Last week I had the privilege of serving as a judge in the MBA Impact Investing National Team (MIINT) competition finals hosted at my alma mater, The Wharton School of the University of Pennsylvania. MIINT is a global program designed to raise awareness and train students studying at the premier business schools in the U.S. and Europe on how to source and perform due diligence on early stage impact investments. This competition has grown from a small event just a few years ago to one involving over 200 students from 25 of the top business programs in the U.S. and Europe with more than 1,500 companies as part of the initial sourcing list.
Each school evaluates and conducts due diligence on between 1-15 companies in order to select the winning team to come to Wharton. Teams determine their own investment theses - essentially geography, sector/sub-sector, the theory of change, impact sectors. The guidelines on the investment itself (stage of the company, size of funding round, investment amount) are provided by the MIINT organizers. Students tend to source ideas via local angel networks, incubators on their campuses or locally, and through their networks. Investment ideas run the gamut of impact sectors -- the environment, financial inclusion/access to capital, education, and healthcare -- with the goal of identifying a short list of compelling companies.
Each team presents their case to an on-campus judging committee that selects the top idea to be presented at the national finals. The winning company receives a $50,000 investment, with the 2nd and 3rd runners up receiving $25,000 each. You may ask, “If the social entrepreneur gets the cash, what does the student impact team receive?” Aside from the pride of winning and bragging rights for their school, they receive real world training on the art and science of sourcing, conducting due diligence and pitching impact investment opportunities. In addition, they get exposure to some high profile impact investing experts.
The Review Process
As judges, we were provided with 25 executive summaries outlining the business and impact case for each social entrepreneur with the expectation that five finalists would be selected by the semi-finalist judges during the morning session at Wharton. I was captivated by the diversity of targeted impact outcomes and areas of geographic focus which included a wide range of interesting solutions to some of the world’s acute problems such as:
- addressing hydrocarbon contaminated water via the use of reactive enzymes packaged in silica beads;
- blending physical construction and a software-based game to engage children in building gadgets that teach engineering, coding, and electronics;
- providing an online skill matching and rating platform for the 600 million African participants in the informal economy to document their professional activities, build their reputation, and grow their businesses; and
- an online recruiting platform targeted exclusively to people with disabilities in Italy.
While I was not surprised by the range of conservative to highly aggressive valuations and financial projections, I was surprised by the variability in the quality of the summaries. Some were exceptional, reflecting an extensive amount of due diligence and a logical thought process, while others appeared to have been pulled together at the last minute. As a mentor of analysts, one developmental theme I have impressed on them over the years has been the importance of the communication “package” - both oral and written. Developing a thorough thesis and recommendation are the baseline requirements. However, the quality of the structure, logic, cogency, and clarity of how the case is laid out are critical elements that can lead to success or failure in winning the minds and wallets of investors.
In the investment industry, we do not have the luxury of tangible packaging to influence investors as we are “selling” ideas, which, by definition, are intangible. Thus, a maniacal focus on excellence in every facet of communication will separate the winning teams from the ones on the losing end. One trend I worry about with this generation is the lack of grammatical discipline. That might seem like an annoying knit from a fastidious old timer, but I maintain one’s elegance, erudition, and grammatical integrity all convey a commitment to excellence as well as a razor-sharp intellect. Regardless, I found the full universe of ideas fascinating and thought provoking.
In the finals, each of the five teams had ten minutes to present their companies and another ten minutes to answer judges' questions. The finalists consisted of the following:
- a U.S-based human resources services company enabling skills-based hiring for middle-skilled individuals, through inbound marketing and video work samples;
- a U.K-based manufacturer of a device designed to reduce the energy consumption of fixed-speed, variable load motors such as mixers, conveyors, pumps and fans without affecting speed or performance;
- a U.S.-based manufacturer of the only EPA approved biodiesel conversion system for medium and heavy duty diesel trucks allowing trucks to operate using biofuel up to 100% of the time while ensuring the truck’s ability to switch back to regular diesel fuel, if necessary;
- a Latin American company providing access to capital as a free and voluntary algorithm-based platform that assesses the creditworthiness of borrowers using utility payment history; and
- a Canadian based company focused on providing lower limb amputees, globally but with a focus on the developing world, with products that enable their mobility at an affordable price without comprising quality and functionality.
