The Honesty Box

The Honesty Box
Moving Impact Investing from Transaction to Trust
As the field of impact investment grows it faces a set of challenges previously
unseen in the fields of commercial investment and social change:
How do investors realise financial return while ensuring their investments
do good?
How do organisations committed to realising social and environmental
change deliver without compromising their impact by returning much
needed finance to investors?
How can the relatively small sums required by social ventures bear the
transaction costs of due diligence, negotiation and capacity building
needed to satisfy investor requirements?
These three headline questions are increasingly being answered by the
providers of capital taking a more finance first, transactional, approach to
investing than is optimum for the delivery of the social ventures’ mission. This
is leading to larger deals with higher expected returns. In this way both smaller
ventures are being denied access to much needed capital and social impact in
organisations that do receive investment is often being compromised.
Is there another way? A way that optimises social impact and financial return –
that moves people from thinking what can I get to asking what can I give? An
approach that reduces transaction cost and opens the way for smaller
investments to be viable? A way that shifts the locus of control from investor to
venture? We think there is. We think it is about moving from a culture of
transaction to a culture of trust.
The Challenge
The Neuroscience of Motivation
The parts of the brain that guide investing and doing good are not connected.
In fact evidence suggests that they may be uncomfortable bedfellows at best
and completely incompatible at worst. Activity in the posterior superior temporal
cortex (pSTC) is triggered by intrinsic motivation (think doing good)1. This is
overridden by the part of the brain called the nucleus accumbuns, the area
activated by extrinsic motivation (think making a return)2.
Why does this matter? Because of the ways in which intrinsic and extrinsic
motivations interact. Introducing the promise of monetary reward can actually
reduce the motivation to do good. Extrinsic motivation trumps intrinsic.
Monetary reward wins out over altruism. This may be why finance first
approaches are coming to the fore over impact first in the field of impact
investing. In short: the evidence suggests that our attempts to combine social
Dharol Tankersley, C Jill Stowe & Scott A Huettel. 2007. Altruism is associated with an
increased neural response to agency. Nature.
2 Knutson et al. 2001. Anticipation of Reward Recruits Nucleus Accumbens. Journal of
impact and financial return, while intellectually appealing, are impeded by
physiological and psychological factors that are incredibly difficult to overcome.
This neuroscience based explanation is congruent with the reality that in social
investment it is the investor who defines the parameters of engagement, thus
ensuring social impact is debated within a financial context. But what if we
could subordinate activity in the nucleus accumbuns to that in the pSTC and so
place finance squarely at the service of impact?
Give and Take
Studies have shown that when people are motivated by generosity the financial
performance of the interaction they are engaged can increase. In a famous
study professor Leif Nelson from University of California’s Haas Business
School trebled the income from ticket sales at a museum by allowing people to
pay what they wanted for entry, not for themselves but for the next visitor3.
In a 2000 study in Israel, researchers offered subjects the opportunity to earn
money for a charity at varying levels of financial reward for responding to a
simple time reaction game. Across the board, when subjects were offered small
rewards (around 1.5 pence), they answered incorrectly more often than when
they were offered no rewards at all. Some subjects did perform slightly better in
response to larger rewards, but not in proportion to the increase4.
So why is it that impact investing, while trying to do good in the world, is utilising
a mechanism that apparently neither optimises social or financial return?
The Hypotheses
This project’s working hypothesis is that by passing responsibility for setting
financial performance metrics to the venture extrinsic motivations will be placed
in a subsidiary position to the ventures objectives to do good in the world. In
this way the transactional, financed focus, culture at the centre of impact
investing would be replaced by a culture borne out of realising intrinsic
motivation through developing a relationship of trust.
Secondary hypotheses in this project are that:
In doing this, through developing this relationship of trust, investors will
become more intrinsically motivated and be able to align their intrinsic
and extrinsic motivations better;
By inverting the locus of control, deal transaction costs will reduce
thereby allowing both investor and venture to acknowledge lower rates of
financial return; and
Through the creation of a relationship of trust both parties will be able to
price the deal on the basis of success rather than on the basis of failure,
which will further drive down return expectations and open up the flow of
capital to smaller and higher social impact projects. and
4 U. Gneezy & A. Rustichini. 2000. Pay enough or don’t pay at all. The Quarterly Journal of
The Experiment
To test these hypotheses we are calling for existing investors to commit to at
least one deal using the following methodology:
1. Develop a relationship of deep trust with the leader and senior
management of a social venture needing investment;
2. Subordinate all traditional due diligence requirements to this relationship
and place the responsibility for all negotiations and due diligence within
the bounds of this relationship onto the venture;
3. Use this relationship to decide if the lead person / people have the
integrity, aptitude and capabilities to succeed and honour your
4. Commit to funding the venture and pass all decision making about
financial returns, timescale for returns, whether debt or equity investment,
etc. to the venture; and then
5. Be present as a trusted friend of the venture and available to them
whenever they ask and for the duration of the investment.
We ask that both investors and ventures record their experiences qualitatively in
a periodic journal as well as record the time and cost taken to develop the
relationship, undertake the deal and then service the relationship and
investment over its lifetime. This will allow us to capture the experience,
measure the cost and value and test the above hypotheses.
If the hypotheses are correct then this approach could set the standard for how
to utilise trust to invest for impact and solve, at least for some investors, the
challenges captured at the beginning of this paper.
As of December 2013 two funds have committed to making investments in early
2014 using this approach.
Some level of resourcing is needed to attract additional investors to adopt this
approach and undertake the monitoring and evaluation of this initiative.
To discuss this initiative, as a potential investor willing to adopt this
methodology or as a funder of project management, please contact Ben Metz at
[email protected]
Acknowledgement goes to Nipun Mehta, one of the inspirations behind ServiceSpace and
Karma Café, for inspiration and the gifting of language to this initiative