What Do Impact Investors Do Differently?

In recent years, impact investors – private investors who seek to generate simultaneously attractive financial and social returns – have attracted intense interest and controversy. We analyze a novel, comprehensive data set of impact and traditional investors to assess how the non-financial characteristics of impact portfolios differ from their traditional counterparts. We exploit the co-investment network between venture investors to identify the extent to which impact investors expand the financing frontier, versus invest in companies that could have attracted traditional venture financing, and find considerable heterogeneity across impact investors. We then explore the portfolio allocation decisions of impact investors and document that they are more likely to invest in disadvantaged areas, crowd in non-impact follow-on investors, and are more likely to invest in “pioneer companies” – the first 30 or 40 companies in new industries. Relative to traditional investors, impact investors select companies that are less likely to reach exits and take longer to do so, which is consistent with greater risk tolerance and longer time horizons. These patterns are most pronounced amongst the impact investors that seek out deals that did not attract traditional investors.