impact
Avantage Venture’s View on Performance Metrics
As impact investing has grown in size and recognition, so have the demands by social investors for rigorous metrics to measure the performance of social enterprises. At Avantage Ventures, we have studied established methodologies for measuring the financial, operational, social, and environmental performance of social enterprises, as well as tested new methodologies. Although our initial goal was to develop a standard set of metrics that could be applied to all social enterprises to enable investors to evaluate different social investments, we have learned that applying a standardized approach simply does not make sense. The nuances of each social enterprise determine which performance metrics are most suitable. Similarly, social enterprises and social investors also demand different sets of metrics for very different use.
A social enterprise may use metrics for self-evaluation purposes by looking at areas such as management, organization, and efficiency, for marketing purposes in order to attract funding, or for program evaluation purposes to assess their effectiveness. Investors, on the other hand, use metrics differently depending on the type of investor that they are. Investment-first social investors place more weight on traditional financial metrics. They require impact measurements that are simple and easy for the average investor to understand. Impact investors, on the other hand, place much more weight on social and environmental metrics. As such, they require more sophisticated impact measurements to quantify the impact of their investment, or in other words, how much good they have done.
Given the different requirements and uses, we believe that a balanced approach is necessary in developing useful performance metrics that provide valuable insight for both social investors and social enterprises. Our criterion for selection of performance metrics includes the following:
- Metrics should be simple and inexpensive to collect
- Metrics should be understandable
- Metrics should be measurable over time
- Metrics should be useful to both social investors and social enterprises
- Metrics should be both quantitative, to demonstrate outputs, and qualitative, to demonstrate outcomes
Of the existing methodologies created by social entrepreneurship practitioners, we like the Base of the Pyramid (BOP) Impact Assessment Framework developed by Ted London for ventures to assess the impact their initiatives are having locally, both in the short-run and over time. The framework focuses on the impact on two main stakeholders, sellers and buyers as well as their communities, along three dimensions: their economic situation, their capabilities, and their relationships. The strength of this approach is that it is holistic and captures a wide variety of qualitative evidence of a social enterprise’s impact. However, due to the qualitative nature of the data collected, it is difficult to compare the impact of different social enterprises, which social investors demand when evaluating potential social investments.
Another methodology that we like, which we believe would complement Ted London’s BoP framework, is the Impact Reporting and Investment Standards (IRIS) Framework that defines, tracks, and reports the performance of impact capital. IRIS created a standard set of financial, operational, and sector-specific indicators to allow for comparison across different organizations that have social and environmental impact as their main driver. In addition to the ability to compare performance and impact across different social enterprises, we believe that another large benefit of the IRIS framework is that many industry leaders, from the Rockefeller Foundation to the Acumen Fund, are supporters of the IRIS framework. The social investment community is seeking a common language and methodology in which to measure the performance and impact of social investments, and more organizations are viewing IRIS as the framework seems for doing so.
We at Avantage Ventures are pleased to see that the social investment community is moving closer towards creating industry-wide accepted norms and methodologies for measuring the social and environmental impact of social enterprises. However, we are cautious to subscribe to a single methodology, especially one that only includes quantifiable metrics, because we believe that due to the double or triple-bottom line natures of social enterprises, there is valuable information about the impact they are having on individuals, families, and communities which simply cannot be measured and quantified. As such, we believe there is a place for hard data and a place for more nuanced, anecdotal evidence. Our balanced approach to impact measurement seeks to encompass both.