Impact Capitalism on “The Pitch”

At CET, we love listening to the podcast “The Pitch”. It’s always exciting to hear about new businesses and to hear how other investors think. This week, the episode featured Jonathan Kumar, the founder of Samaritan. Kumar’s company wants to provide a better way for cities and non-profits to take care of homeless people. This post isn’t so much about the business itself, but rather about the way the investors on the show think about “Impact Investing.”

But to give some context, it may help to understand how Samaritan works. In brief, when a homeless person enrolls in the program (typically through a city or a non-profit) they get a bluetooth-enabled beacon and a digital wallet. People who want to help the homeless download the Samaritan app and get notified whenever they’re near someone with a beacon. The app tells them a little bit about the person and gives them the chance to donate through the app. When the homeless person checks in at their local non profit (like a Red Cross, shelter, etc.) they can cash out their wallet or they can spend against the account at participating local stores.

The Ethics of Making Money off a big Social Problem

Some of the investors in the room didn’t invest because they couldn’t see Samaritan turning into a big enough business to garner the financial returns required by the VC model. That’s totally understandable and not what we’re talking about today.

What I’m more interested in something investor Michael Hyatt said: “I don’t know if I want to capitalize on this.”

Michael explained what he was thinking:

“I had a real moral struggle with what this was. Think about me saying ‘Hey, I’m making a ton of money off of this app that is built to make money for the homeless.’ I don’t feel comfortable with that. And it didn’t make any sense to me. At the end of the day, I don’t really want to be in the business of profiting off of people’s difficulties. Isn’t the profit off this — shouldn’t that be going to those people? I don’t need that money, they should [get it]. I can’t reconcile that in my head. Just step back and think about it. You’re looking for a 3–5x your number [as a financial return on your invested capital]. I don’t see any VC wanting to say to their investors that they made all this money off of this type of program. I don’t see it.”

I suspect we all feel some understanding for what Michael is saying. There’s something unsettling about feeling like we’re making money off of someone else’s misfortune. There’s a feeling that the business requires suffering in order to keep making money. After all, if Samaritan really worked, there would be no more homeless people and—therefore—no more profits for investors.

But while this feeling is understandable, I don’t think it makes sense. Think about the alternative. A VC invests money in, say, a dating app instead. This delivers the 3–5x returns the investors asked for but no homeless people were helped along the way. Is Michael donating all of his financial returns to the homeless? Doesn’t he still think they need the money more than he does? If that’s his metric, shouldn’t he think it is strictly better to deliver returns while helping people? It is really interesting to see how the moral discomfort leads him to make a socially sub-optimal decision.

On the other side was Gillian Manus, who, before becoming an investor was homeless for a time. She did invest in Samaritan through her angel fund and didn’t see any ethical issues with it.

Gillian’s view was that “we’re making money helping people get off the street [which is one of the biggest problems in cities] and this is a solution. Aren’t we investing in solutions? Isn’t elevating society the end game? Isn’t this one of the most dynamic returns that we could get—to help families living in their cars, to help provide a roof over people’s heads? What, we should be ashamed that we’re making a profit off of that? The profit goes back into society. Isn’t that what we’re all doing with every company?”

Impact Investing in the Future

I expect that we’ll see the continued growth of impact investing across social causes, education, healthcare, and the environment. As we do, I think discussions like these will become increasingly common. The question will be whether perceptions of immorality around profiting from social causes will change in the future.

Jonathan, the founder of Samaritan, was steadfast in his view that VC can and should be used to support double-bottom-line businesses. “If we’re able to scale quicker because we took this VC money, and if that helps us get people off the streets in 5 years instead of 10, and the result is that we returned a lot of money to these investors to use on their yachts or their vacations, I am glad about getting to people in 5 years instead of 10.”