This post originally appeared on B the Change Media in August 2016.
Cathy Clark, Faculty Director of CASE
The other day my 8-year-old daughter sat at the barstool in front of our kitchen island and asked me to explain to her what impact investing is. She knew my book was on this topic, that I teach it, travel to go speak about it, work with the White House to promote it, and said it was time to explain it to her.
I realized this was a communication challenge beyond all the speeches and writing I do for a living. Could I explain impact investing so that a second grader with no understanding of investment, business or social policy could understand it? Would it help me communicate this topic to others?
I started with the concept of investment.
(LESSON 1: START WITH THE BASICS.)
I told her, “Investors give you money so that you can use it to do something that will generate more money. Then you pay them back more than what they originally gave you. Then the investor gets what’s called a “return” and the person getting the investment gets to use it when before they didn’t have enough. The only catch is, you HAVE to pay them back.”
What happens if you don’t? she asked.
“Well, sometimes they can sue you for more money.”
“Oh.” Blank look. I was losing her.
(LESSON 2: READ YOUR AUDIENCE. MEET THEM WHERE THEY ARE.)
“It’s a little bit like a savings account. You give them your money and for the privilege of holding on to it, they pay you back interest. Only with impact investing, it’s an organization that gets the investment to sell something and pays it back.”
“But how can you do that?” she asked. “I don’t understand. Where would you get the extra money to pay them back?”
“The secret to that is selling something for MORE than it cost you,” I answered. “So, let’s say you have a lemonade stand,” I said.
(LESSON 3: USE FAMILIAR ANALOGIES.)
“Let’s say it costs you a dollar to buy all the ingredients to make 10 cups of lemonade. The lemons, sugar and water. To make this easy, your dollar would be split into 10 cups of lemonade, so if 10 times 10 = 100, each cup of lemonade would cost you 10 cents to make. Right?”
We reviewed that a few times until she was with me. She hasn’t done division yet but she knows her times tables, so it didn’t take long.
“But then you sell the 10 cups not at 10 cents each but at 25 cents each. That means when you count up your money, you have 10 times 25 cents or $2.50. So you do in fact have more than the dollar you started with. So you could borrow that dollar in the morning before the lemonade sale and agree to pay someone back $1.50 at the end of the day. That person has just gotten their dollar back but also another 50 cents.
“They are like an investor. They invested and got a return, which means their money plus a little more. You also got something out of this. You still have $2.50-minus the dollar you borrowed, minus the 50 cents you paid back, so $2.50 – $1.50 = $1. That’s a dollar you didn’t start out with. That’s called your profit.”
“Wow!” she said. “I never thought of it that way.”
(Long pause, during which I assumed she was going to ask about opening her own lemonade stand out in the 90 degree heat. I love encouraging budding entrepreneurship, but really hate lemonade stand sitting. I braced myself.)
But no — her next question was: “But what about the impact part?”
(LESSON 4: DON’T FORGET ABOUT THE IMPACT!)
“Oh!” I said. “I forgot the most important part! The impact part is when, as part of the investment, the investor also gets to know something really great happens with their money and that business makes an impact on someone’s life. The critical part is agreeing up front on what that impact will be and how you’ll know it happened.”
She looked interested, but confused. “Like what?”
(LESSON 5: GIVE CLEAR EXAMPLES.)
“It could be anything. Every business has an impact on people, but this investor could have a specific goal.
“It could be what you put in the lemonade, such as using really healthy lemons, like organic ones, so that all the people drinking the lemonade are drinking something healthy for them instead of nasty chemicals.
“Or it could be where and who you sell it to, like selling the lemonade to poor people as they are coming out of a job center. It could be agreeing to sell the lemonade to rich people for 75 cents a cup in the morning, so you can afford to sell to poorer people in the afternoon for 5 cents a cup, less than it actually costs you or them to buy the ingredients.
“Or it could be that you pay the person who sits at the stand really well and the investor wants to know they were paid fairly.”
She nodded. Eyes bright. This all sounded very positive. Lemonade could do great things.
“So for the investor, their investment has IMPACT on something they care about.”
(LESSON 6: USE SOME STATS TO SHOW HOW BIG AND IMPORTANT THIS IDEA IS.)
And most of the time, the investments aren’t a dollar, they are MILLIONS of dollars.”
“Really?!?”
“Yes,” I said, getting really excited.
“So what do YOU do, exactly, Mommy?”
(LESSON 7: MAKE IT PERSONAL.)
“My job is to understand the different ways that people make investments, define the impact they want to achieve, and help others learn what works. And I help people pool their money together so they can have really big impacts on really big problems.
“Remember how I went to Africa twice last year?”
“Yes.”
(LESSON 8: RELATE IMPACTS TO PEOPLE THEY CARE ABOUT.)
“The U.S. government actually pays me and my team at Duke to help people invest in organizations helping moms and their babies in Africa and India. The organizations I work with have kept millions of moms and newborn babies from getting sick and helped them get better when they do get sick. I think it’s really cool. It makes me so proud to do the work I do! Isn’t that cool?”
“Yup.”
Satisfied, she slid off her stool and wandered off. She went about her day, and I pondered if she would ever remember this conversation, and whether anyone else could benefit from these 8 simple lessons in communicating the complex topic of impact investing.