Kirstin Hill on Impact-First Investing: Matching Capital to Purpose

Timestamp for Kirstin’s opening remarks: 4:54

Let me start by thanking the New York Federal Reserve for hosting today’s conversation. With special acknowledgements to David Erickson, who had the idea for this event; Otho, who is hosting us today and has been a terrific partner; and Edison Reyes, who played a critical role in organizing today’s event.  

Now, would you believe me if I told you that Benjamin Franklin might have been America’s first impact investor? 

In June of 1789, less than a year before he died, Benjamin Franklin added a codicil to his will, leaving 1,000 pounds each to Boston and Philadelphia. 

That money wasn’t to be given away. It was to be lent in the form of small loans, at modest interest, to young tradesmen. Tradesman who had finished their apprenticeships and were trying to start their own businesses. 

He could have set up a grant program, but he wanted the money to come back, so it could go out again to help another person, and then another. He set the rate himself — lower than he could have, because he wasn’t trying to maximize what it earned. 

Franklin had identified a group of people who were skilled, credible, and ready to work, but who were struggling to get credit anywhere else. And he knew from his own experience what a loan like that could do. Franklin got his start when two friends loaned him the money for his print shop, which he later called “the foundation of my fortune and all the utility in life that may have been ascribed to me.” 

But despite that example we sit here today, 250 years later, and capital still fails to reach the people who need it most. 

Here’s what that looks like in practice. 

How many of you have heard of a Contract for Deed? I hadn’t, and I worked in banking for 25 years. 

It’s a $200 billion market. Essentially, these are home loans with all the downsides of a mortgage but none of the upsides. You’re paying high interest rates. You’re paying for upkeep on your home. You’re paying taxes on your home. But you don’t own it. And the first time you miss a payment, you lose that home and every dollar you’ve put into it. 

Contracts for Deed exist because it’s hard to get a mortgage under $100,000. It costs a lender roughly the same to write that mortgage as a $700,000 one. The labor, compliance, and paperwork are all the same, but it earns a fraction as much. 

This is what economists — and our colleagues at the NY Fed — call a “missing market.” The need is real, the value is real, and conventional financing doesn’t reach it. The economics simply don’t work for a traditional investor. Perhaps the time horizon is too long, the risks are unfamiliar, or the model hasn’t been proven yet. 

Often, nothing fills a missing market. In this case, something worse did — capital that was built to prey on families rather than serve them. 

But a gap like that can also be seen as an opportunity to build something better. 

And in this case that’s what happened. A group of people with decades of real estate investing experience saw an opening for something new. An opportunity to deploy a different form of patient capital. They buy pools of these predatory contracts and convert them into traditional mortgages. They reduce interest payments. They keep families in their homes and communities more stable. For families who started with no equity, the average wealth transfer is $70,000. 

Philanthropy alone cannot address a $200 billion market. And these solutions are too uncertain for conventional markets to tolerate. So, these investors made a market where there wasn’t one. 

What I just described is what impact-first investing, or catalytic capital, looks like in practice. 

Think about the spectrum of what you can do with a dollar. At one end is philanthropy, where you give the dollar away knowing it won’t come back. At the other end is traditional investing, where you want as much return as you can get for the risk you’re willing to take. 

Impact-first investing sits in the gap between those two systems. Its money that thinks differently about risk and return to reach a missing market. It’s still an investment. The money comes back, and then, ideally, it goes out again — to the next family, the next worker, the next entrepreneur.  

That middle is where we work at Social Finance.  We are two things at once, which is unusual. We’re a national nonprofit that owns and operates an SEC-registered investment adviser. That structure is deliberate — the head and the heart of this work under one roof, the discipline of markets and the purpose of a mission, combined 

It’s also where Benjamin Franklin was, long before any of us had a name for it. And he isn’t alone. Identifying a gap, a missing market, and building the instrument to fill it is how some of our largest markets in America have gotten started. 

In 1944, Ralph Flanders became president of the Federal Reserve Bank of Boston. He’d been an apprentice machinist before he was a banker. He looked at New England and saw a region losing its footing. Employment in cotton manufacturing in Massachusetts had lost 80 thousand jobs, down 75% in 20 years. 

But the region wasn’t short of capital. It had plenty, in the form of banks, insurers, trusts, and endowments. What it was short of was anyone willing to take a chance on something new. The head of one of Boston’s largest investment trusts said his firm wouldn’t touch risky new ventures, because, he said, “we are not staffed for that purpose.” 

So Flanders left the Fed. He raised $3.5 million and helped found American Research and Development, widely considered the first modern venture capital firm. Its most successful investment started as $70,000 in a small tech company. 15 years later, that stake was worth over $350 million, and as importantly the company was the largest private employer in Massachusetts. 

Venture capital, which we now think of as a foundational building block of entrepreneurship in America, began as a missing markets project. Today, it is an over one trillion-dollar asset class. 

Using capital in new ways to solve hard problems is not a new idea. The modern mortgage was created in the 1930s, when Washington replaced five-year balloon loans with a thirty-year mortgage, so families could build equity. Microfinance came in the 1970s, when someone tested whether people with no collateral would repay small loans. Community development financial institutions arrived in the 1990s, when people decided that lending in neighborhoods long overlooked by traditional finance could be both economically viable and socially valuable. 

None of that was inevitable. In each case, somebody saw a problem that existing capital didn’t reach and built something new.  

Every one of them came from the same American idea: that where you start shouldn’t dictate where you end up. It’s never a guarantee, but a promise each generation either works to keep or lets slip. 

Two hundred and fifty years in, we are falling short on that promise. Americans born in 1940 had roughly a 90% chance of outearning their parents. For those born in the 1980s, it’s down to about half. In two generations, a promise became a coin flip. 

Benjamin Franklin was 83 years old when he wrote that codicil to his will. He knew he might not live to see a single repayment, but he wanted the power of his investment to live beyond him — doing good. 

None of us has to accept the markets we inherit. Taking risks with capital to create opportunity isn’t new in American life. What we are here to talk about today is applying that same instinct to social challenges that have been stuck and for people who need it most.  

We can build the markets that are missing or fund the people who will.