At the conclusion of the presentations, the judges adjourned to a conference room with the objective of picking the top three ideas based on their investment and impact merits. The top two picks were numbers 2 and 4, while number 5 came in third place.
I was extremely impressed with the caliber of the students who will become our next generation of impact investment professionals—those with an equal appreciation and focus on analyzing companies for their impact and financial outcomes. While the quality of the finalist investment teams was striking, I would have valued the opportunity to impart some real world advice.
Oftentimes, I find analysts and portfolio managers focus far too much on returns and pay little attention to the risks. Given the opportunity, I would have highlighted the need for them to engage in a more extensive exploration of the risks, both financial and non-financial, as most proposals were light in this area. Applying a rigorous risk management lens and scrutiny to these types of deals can only enhance the space’s ability to attract more institutional capital. Most importantly, young impact investment professionals should heed this warning—those who focus on returns first and treat the risks as secondary will, most certainly, be scared multiple times in their investment career.
The most important, albeit less sexy, skill is the ability to roll up your sleeves, don your Sherlock Holmes investigator’s cap, and look for any and all clues to the financial AND operational risks (i.e. the risk of fraud). Underperforming returns can put a damper on wealth accumulation but unexpected risks can potentially wipe out a portfolio. Assessing risk as an initial step does not mean you are risk averse but that you understand the importance of being compensated for the risk you are taking:
- Is there a risk of the company or portfolio manager in the case of an impact fund straying from their impact mandate?
- Who is auditing their impact results?
- How do you know the governance, in reality, is aligned with their articulated philosophy?
- Have you explored the existence of negative externalities—the “unknown unknowns”--that could negate the good outcomes being targeted?
I wish the teams had had time to review their decision-making process—what I believe to be the most critical component of investing. One of the key characteristics of our decision-making process at Threshold Group is the understanding, incorporation, and application of behavioral finance principles. Once you realize you are human, which renders you flawed both emotionally and cognitively, AND you can reveal those biases to your teammates (i.e. you can be vulnerable), the quality quotient of the team decision making can and likely will skyrocket. At TG, we routinely challenge each other’s expressed perspectives by asking our teammates to think about whether a point of view is unencumbered by that person’s emotional and cognitive biases.
Finally, I would point out two other developmental challenges faced by the emerging class of impact investors which have affected every young investment analyst I have had the privilege to coach and mentor as well as yours truly. The stories told by entrepreneurs and by investment managers alike are seductive. Most of these individuals tend to be dynamic, articulate and passionate about their quest for financial and non-financial outcomes. It is easy to become afflicted by confirmation bias when a story resonates with you, especially in the impact space where passion regarding the non-financial outcomes can burn stronger than the financial ones. You must tie yourself to the mast of the facts and not succumb to the serenade of the stories. This discipline becomes easier with multiple “at bats.” It is amazing how incisive and intuitive an analyst becomes after the 100th presentation they have seen by a manager within the same asset class/style/impact sector.
I had the privilege of working with a gentleman who should be on the Mount Rushmore of manager research analysts. By reviewing a manager’s pitch-book and performance before the meeting, he could tell you with a very high degree of accuracy whether a manager had a unique and repeatable insight that could generate excess returns within 30 minutes of the live meeting. His “instinct” was actually an amalgamation of the thousands of meetings, questions asked and clear answers evaded, and observations of manager behaviors (facial expressions, fidgetiness, tone, treatment of teammates, etc.). I have worked with many analysts gifted with rocket scientist-like quantitative skills who, as a result of those skills, have become far too confident in their ability to accelerate their evolution from entry level, good, or above average to great investors. To them, I say, “There is truly no substitute for time and practice, i.e. many, many repetitions of the same qualitative and quantitative analytical process to spot patterns and red flags. Sorry, young bucks, age does carry some wisdom!"
Hopefully, the winners of the MIINT competition will capitalize on their early success and use it wisely in their careers. There is much for them to learn, some of which will be done the hard way. With that said I walked away from the experience as a judge optimistic and inspired that this new generation of hybrid investment analyst or portfolio manager can and will drive extraordinary change across the economic, and social spectra.
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