A young person from a wealthy family has an incredible array of choices as he or she enters adulthood and considers some age-old questions: What will I do with my life? How do I make a difference? For the heir in a wealthy family, the many opportunities that lie ahead may include an undertone of anxiety, as the young adult tries to reconcile an internal conflict about the best path forward.
First of all, there is the challenge of personal identity. His life has been made special by the achievements of prior generations, some of whom have outsized achievements and personalities to match. How can he do anything to justify his inheritance and make a mark in life? Adding to the family fortune alone may not count for much, but just living off the family fortune is not much of a life.
Second, since the family is well-known in the community, he wants to do something that adds luster and respect to the family name. How will he serve the community and earn respect for what he does with his significant wealth? This brings up the question of values, of what form the family's contribution will take. Even if the heir acts as an individual, his actions will reflect on the family as a whole.
The aware young person beginning his life journey wants to build a personal identity that either adds to the family fortune or to its place in the community. Is this really an either/or choice, or can these competing currents be reconciled?
Working as a family governance consultant and as a venture capitalist with such inheritors, we have met young people who discover that taking the path of the social entrepreneur, or impact investor, is a fulfilling way to resolve this dilemma. With this focus, the young person finds that family wealth can help the world in a way that is not simply charitable, but also brings a return on an investment. As the world moves to confront the issues of energy responsibility and education reform and to provide a livable life for billions of people who live in poverty, good ideas are emerging that can make a difference with adequate financial support.
Impact investing takes many forms, ranging from nonprofit entities to those that seek market-rate returns. Some of these efforts may not lead to a product or service that can bring a return on invested capital. They aim not at ameliorating current pain, but at long-term developmental strategies. These ventures are entrepreneurial in that they gather the dedicated energy of a network of people. If not self-sustaining, they at least have an impact far in excess of the capital they use. They include business ventures that create products useful to meeting social needs-that can be developed as profit-making ventures with the potential to generate market-rate returns.
It is not just socially responsible investing (SRI). SRI typically involves reverse screens for publicly traded equities (no alcohol, tobacco, firearms or casinos, for example). Impact investing goes several steps further to focus on proactive solutions by focusing on certain industries and opportunities where technologies are being used to not only solve problems, but also make money. It gives families a complement to their charitable giving and a more complete approach to problem solving.
If young people are interested in education reform and supporting teachers, for example, their options are broader now than they have ever been: They can donate to a nonprofit organization, but also to individual classrooms and teachers through sites like "Donors Choose." They can invest in a for-profit company such as 2tor, designed to mass produce high-quality teachers, or become entrepreneurs and create their own solutions. The next generation can help their families innovate by combining return on family capital with social responsibility.
Not only is the line between for-profit and nonprofit graying, but the opportunities to achieve both impact and returns simultaneously are expanding. For the first time, families that are willing to consider their social mission while executing their investment thesis have options in most asset classes and geographies. These families can now not only work to protect and increase their asset base but at the same time honor the legacy of the original wealth-creating entrepreneurs in their families.
Impact investing allows multiple generations to work together in a way that respects their values and perspectives. At one company, for example, the patriarch set up a U.S. charitable lead trust that could invest in socially responsible ventures. He felt that this was a way to involve and engage his son and daughter, who were passionately interested in sustainability. The voting power over the trust's investments was left in the hands of the recipients, creating a special partnership between the two generations. The younger generation became very involved not just in giving to worthwhile ventures, but also in working with them to ensure their success. Their hard work demonstrated their commitment and emerging capability, deeply impressing the older generation.
Placing oneself and one's family in this realm offers a special path to doing important work and becoming a worthy heir with a sense of self worth. This is an opportunity that was not really open to prior generations, and it allows the new generation to make a distinctive contribution to their families and their communities that can enhance the sustainability of the family assets and the world.
Dennis T. Jaffe, Ph.D. ([email protected] and www.dennisjaffe.com), is a professor of organizational systems and psychology at Saybrook University in San Francisco, and an advisor to families about family business, governance, wealth and philanthropy.
Josh Cohen is managing partner of City Light Capital, a New York City-based venture capital investment firm.