Millionaire VC Shares His Advice on How He Became Successful Investing In "Impactful" Companies

[Music] hey everybody welcome to another episode of impact theory i am joined by somebody today that i think you guys are going to find incredibly interesting it is sir ronald cohen thank you so much for joining me today pleasure to be here with you tom all right i am super excited to talk about your book impact and i think so obviously with the title impact theory people know i am obsessed with impact and what we can do on our own lives and at grand scale you're coming at this as somebody who has built it an incredibly successful investment firm if you would walk people through exactly what impact investing is and what you see as the future of this movement well tom we're all aware of risk when we make decisions we're all aware of the return that we get when we make an investment but to date we've left impact out of the picture and things are changing we see young people in particular like those joining us today refusing to buy the products of companies whose values they don't share because they disagree with using child labor or they don't like the pollution they're creating they also don't want to work for these companies and this has become noticed by investors so today for the first time in history we see massive sums 40 trillion dollars being invested on the basis of risk return and impact so what impact is about is improving lives and the planet and what impact investment is about is generating profit as well as impact and it's basically changing the world we've had a technology revolution all of us are aware of that this technology revolution is being followed by an impact revolution now where companies just making money isn't good enough they've got to make money and they've got to make a contribution to solving some of our big challenges improving lives improving positive opportunity reducing racial discrimination increasing diversity reducing environmental damage and i'm glad to say that technology enables us today to measure the impacts of companies we can measure the products they have and the impact that they create we can measure what impacts they create through their employment and their operations their operations influence people and a planet and so we begin to have a different type of economic system creating a much better world than the one we become accustomed to all right i think there's two key pieces that make your story incredibly interesting and those are um you as a refugee i think people getting a little bit of background on that would be incredibly powerful uh and then the other part is how you came to this impact investing specifically when the government the uk government reached out to you i think those two pieces will help contextualize you well i consider i've been very lucky in my life but it didn't always look that way at the age of 11 my family and i were kicked out of egypt because some of you will know of the suicide israel britain and france tried to take back the sewage canal which the egyptian leader nasa nationalized and as a result of that i find myself at the age of 11 with my parents and my younger brother living with 10 egyptian pounds in our pockets and the suitcase each and clutching as i mentioned in my book my snap collection under my arm but it turned out to be a blessing in disguise we ended up in britain because my mother had a jewish passport as well as an egyptian one we were welcomed in britain i went to state schools my education was paid for at oxford i got a scholarship called the henry fellowship to go to harvard business school and when i arrived at harvard business school i discovered venture capital which was just beginning this was the end of the 60s and i sensed that this idea of young people creating new companies that can innovate better than big ones was really the right idea and i felt wow this is going to be big and i had an obligation to bring back something of value after the terms of my scholarship to the uk and i brought back venture capital okay so uh you make a i heard a joke that you made in one of your interviews where you were saying you know this was a time where uh there was a kid i think it was an older kid somebody in college that was saying oh my dad is an adventure capitalist and you were like nobody knew what this was one thing that i took away from your book which i found really interesting is the sense that some of these things are pretty new and so you've got in 1929 you have this sense of like hey we have a problem here we've got no generalized um general recognized accounting practices so even that is in the last 100 years in the last 50 years you've got the idea of risk so walk people through some of this stuff and then if you can sort of end with what venture capital is so that people understand how these things work okay so venture capital is about putting money behind people usually young people who want to create huge businesses and they have a good idea of how they can do it and they can recruit a team to do it and so by putting money behind them you give yourself the opportunity to make a great gain if they become successful and they ipo or sellout at the beginning people thought it was very risky top like when i started out it was so difficult to raise money for this it took us years but then as you saw the bill gates's and the steve jobs and others who were dropouts from university built companies that became bigger than the established leaders like ibm the idea called tom and today it's a trillion dollar pool it funded the tech revolution basically what i didn't realize which i think is what you're getting at tom what i didn't realize is that i happened to be at business school in the us at the time of the birth of venture capital and something else very important which was people were beginning to measure risk now everybody invested with risk in mind as we were saying but nobody had ever measured it when you began to measure it people began to realize hey this new game venture capital well it may be riskier but it makes more money then it brings risk so it's worth investing in so you began to see venture capital and