact investors and tri-impact entrepreneurs are struggling to figure out how:
  1. Businesses can know that their proposed action (the design of their business model) is well aligned with the their intention to create tri-impact 
  2. Businesses can share the story of their proposed action in a language that will resonate with impact investors
  3. Impact investors can quickly judge whether a businesses proposed action to achieve tri-impact is sufficient and realistic
  4. Impact investors can sense what risks to tri-profitability and opportunities to increase tri-impact a business has missed, and communicate this in a way an that a business can quickly improve its planned action.
In summary the unresolved problem is: how can the investor and the business to quickly share the action planned by the business in a way that allows mutual understanding and learning while deepening their relationship?  How can they efficiently and effectively determine if they are aligned and have a good fit for each other based on their shared values?

Slowing the Growth of the Impact Investing Market

The lack an efficient approach for impact investors and tri-impact entrepreneurs to deepen their relationship around their shared values creates a range of problems for them both:
  • It takes too long to build confidence - impacting deal cost and deal flow
  • Its hard for businesses to tell inspiring stories about all aspects of their planned tri-impact - profit, people and planet 
  • Its hard for the impact investor to communicate to additional opportunities for tri-impact or additional risks they identify
  • Its difficult to identify a concise set of performance measures and reports to track all aspects of the businesses progress in delivering its planned tri-impact
But there is also a wider impact on society: these problems effectively limit the number of viable tri-impact business opportunities demanding investment, and the supply of impact investments seeking those opportunities.  In turn, this limits the scale and speed of the impact investing market and hence the total quantity of integrated environmental, social and economic benefits being created by business to address today's most pressing challenges created by the ever growing mega-forces of change. 

Challenges of Current Approaches

But don't existing techniques used by profit-priortizing businesses resolve these challenges?  

Unfortunately the two most common existing approached by themselves will not enable the required level of values aligned shared understanding, mutual learning and relationship building via story telling

  • Business Plans.   First there is no agreement on what a business plan that describes a tri-profitable business looks like; every business and impact investor has their own ideas of what's required.    Second, as Alex Osterwalder and Steve Blank have observed, business plans don't enable compelling story telling, they are not conducive for learning, nor are they easy for investors to assess.
  • Reporting.  First, while reporting provides some evidence of tri-impact created in the past, it doesn't give a view of the future that helps assess the quality of the planned actions to create (more) tri-impact.  Second, we don't have an integrated set of reports (financial, social, environmental) that allow rating and ranking by investors.  This is a large part of the challenge our colleagues in the Reporting 3.0 initiative and the Future Fit Business Benchmark project are wrestling with.   As examples: The popular B Impact Assessment doesn't include the financial dimension of tri-profitability, and the Global Reporting Initiative standard doesn't allow comparison since everyone gets to choose the specifics of the metrics they report.   

    Introducing New Approaches

    We think that impact investors and business would find it easier to get aligned on a specific opportunity based on their shared values if they had a shared language to communicate both:
    1. The action the business is planning to create its tri-impact 
    2. The quantity of tri-impact the business is currently creating in the world
    To make this language usable in practice impact investors and businesses also need need tools that use this language to enable them to communicate.  Two tools that have done exactly this are 
    1. the Flourishing Business Canvas, a tool to communicates the action a business is planning to create its tri-impact via its business model
    2. the Future Fit Business Benchmark, a tool to communicate the quantity of tri-impact a business is currently creating in the world.
    Let's explore these two new tools and how the solve the problem of developing values aligned shared understanding, mutual learning and relationship building via story telling between impact investors and businesses.

    The Flourishing Business Model Approach to Describing Planned Action

    Business models are a language shared by investors and business to describe action a business is planningIdentifying the elements of a language and collaborative visual design tools to describe and design financially viable business models was the amazing contribution of Alex Osterwalder in his million selling book "Business Model Generation".
    But impact investors and tri-impact entrepreneurs need an expanded language for business modelling that includes not only the elements of financial viability, but also a full conceptualization of tri-profitability and the root enablers of the possibility for flourishing. 

    To find these root enablers for flourishing we must look to the natural and social sciences to inform our understanding of the elements required to describe a tri-profitable business model.  In our recent research we developed a solid understanding of the relevant science and used this to develop the shared language of tri-impactful business models.  

    We then developed the Flourishing Business Canvas as a visual design tool using this language (you may have heard us talk about an earlier version that was known as the Strongly Sustainable Business Model Canvas).  We're also using the same understanding of the root causes to  describe "design principles" for flourishing business" which can help businesses design their business to create the most tri-impact now and in the future. 

    We believe that by providing a shared language for impact investors and businesses a flourishing business model approach adds an efficient and effective means for:

    1. Businesses tell powerful stories to impact investors of the actions they plan to take to create tri-impact.   A flourishing business model clearly identifies the necessary and sufficient hypothesis for all the planned actions to create tri-impact: outcomes, value, stakeholders and processes) 
    2. Impact investors to communicate risks and opportunities in the same language the business already understands and can directly act upon (its not easy for a business person to figure out what to do differently from a report - its much easier from a business model)

      The Role and Importance of Reporting

      But having a shared language to describe flourishing business models, the actions a business plans to take in the future to be tri-profitable, is only half the story.

      Once an investment has been made by an impact investor in a business, both parties are keen to know if the flourishing business model they now share an understanding of is in fact creating the  tri-impact they both desire.  

      To do this we believe the business should report its performance based on the same understanding of the root causes of tri-profitability used to describe its flourishing business model.  By doing this the reporting becomes a key part of a powerful learning feedback loop for both business and impact investors.  We believe this returns reporting to its role as a powerful shared learning and decision making tool - as suggested by the Total Quality Management movement (Dr. Edwards Deming) in their now famous Plan, Do, Check (report), Act continuous improvement cycle. 

      But what business performance reporting system is based the same understanding of the root causes of tri-profitability as the Flourishing Business Canvas approach?  While the B Impact Assessment is well aligned with the underlying science, to our knowledge to date only second project we're involved with, the Future Fit Business Benchmark, uses this same understanding of the same science to build its KPIs and goals. 

      Symbiotic Approaches

      The following diagram shows how together the Flourishing Business Canvas and the Future Fit Business Benchmark are symbiotic approaches to help businesses achieve tri-profitability and maximize their tri-impact.

      Symbiotic Initiatives to Enable Tri-Profitable Business:
      The Flourishing Business Canvas and Future Fit Business Benchmark


      We'd like to invite you to explore how impact investors and business seeking impact investments can use this new language of tri-profitable, flourishing, business models and reporting to more efficiently and effectively achieve alignment based on their shared values.  

      If you're interested in learning more about this topic please check-out