During my career in impact investing, I’ve heard many analogies used to describe the investment industry. While these comparisons help people better understand the sector, there are risks to taking them too seriously. Below are a few of my favorite analogies, as well as what can happen when you take them too literally:
1) Dating - Great for Process, Bad for Diligence
Where it Works: The Screening Process and Investment Cycle: Investors don’t ask too many difficult questions early on and entrepreneurs don’t reveal everything at once. This is very similar to dating, where people disclose little up front and learn more about one another over time before committing. No one asks how many kids someone wants on the first date if they want a second (I think, I’ve been out of the game for a while now) and entrepreneurs rarely reveal significant risks in the initial pitch.
Where it Fails: Due Diligence: Part of the investment process is collecting as much information you can about a target investment (commercial, legal, etc). It’s a bit harder to do this with a potential romantic partner. You can’t get an unbiased opinion from one of their exes the way you sometimes can from an entrepreneur’s former colleagues. And even if you could connect with all of your partner’s former boyfriends or girlfriends, would you want to?
2) Sports – Good for Skills/Scandals, Bad for Track Record
Where it Works: Talent and Insider Training: Before I started working with fund managers, I had no idea how hard it was to raise and manage an impact fund. The partners at my firm compare it to a decathlon, where teams need to be good at a lot of things and really great in 2-3 areas. This analogy is also great for doping and insider trading scandals, where people who outperform like Lance Armstrong and Bernie Madoff often suffer (deserved) public backlash when exposed.
Where it Fails: Track Record: Previous success in athletics is not always a proxy for future performance. In investing, people typically want to give their money to funds with a track record of success. While that logic may apply to certain Olympians like Michael Phelps and Usain Bolt, I doubt Tom Brady or Eli Manning’s best 10 years are ahead of them.
3) Gambling – Good for Risk, Bad for Rewards
Where it Works: Understanding Risk: In both gambling and investing, you put your money at risk for financial gain. The less likely an outcome, the more you are compensated for success. In both roulette and venture investing, you are expecting (hoping) for one or two big winners to pay for all of the losing bets.
Where it Fails: The House Always Wins?: In Vegas, the rules of the game are always rigged against you. With investing, you can’t make the same assumption. Just because a fund or industry has done well for years, doesn’t mean it will continue to outperform expectations. Ask any investor in Pets.com during the original dot com bubble. However, when investors successfully lobby governments, the odds shift in their favor.
My Bio:
Isaac Gross is an investment manager at Capria, the first global accelerator for impact fund managers. Isaac has spent his career in the impact sector at organizations such as the Dalberg and the Clinton Foundation. Working with the Clinton Foundation he managed a $10 million HIV medication donation in West Africa. At Dalberg, he evaluated impact funds with $50+ million assets under management. Isaac has an MBA from London Business School and a BS with Honors from Brown University.