then private equity and then hedge funds become very important parts of portfolios today taken together these three different ways of investing probably account for a quarter of a sophisticated institutions or families wealthy families portfolio so venture capital came because we could measure risk now what's happening is we're beginning to measure impact and impact investment is coming because we can measure impact and as you were saying in the 30s after the great crash of 1929 when the stock market collapsed the us introduced generally accepted accounting principles so every company had to report its profits in the same way which until then they didn't have to do and the use of auditors who basically said these figures are right they had a legal uh obligation uh going with with making that statement now that gave transparency on the profit of companies and today i believe we're on the threshold of getting transparency on the impacts of companies so we can look at the profit and the impact but we can have an accurate view of what this company is actually achieving because making money at the expense of the environment or people isn't the way to do business and it doesn't help solve the social and the environmental issues we face so the reason i bring that up is i really want people um watching this to understand that these systems are created by people and they are not immutable that changes happen with frequency and when somebody has an insight because you've talked about the people at i think it was chicago university had the insight around risk and it was an insight and the new insight that you're bringing forward is hey you can actually measure some of the things that the companies do that have a knock-on effect we'll call that impact so whether it's deforestation whether it's pollutants whether it's you know like you said child labor whatever like you can actually start looking at this stuff measuring it and that key insight gives you the tool with which to change the system and begin to shape it because i am so worried that people just get terrified that these systems are so big that they can't do anything yeah you're right you're right and we wouldn't have been able to talk in these terms about measuring impact 10 years ago time big data and computing power enable us to do this previously we couldn't have done it it's the first time humankind can begin to measure what our company does to people and the planet as well as the profits of the lose yeah that the the timing of everything and understanding what the underlying insights are i think will help people see how they can plug into the system so one thing that i want to talk about is so as people are looking at the companies that they want to support they're looking at the companies that they want to um work for or whatever the case may be what are the elements that you think people should be paying attention to so you should be paying attention to the products of the company is this a product you're comfortable consuming does it do more harm than good for that company to produce it soon you'll be able to hold up your phone to the barcode to the product you want to buy and you will see the environmental and people impact of that product and of the company that makes it the second thing is it's employment practices if today it's a great company with a great product but it doesn't have enough diversity doesn't pay the same amount for men and and women people of color don't advance in the same way through the organization despite the fact that they have the skills then it's your obligation to change it finally if its operations are creating huge pollution if it has a huge fleet of lorries running on on petrol then get the company to shift to electric vehicles these changes are happening all over the world now they're examples of very successful companies doing just that and convince your company that doing good and doing well is in its best interest if it wants to make more money the best thing it can do is to do good and do well because it will attract talent like you consumers and investors and it will avoid getting taxed and regulated and young people get this all the people have got used to the old system and begin to find a million reasons often not all of them a million reasons why this isn't going to work but with 40 trillion going in this direction in esrg investing with a trillion as much as the whole venture capital pool in the world of impact investment proper where you measure the impact as well already in in existence that is the future okay so if i am putting myself in the shoes of somebody watching this who may be inclined towards cynicism uh i think well why aren't we just taxing the rich just redistribute the wealth tax the rich get them like a 90 tax bracket they'll still have plenty of money uh why aren't we suggesting that so i'm not saying that you don't need to tax those who are better off governments need to redistribute wealth and income each country picks the extent to which it's comfortable doing that what i am saying tom is that won't solve the problems that we face because it's not big enough however much government stanks it's a timing proportion of what companies produce through their products through their employment and through their operations it's tiny so however much distribution you take care of you're not going to solve these issues but if companies begin to compete with one another on the basis of diversity of equal pay of low carbon emissions then investors bring that change about for you because the money would go to the companies that are doing a better job of delivering profit and impact and those that are left behind like exxon mobil for example will see their share price full by two-thirds in the space of three years because they're doubling down on fossil fuels which investors think is a crazy thing to do yeah it creates 39 billion dollars of damage a year from its operation stock compare it with bp 13 billion shell 23 billion as an investor are you wise investing in exxon mobil it could get taxed and regulated it may not attract the talent anymore and its customers may leave it no so you go to those who are