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Scaling versus Catalyzing: A Choose-Your-Own-Adventure for Impact Investors

Cyrus Kharas
Scaling versus Catalyzing: A Choose-Your-Own-Adventure for Impact Investors

One of the most exciting aspects of designing and launching an impact investing program is that it can take many forms, depending on the goals and personality of the investor. “Success” will look different from investor to investor because we all have different goals, risk appetites, and ideas of what impact we want the portfolio to achieve. 

All my impact investing clients have taken different approaches to developing and executing their impact investing strategies. There are many decisions new investors must make: how much of an investment portfolio to deploy, who will manage it, how quickly to deploy the assets, and many other factors. One of the most pivotal first questions to ask yourself is: Do I want to catalyze new, risky ideas and programs, or do I want to scale proven concepts? This question will help you design a portfolio with the greatest likelihood of success, according to your personal definition of what success looks like.  

Not only is defining this preference upfront a crucial step for individual investors to make to gain clarity about which investments to pursue and feel excited about, it’s an important exercise for the field more broadly. That’s because this subjectivity of success is one of the impact investing industry’s greatest obstacles to broader adoption. The fact that success is not clearly defined can be scary—resulting in fewer people opting to use this incredibly powerful tool as a way to accelerate their impact. As that’s clearly counter to our collective goals to maximize impact, I’d love more people to get comfortable with this ambiguity or to push back against it. One way to do that is by envisioning and reflecting on what kind of investor you want to be: a catalytic one, or one focused on scaling proven programs.  

Let’s look at what these two types of strategies mean. 

A catalytic portfolio is one that intends to unlock some type of progress that wouldn’t be possible without that investment. If you’re investing in a fund, it might mean making an early commitment that could help a first-time manager reach a scale that would make the fund more attractive for institutional capital. If you’re investing directly in an entrepreneur, being catalytic may mean making an investment in the earliest stages of the business before proof of concept or significant sales. In both cases, this early capital is critical for these ideas and investors to get off the ground and prove their model’s viability and importance. These are also highly risky investments because, of course, it’s possible the model may turn out to not be so viable, after all. 

On the other hand, an investment to support scale builds on early success. This could look like supporting a fund manager on her second or third fund as it aims to direct substantial capital toward impactful companies. Or, it could be helping a company grow beyond its venture cycle to a growth phase—extending the reach of its impact. These are less risky, and therefore the capital has a greater chance of returning to the investor and being redeployed. 

Your portfolio could: 

  • Prioritize smaller, higher-impact catalytic investments: These multiple smaller deals will be more difficult and expensive to underwrite. But if they succeed, they have the potential to create significant impact as well as substantial financial returns. 
  • Focus on getting big checks out the door: This type of portfolio would support larger, proven organizations or programs that are only really looking for large investments in order to scale. Investors are likely to see these dollars come back to them, ready for reinvestment.  
  • Take a hybrid approach: There are lots of names for this model: Core, Core+, Hub and Spoke. The idea is that there is a central, stable part of the portfolio for scaling-focused investments, combined with peripheral, high-risk catalytic investments that are smaller in size but come with big potential impact. 

So, how do you choose which approach is right for you? The decision-making process is highly individual, but I suggest my clients start with the following two steps:  

  • Ensure that you and your stakeholders understand the implications of each approach. This includes how much each one will cost, how risky it is, and how time-intensive. Consulting a professional is the best way to determine how each of these factors will play out in your chosen issue area, geography, etc.  
  • Reflect on how each approach—and the result of each approach—would make you feel, particularly in downside scenarios. How would you react if your high-impact portfolio companies go under? How would the portfolio look if your impact investments underperform traditional investments, and how would you feel about that?  

From there, you and your partners should have a good sense of which approach will work best for you. But don’t get stuck at this stage. Even though this is one of most pivotal questions an impact investor must answer, it’s ultimately less important which path you choose than that you are committed to your choice—whatever it is. One strategy is not more important than the other; capital is needed at both stages. What really matters is that the stakeholders at your organization who influence impact investing allocations feel good about the approach and will maintain their support for the work—cultivating a long-term commitment to the practice.  

In the end, the best strategy is the one you will continue. 


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