By Jess Christiansen-Franks, Managing Director, Wade Institute of Entrepreneurship
I spent years building an impact business, and I still couldn’t tell you what impact investing meant.
I had a commercial business with real social impact, good networks, aligned people around me. And I still couldn’t draw the line between venture capital and impact investing. When I was in the room with VCs, they’d ask if I needed impact investing. But when I went to the impact funds, I wasn’t impact enough. So I sat in the middle, unsure which kind of capital actually fit what I was trying to build.
At the time I was just a founder with my head down, without much time to think about the wider ecosystem. But now, running Wade and working with organisations building everything from scientific research to impact software, I see that same confusion everywhere. It’s not smaller than I thought it was. It’s bigger. And it’s not just a founder problem, it seems to be a genuine inconsistency in what people understand impact investing to be.
When people can’t agree on what something is, capital doesn’t get deployed as strategically as it could be, and an inefficient, fractured system risks undermining the very impact it’s meant to create.
So I sat down with Dan Madhaven, one of Australia’s leading thinkers in impact investing, with more than twenty years operating across various investment asset classes, on Wade in Conversations. Here are the three misconceptions we unpacked, and why each one matters if you’re deploying capital into impact.
Misconception 1: If a business has impact, impact capital will fit it
Reality: Not quite. ‘Impact’ can take many different shapes – and this changes everything about the capital that fits.
Most people assume that if a business has impact, one kind of capital will suit it. It won’t, because impact gets built into a business in very different ways. As Dan put it, there are broadly five models of how impact is achieved:
- In the product or service: the impact is the thing you sell, so more sales means more impact.
- In who you employ: hiring and training a particular group of people, the way many social enterprises do.
- In the supply chain: sourcing inputs from a particular community or region, creating livelihoods.
- In revenue or profit share: a set portion of profit flowing to a cause.
- In ownership: a not-for-profit owns the business, so all profits and value accrue to that organisation.
Each of those carries completely different incentives and financial implications. So the capital that works depends entirely on which one a business is actually running.
The clearest example is the tension in an employment model. If the impact is the hiring and the training, the business wants to employ as many people as it can. But a private fund investing for returns may want to back businesses that employ as few people as possible. Point the wrong capital at that model and you’re pulling directly against the impact.
Why it matters: as a capital deployer, the job isn’t just to pick impact businesses. It’s to match the right capital structure to the impact model the business is actually running, and to think about the structure that best incentivises the impact you’re there to support.
Misconception 2: Impact investing means giving up commercial returns
Reality: No. Impact investments commonly deliver commercial returns, but there is more to it than that.
Newcomers often arrive assuming impact investing must mean accepting less. It doesn’t. Impact investing always means your capital is returned; where it varies is the financial gain on top. Plenty of impact investments target a full commercial return alongside their impact. Others involve different trade-offs, time horizons or structures. There isn’t one rule about return, there are many types of it.
Dan’s analogy is the Olympics. Investment as a whole is a collection of very different things under one umbrella, the way rowing looks nothing like the hundred-metre sprint. He thinks of impact investing as track and field. The commercial, finance-first side is like the track: you’re in your lane, chasing a market return plus some impact, and the different distances all look broadly alike. The concessional, impact-first side is like the field events: weird and wonderful structures that look nothing like each other.
And it’s precisely because there are so many types of return that the real frontier has emerged: blended finance. Blended finance layers different types of capital into a single deal or fund, commercial capital, concessional capital and grants together. The old stack of just debt or equity becomes concessional debt, equity, concessional equity and grants, all in one structure. That lets you do things you simply couldn’t before:
- A foundation takes a first-loss position, so everyone else is protected and de-risked.
- A development bank guarantees half the loans, making the risk-return stack work for commercial investors who’d otherwise stay out.
- An impact-first investor gives up some of their return to crowd in capital that would never have shown up on its own.
Why it matters: if you think impact investing means sacrificing returns, you’re ruling yourself out of something you might well have a place in. You don’t have to be impact-first to take part. Increasingly, commercially-minded organisations are joining an emerging field of blended finance, each taking the sleeve of a deal that suits what they want from it, financially and in terms of impact.
Misconception 3: A good impact model will take care of itself as the business grows
Reality: It won’t. Impact may quietly reshape, or even erode as a business scales and its priorities evolve, unless the governance is built to hold it.
This is the one I find most important, and Dan named it precisely: impact intention holds beautifully at the start, and then quietly erodes as the business grows.
You can begin with genuinely aligned incentives, where the impact grows as the business grows. But scaling changes things. New investors come onto the cap table. The board composition shifts. Commercial pressure builds, quarter on quarter. And decision by reasonable decision, the original intention gets diluted. Dan’s image for it is cordial: keep adding water and eventually it’s just water. At some point you shouldn’t call it cordial anymore.
So the thing to scrutinise isn’t whether the impact is real today, it’s whether it’s built to last. Which makes these governance questions, not mission questions:
- Does the business model mean impact grows as the company scales, or does growth pull against it?
- Who’s joining the cap table, and what do they actually want from the business?
- Who sits on the board, and is anyone there to protect the original intention?
- What’s in place to stop impact being watered down, one sensible commercial decision at a time?
Why it matters: you’re not just investing in an impact model as it looks today, you’re investing in whether it can survive its own growth. The impact you’re buying into at entry is only worth anything if the structures exist to keep it intact at scale.
So what do you actually do about it?
The confusion I lived as a founder, and the confusion I still see across the sector, isn’t really a founder problem. It’s an inconsistency in what we all understand impact investing to be. And it means well-intentioned capital doesn’t always flow to the places it could do the most good.
If you’re deploying capital and you want to move past that confusion, this is the work we’ve built with Dan. Impact Catalyst is our program for investors, family offices, foundations and capital deployers who want to genuinely understand how to structure capital for impact: what the different impact models are, how blended finance actually works, and how to make sure the impact holds as businesses scale.
Dan developed the program and delivers it with us. He goes far deeper on all of it in our Wade in Conversations episode, well worth a listen if any of the above landed.