doing a better job and i think just bringing this transparency which i view as a human right transparency of the good and the harm that companies do is a human right for everyone who is an employee for everyone who's a consumer and for everyone who's an investor okay so now i want to go back to um how you got into this in the beginning so as i'm not a born entrepreneur so i had to learn about business i had to learn sort of how to view a problem through an entrepreneurial lens and when i heard that the uk government reached out to you and said hey look we've really tried to address poverty but it's proven to be a more pernicious problem than we could have imagined and so help us look at this from an entrepreneurial lens i want to know why is poverty so pernicious and what is an entrepreneurial lens and how does that help so the first thing i realized when i began to look at poverty and everything it it causes is we have governments and we have philanthropists dealing with the issue businesses are out of it investors around it i was involved in luckily for me being there at the birth of the venture capital industry and contributing to its development it was a new way of funding people who want to make money and i said to myself how can it be that we can't be imaginative enough to find new ways of funding those who want to improve people's lives right so far i'm sure you you agree with me it's a good question so then i said if you look at the way philanthropists work they've led to a system where all the charitable organizations they're funding are small and have no money is that side of a system that works no as i said this thing of just giving money away just doesn't achieve the results the sums aren't big enough either there's one half trillion uh pool of philanthropic money in the world and you got 200 trillion of investable assets so then the question was how do we bring investment to those who want to do good and 10 years later after that call i received from the government in 2000 a team of young people 30 year olds and i developed the social impact bonds where basically we said you can have an investment where you return depends on reducing number of prisoners going into prison reducing number of kids who drop out of school increasing number of people who are off the street and into jobs etc now at that time i thought we found a new tool to help philanthropists because they can now attract investment money on top of the grants they make but then with the passage of time since 2010 i realize the social impact bond really optimizes it tries to give the best balance of risk return and impact and that's the direction the world's going in so what looked like an instrument that was clever to achieve a more modest objective now signposted the way forward to what our economist could do imagine if every company and its investors tried to optimize risk return and positive impact rather than just risk return imagine the change that this would create in pollution alone i'll give you a number just to focus the attention at the harvard at harvard business school i share an effort to turn these numbers we're talking about pollution uh lack of diversity into dollars and include them in the accounts of companies which is what's going to happen we put out the figures for 1800 companies and all of you can go to hbs iwa look up the data set you'll see 1800 companies from across the world with their numbers they tend to be big companies because they make this information available under pressure usually from their shareholders or their boards or all their customers if i say to you tom that 250 of these companies create more damage than they make profit in a year doesn't the light bulb go on in your mind and i say to you a third of them 600 companies create damage environmentally from their operations alone not from you know their product or their employment equivalent to a quarter or more of their profit and that together the 1800 create three trillion dollars of damage a year environmentally you know what does that do to you doesn't it immediately give you a sense of what by measuring i can really begin to understand the scale of the problem and who's creating it and who's able to solve it put a pin in this for people so you are very aware that what you measure is going to become a huge part of this you're very aware that it can create perverse incentives and people have to pay attention to that um the reason i'm not steering the conversation into that is i think the hey we're going to iterate on this over time it's just a question of can we agree that there is a metric that we should be slotting in here for impact and so that makes a lot of sense to me now i want to explain something fundamental to people uh because this believe it or not for me like i learned this really late in life and it might be useful for people so investing is basically hey we have all these people that have made money inflation is a thing so if you put your money in cash over time your buying power goes down so people want to invest that money to make a return bigger than inflation so that they're getting wealthier over time and not less wealthy your parents are doing this with their 401k you know it's not just the ultra wealthy that are doing this so now the sib the social investment bond you've got something where the government participates says we take this money in tax and now we're going to pay for performance which i think is so brilliant so hey less recidivism in the prison system for instance so dear investor i'll give you call it three percent back on your money so if inflation is two percent i'm going to give you three percent so a little more so now you can put money in and actually get a return that's making you more wealthy for making the world a better place and i bring all of this up in the context of i think it's milton friedman who talked about the invisible hand of the market and that notion that buyers are real people with hopes and dreams things that matter to them and that as an investor what we're trying to create here is a way for people to get a return on their capital that actually moves the world forward so just i i want to