Why Human Capital May Matter More than Money, and What Investors Can Do About It
Impact investing, in the words of Mugatu, is “so hot right now.” More than $15 billion a year is flowing into impact investment, fueled by a growing appreciation for the ways business and market-based mechanisms can drive positive change in the world. This is great news! I’ve been working in the social enterprise world for more than a decade, from my early days as a wannabe begging for an unpaid internship in India, through stints at a fast-growing microfinance institution and a seed impact fund, and now co-founder of a social enterprise of my own. But money is not enough for impact businesses to succeed; they desperately need an answer to their human capital challenges to unlock their world-changing potential.
As an investor, I saw firsthand how deeply companies struggle to recruit and retain the best talent, cultivate senior leaders and define the right culture and values. This cross-cutting challenge is not confined to one sector, and deserves much broader attention and action, in a similar way that multiple sectors unified and rallied around impact investing over a decade ago.
There is definitely some great work underway in worlds beyond impact investment, with myriad funders, nonprofits and even companies dedicated to human capital issues around the world. Firms specialize in delivering leadership training, running fellowship programs as social enterprise on-ramps, providing all varieties of up-skilling to in-market talent, and promoting talent management best practices. But while impact investors have at times mobilized around cross-cutting ecosystem factors like capital markets, regulatory frameworks and distribution infrastructure (which is great!), most relegate talent topics to side conversations and suppose portfolio companies will figure it out on their own.
I hope impact investors can start to understand the many ways that human capital issues are worthy of more attention, lest all this money flowing into the space will not be leveraged to its fullest potential.
Why does human capital matter?
How do we dimension this human capital problem, and why should the impact investing world care?
Bottleneck to growth and impact
Entrepreneurs and managers consistently cite variations on “not finding the right people” as one of the biggest challenges and constraints to scale, ranked on par with or sometimes even higher than funding. One study recently found that once they’ve raised capital, 75 percent of early-stage entrepreneurs believe that the inability to attract and retain talent is a critical impediment to scaling. McKinsey has found that over half of companies the world over cannot find qualified candidates for entry-level roles. During my time at Accion Venture Lab, we surveyed 35 financial inclusion CEOs around the world and found that talent was the top issue facing their organizations and the single most important issue to them personally (above funding).
For companies, vacant positions stall growth and cause quarterly targets to slip. Making the wrong hire can be even more costly than none at all, given the amount of time and money invested in new employees. A recent global study found that 69 percent of employers reported that a bad hiring decision put a strain on their company, and other data reveals that up to 50 percent of hiring decisions were considered a mistake. Even further, if a company can’t effectively develop its team, the failure of employees to realize their potential directly impedes the company’s growth and impact potential.
Fixing a rigged opportunity marketplace
Beyond measures of enterprise-level underperformance, impact investors should care about fostering more fair and transparent job marketplaces as ends in themselves. More than just income, work for most people shapes identity, self-worth and personal fulfillment.
Unfortunately, today’s labor marketplace is rigged. Job opportunities are determined far more often by factors like pedigree, connections and bias than genuine ability and merit. Researchers from the University of Chicago and MIT have found that white-sounding names had a 50 percent better chance of being called for an interview than African-American sounding names, and similar biases exist globally around race, gender, religion and more. Further, in emerging markets, where access to opportunity is more often determined by “birth lottery” (the initial conditions into which someone is born) than ability, mindset and hard work, impact businesses need a better way to identify competencies and match talent to opportunity. We need to shift the recruiting paradigm from pedigree to potential.
This isn’t charity, it’s just about leveling the playing field and giving talented people the chance to be considered for life-changing opportunities on the basis of what matters, rather than what doesn’t.
Why is human capital being under-supported by impact investors?
If focusing on talent is such a big opportunity, why wouldn’t impact investors be all over this? How can we account for this apparent “impact market failure”? Without belaboring the point, there are a few issues that might explain the minimal attention:
· No owner: Most funders are issue- or sector-specific, and because human capital doesn’t “belong” to a single sector, it often slips through the cracks.
· No comfort zone: When all you have is a hammer, everything looks like a nail — and at present, most impact investors come from financial backgrounds and are more comfortable talking money than people.
· No easy answers: Human capital is a many-headed beast, implicating structural issues like local education systems and globalization; individual differences in personality, circumstances and abilities; firm-level differences in organizational context and culture; and so on. It touches everything and resists easy fixes.
· No success stories: Most sectors become “a sector” when a successful new model shows potential. Microfinance’s rise gave birth to “financial inclusion” and solar pioneers gave birth to “access to energy” as fields with dedicated funding pools, in-depth research and dedicated convenings. There haven’t been human capital posterchildren yet, but I’m hoping the rise of impact-oriented talent players like RippleWorks, Omidyar Network’s human capital team, African Leadership Network, Spire, African Management Initiative, and my company Shortlist can start to change that.
· No convening body: Financial inclusion has CGAP (and others), solar lighting has GOGLA, cookstoves has the Global Alliance for Clean Cookstoves — and, of course, impact investing has the Global Impact Investing Network (GIIN). Unfortunately, the GIIN of human capital just hasn’t been created yet.
What can we do about it?
I hope more funders start to recognize the critical importance of human capital as the foundation for the success of the impact enterprises and initiatives we’re all supporting. A number of groups have started doing research and a small but growing body of literature is emerging on talent and human capital. But we need more to further diagnose the problem, understand the ecosystem, contextualize issues and ideas to local markets, and make recommendations for action (at both an ecosystem and firm level).
We also need more pioneering investors to see this as an area of great opportunity. Omidyar Network has been a leader here, setting up an in-house “human capital” team to help their investees attract, develop and retain top talent — but I’m not aware of other impact investors who have shown such commitment. Organizations like Argidius Foundation, Blue Haven Initiative and AHL Venture Partners (all funders of ours) have made human capital a focus area, but they are the exceptions (unless the broad bucket of “education” or “edtech” counts). At Shortlist, we just went through a fundraising process and heard a similar refrain from many impact investors: “Human capital is not within scope or is not a mandate fit,” or “human capital only counts as ‘impact’ if focused on people making less than $2 a day.” I’m hoping more investors and funders start to see this as an important issue with the promise of system-level impact, up and down the salary scale.
Even for investors who don’t start investing in human capital companies, I hope they can focus more actively on human capital issues within portfolio companies. When making an investment, go deeper than assessing the co-founder biographies: Spend time understanding the organizational structure, staffing plans, recruitment strategies, training programs and the company’s values. I’ve seen impact investors spend weeks digging through financial models, formation documents and board minutes, but not ask a single question about the culture and sub-C-suite team. If investors cared more about people, so would entrepreneurs — you can help entrepreneurs prioritize people just by asking about them.
We also have an opportunity to learn from mainstream global trends around the future of work and the evolving higher education landscape. It’s a heady time with many calling for the unbundling and disruption of higher education, the digitization of economic opportunity, and new tools to help companies find, recruit, manage and train talent. Let’s learn from the best and bring these new practices and technologies into our markets and investments.
Finally, let’s turn this into a sector, shall we? I, for one, would love to see a dedicated resource center focused on “talent for impact” that could bring together the best research, resources, brains and energy around the world to help impact investors and social enterprises alike. That’s a conference I’d show up for, and bring my friends.
This article originally ran on NextBillion.