Kjartan Rist, for Forbes

With its focus on ‘doing good’, ‘Impact investing’ is currently one of the hottest areas amongst the broader investment community. But as I’ll elaborate here, there are many more facets to ‘making impact’ than most investors realise.

Impact investing is all the rage, with investors big and small eager to get in on the action. Last year, around $35.5 billion went into impact deals, according to the Global Impact Investing Network, a figure that was predicted to increase by 8% in 2018.

One can’t argue with the positive sentiment behind encouraging more investment into businesses that create a meaningful impact on society. However, the rise of impact investing may imply that other types of investing don’t create a positive impact which, in the case of venture capital, is far from reality.

That’s why, when Concentric is asked whether we invest in any ‘impact’ projects, we always respond with the same answer: that venture investing is inherently impactful. Here are a few reasons why:

Boosting productivity: Venture Capitalis the business of reallocating an underutilised resource – capital – to novel, unproven and untested business ideas. Primarily in areas of the economy where there is the greatest opportunity to drive technological change, progress and value, as demanded by market forces. The consequence is an increase in productivity, employment and returns – both for investors and the economy as a whole. Real impact.

Better, cheaper products that improve lives: By taking a risk on the power of new technologies, VCs and startups are driving huge forward leaps in service, convenience and cost, meeting the needs of society more effectively, and more affordably. A reduction in the cost of an essential service provides a clear ‘impact’ to individuals through higher disposable income and improved quality of life. For example, the UK challenger bank, Pockit, has used technology to reduce the cost of serving the swathes of customers that are not viable to traditional banks – often referred to as the ‘unbanked’. As a result, now everyone has the opportunity to join the modern financial system.

Preventing abuse of market power: Without VCs to fund innovative startups, markets become lazy and uncompetitive, due to the absence of any real alternatives. This is particularly true in industries such as financial services or utilities, with traditionally high barriers to entry, that have been monopolised by a handful of big players for years. The flurry of challenger brands now coming to the fore is testament to the important role VCs play in shaking up old, staid markets, forcing incumbents to do better by their customers – and society as a whole. The utility subscription service, Homeshift, has done just that, creating a fairer, more transparent market for utility services, ensuring customer loyalty is not abused.

Increased market resilience: Greater market diversity also reduces risk, by improving the ability of society to absorb shocks or ‘black swan’ events that could bring down the entire system. A constant supply of new startups helps industries to respond and adapt to both slow and sudden changes by ensuring there is no single point of failure, while also driving the development of new solutions to protect against emerging threats. This is a major impact that the VC industry delivers.

Empowerment of individuals: Startups empower individuals to harness the full extent of their talents and hard work by solving ‘problems’ and thereby creating value. This is very much the case today; there has never been a better, more opportune time to start a company. Empowerment of individuals is not a minor point, it is absolutely fundamental to the success of modern economic systems and societies. History has taught us that treating people as a collective often ends in disaster, and the most effective route to innovation is through decentralising power structures and idea generation – an idea that is integral to the VC model.

So, while the growth in ‘impact investing’ should be applauded for driving underutilised funds into deserving projects, we shouldn’t get caught up in the idea that this is the only way to make a positive impact. Look a little deeper and you realise that startups across a whole range of sectors globally play a vital role in improving society in a multitude of ways. And VCs are central to ensuring they continue to do so.

Original Forbes article