anchor people on that so they know you're not blind to the potential challenges but that they really understand sort of where this is going okay now i want to talk about capitalism are you a proponent of capitalism is getting a real ugly name these days i think capitalism means using markets and capital to deliver growth and profit in the economy i am in favor of that i don't think communism is better i don't think very prevalent that deeper socialism is better so it's two chairs for capitalism rather than three jobs but we can't let capitalism be driven by profit only we must have markets trying to achieve profit and something good for society or the environment otherwise capitalism creates problems at such massive scale that even governments can't cope with them which is what's happening with our climate challenges and what's happening with black lives matter right so i believe as i say in the book that if we bring impact to the center of our economies by measuring it we begin to change the behavior of the actors in capitalism who are primarily all of us as employees and then all the companies we work for and all the investment organizations and the investors that are funding them so i'm in favor of harnessing capitalism to achieve risk return and positive impact and i actually think tom it's the only way the only way to cope with the huge social and environmental challenges we face governments can't do it companies have to do it and companies won't do it voluntarily all of them very few of them 100 maybe 120 have actually embarked on trying to measure their impact it looks to them like some new idea that is going to make their lives even more difficult but investors want it and when half of all professionally managed money says to companies hey guys you've got to start worrying about your impact we want to know why you're causing so much deforestation and two-thirds of us shareholders vote against the management because what you because of what you're doing through you's obama when that begins to happen companies pay notice and i think most company leaders would rather do good and do well than create problems and make money but it's the power of consumers and employees and investors together that are going to get them to change their their behavior now you say well okay so you don't need government that's your next question i can feel it you do need government because if government doesn't say hey every company's got to report on its impact in the same way just as we do with your financial numbers then every company will pick its own numbers and you'll never be able to compare accurately and investors will make wrong decisions because they don't have the right information fortunately i think we're going in the direction of everyone recognizing that we do need to have standardized measurement of of impact and that it needs to be to go beyond paragraphs of words it needs to go to numbers numbers that you can compare to the profit you're making that all make sense to me i want to go back to something that you said about um communism isn't going to do it deep socialism isn't going to do it why not i want to get to the physics of this like what is it so this is the part of the reason i brought up milton friedman is you have this notion of hey guys humans are a certain way and while wildly complicated and oftentimes irrational there are certain things you can predict in their behavior to me communism and socialism break down because of a fundamental misunderstanding of what motivates humans and how humans begin to game the system um what's what's your take on specifically why those things aren't the solution so we've seen uh in in russia and in other places that communism meaning by that the state owns all of the production resources of a country where everybody is paid more or less the same salary and so on so forth achieves much lower levels of economic growth and prosperity than companies that are driven by the profit motive i think because of what you said because of human motivation because if you plan everything for people you kill innovation and entrepreneurship the ability to think out of the box the freedom to try to execute it and and investors are better judges of what's going to work than governments are and entrepreneurs are better judges of what's going to work than you know the governments are so what i have found is that if you're going to reduce the prosperity that you're creating you won't help as many people what you have to achieve is that increase in prosperity being spread much more widely than it has been to date and as we were saying earlier you can do that by redistribution through tax you know of income and wealth and we need redistribution of income and wealth different countries will give you different proportions but there are very few countries where people say you should have no redistribution of income and wealth if you happen to have got lucky that as i have done and benefited from a great education at the expense of the state and you've made a lot of money you should pay more tax it's fair that i should pay more tax it's fair i was given a hand up i want to give other people a hand up too but if you tax people so much and we've seen it in the u.s and we've seen it in the uk and elsewhere that you take away the incentive to innovate and to put in a lot of hard work and effort to try to build a company up we all end up being worse off or less better off okay so i believe that just as we've evolved as human beings from apes our system our economic system evolves too up until a few decades ago we seemed to be able to cope with the consequences of capitalism we didn't have the climate change problems we have today we didn't have the inequality beginning to create rebellion and violence and dysfunction within our society and political systems we seem to be able to cope but now we no longer come the scale is so great the floods and the droughts and the the fires are so great that they threaten the existence of the planet so hey we got to get going on being wise and creating a system which is capable of taking these consequences into account now the key to all of this is the risk return and impact will actually deliver in my view in my humble opinion better growth and profits now that may sound counter-intuitive because we think of impact that we think the laterally very often but if you look at the changing values that are happening today people not wanting to buy products work for companies invest in them and so on and so forth if they're creating hard and wanting to go to those that are good doing good that's changed the rules of the game and if you add to that the huge leaps in technology that can improve people's lives on the planet artificial intelligence machine learning augmented reality you know the human genome and the life sciences we've never been humanity has never been in a position to deliver impact more widely and more deeply and finally if technology enables us today to measure the impacts of companies then those three things together are changing our system it's reflected in the trillion of impact investment the 40 trillion of esg the millennials and and zgen who don't want to buy products and or work for companies and so on so forth so we are at a turning point in terms of our economic system one thing that i want to um sort of define for people that i think your work in the book impact does is take this philanthropy so my beef with philanthropy has always been it is not a self-sustaining economic engine so for anybody that's ever looked at a philanthropic organization they are constantly going to people who have figured out a self-sustaining economic engine and begging for money and you talk about that in the book you talked about here that you're keeping these organizations really small they cannot take risks um and so it's it's sort of a terrible model all over and the thing about capitalism that works is it i i don't mean this in a in a negative way but i've always said you want to align selfish desires so i'm trying to align my selfish desire for what i'm trying to do in my life with my employees selfish desires with my customers selfish desires so i don't need them to be any more altruistic than their selfishness will lead them to be and find a way for this to perpetuate and that's what i see is happening in what you're pushing for in this movement now i think one of the things that you're going to be up against or we're going to be up against is this is the core of my existence uh is there there is pushback in the sense of communism and socialism sound a lot better than capitalism so the fact that they they have such good pr is uh it's very difficult so i want to contextualize this you were a refugee you had to start over from scratch it's not so hard to believe an 11 year old doing that i want to talk about your dad who's 42 43 something when this is happening what was he saying to you was he like this is unfair it shouldn't be was he hey we're gonna get a new skill set like what what was he saying you know uh my dad uh never complained he told me once uh when i was a little bit older probably when i was 18 or something that he'd walked up and down the streets of london uh wondering what he should do but he didn't he didn't think of implying himself or finding employment he wanted to create a business of his own which he eventually did with my uncle who was a textile engineer and the advice he always gave me is don't work for others you go out and do your own thing and when it was tough and there were partners who didn't believe we'd be successful who left he said to me you just persevered you know you you'll get that my mum was equally important my mum presented everything as a positive challenge a positive opportunity as she baked a chocolate cake the minute we arrived in the uk for us to feel that life and you know i hadn't changed i mean you know she told me that why she did it subsequently she was very courageous about it and she too never complained i mean i guess you you would say she was really a a fighter and what she dropped into me and my brother and so did my dad but she in particular is education is the only possession that can't be taken away from you so having lost everything in egypt you can understand that i applied myself to getting decent education now when you talk in terms of communism and socialism and so on sure my dad could have ended up um working for a company owned by the state and you know he would you know he maybe wouldn't have done worse financially in the end because his venture wasn't a great success but he had this urge to go there create a company do the best for his kids encourage me and my brothers to do the same and i think that's a more natural instinct funnily enough than the instinct to form everybody into organizations that keep them equal human nature is about striving striving for survival striving for success it's all about striving and our system encourages and enables the striving the problem as we were saying earlier is that this driving has been purely material up till now with few exceptions obviously you had the quakers and you had other business leaders who cared about the way they made money and cared about the welfare of their workforce they're always worse but it's only when you begin to think why should it be striving for money alone why shouldn't be striving for money and improvement in people's lives in the planet and you realize that well that's where the world's going that's what the majority of us want and that's what investors are showing that we want and you know and they want and so it's changing whether we're in favor of it or not it's changing the role of companies for the better i love that you have introduced this idea of striving i think that the the recognition that sort of the human brain is wired to incentivize striving right to go out to hunt to survive to fight to live um and recognizing that is whatever structure we put in place is going to need to take that into consideration and when i think about uh the pandemic that we're living through now and coming out of that and how it's changed the way that people do business companies have scaled back and realized whoa we can actually do this they're going to want to hold on to that so now you can have a lot of people that are displaced now here's where when i was saying that communism has good pr so there's a sense of um just it's unfair it shouldn't have happened to me somebody should be looking out for me and losing sight of that humans want to strive i think exacerbates this problem there's a whole meme around learn to code i don't know if you've heard about that but it's people's reaction to say hey you have to re-skill and when i first heard that i i could not fathom that people were reacting negatively to the idea of re-skilling so how do you help people look at like your dad did the need to recontextualize yourself and not come with your hand out asking for somebody to take care of you yeah you know we've gone through periods in history where whole industries have been made completely redundant so just one example the arrival of the motor car killed the horse and carriage industry right you could no longer sell horse whips or carriages and human progress involves this type of destruction as we call it today the thing is it's happening now much faster and much more frequently within a person's life so we have to build our ourselves into people who are constantly sensitive to where the opportunities are and how they can put themselves in the in a position to take advantage of them so in the old days if you were a co-miner coal mines have been there for 100 years the coal mines closed where were you going to find the job today i think we say to ourselves look technology is changing things so fast thick retailing retailing has been transformed now by the internet where are the people who used to work in shops going to find jobs in the future what skills can they have are we going to keep moving towards a service economy where basically machines help us to increase wealth all the time we can all share in it and we look after each other after all we have bigger aging populations people are living longer they have needs in terms of health and so on so forth so we begin to think of reskilling as part of our system it's not unnatural that you should have several careers in you know in a lifetime and so you begin to see the tools of impact investment now creating career impact bonds that teach young people who don't know how to code to code and to get into jobs where their coding skills enable them to make more money me i can give you an example from israel where i sit as we talk today where you have young girls who were top of their class living in villages in the drew's community which is a branch of of islam and they can't go outside of the village for religious reasons but we've created locations for them to work for tech companies remotely about 60 of them will have been trained and got into jobs where they make four to five times the monthly salary they make when they work as cashiers in the supermarket these young women are becoming the bread owners of their families you know so you know of course here you're talking younger people but it could apply to a 50 year old there are lots of skills that you know that people can learn and so we have to think imaginatively if we see the fossil fuel industry going down and we see clean energy going up we have to say well how do we reskill people so that they can find jobs in clean energy what are those jobs going to involve you know is it is it going to be in solar farms that are generating electricity battery manufacturers to store you know that that electricity uh is it gonna be other forms of uh of electricity generation that so you know we're gonna go towards what are going to be the ways of of remedying um you know fossil fuels and similarly uh with the water water is crucial to the development of the world we can't just develop developed economies and forget about emerging countries you see what's been happening with refugees trying to get into europe from africa in search of a better life and then the us from from mexico we have to find solutions for them too those solutions will involve education of these populations which companies in the developed west can create products for as i was saying earlier the ability to use technology to provide remote health remote education and so many other things remotely is greater than it's ever been and so i think tom when you think in terms of of a system that can cope better with these challenges which come from human ingenuity and innovation a system like capitalism which is dynamic and resilient and reactive if it is channeled in the same way will be better than a system where the government tries to plan everything from above but we can wait and see if we find communist systems that work in the future and do a better job of it then we have time to look at their methods and adopt them that is the perfect place to end i love that you put a button on it of what i'll call the entrepreneurial spirit of what works what actually works all we care about is what works so once we agree on what we're trying to achieve then it is merely what is the most effective path to get there sir ronald cohen thank you so much for joining me today where can people connect with you where can they get the book which you should tell people that all the proceeds are being donated i think that's important that's correct to impact charities you can all get the book on amazon uh the ebook is only a couple of bucks so that everybody can afford it uh the hardback is also inexpensive the paperback will be coming out in the united states in a month or so all of the profits are going to all the royalties are going to impact charities spread the word about it it explains how all these pieces fit together and you have each of you a major role to play in this impact revolution as consumers as employers as investors as government officials so let's all do everything we can to bring this revolution about the fates of billions of people and the future of our planet depend on it i love it all right guys speaking of things that will influence the future if you haven't already be sure to subscribe and until next time my friends be legendary take care once you have a fear that you might be wrong but you have still the audaciousness and courage to go forward you're a lot smarter than the person who thinks they know