[MUSIC] One of the important elements in innovative financing is understanding how to adjust a risk/return/impact profile. Let's start with what a risk/return/impact profile is. A traditional financial risk/return axis looks like this. The risk is that the investment might fail and the financial return is what is required to offset that risk. The higher the risk, the higher the required return to offset that risk. For instance, an investment in a US government bond is a very low risk investment. So its return is quite low. A private equity investment on the other hand, is much riskier. So investors require a higher return to compensate them for taking that risk. One of the reasons that impact finance is so interesting is that we add an additional element to the risk/return axis, impact. This impact dimension is measured using some of the metrics that we discussed in impact measurement, such as percentage improvement in income for small holder farmers or the number of additional women graduating from high school. Unfortunately, the impact axis is not yet standard. Although there are industry efforts like the Impact Management Project, that are trying to get some sort of standardization. For now, funders have to determine levels of impact using their own priorities, estimations, and projections. Which in reality is what we have to do with the risk/return axis. We just have more information and standardization on those lines. In order to use an axis that has three lines, we need to connect the lines and look for a way to create the greatest area, based off of our tolerances and preferences. Here is an example of an early stage impact investor that has a high risk tolerance and is impact focused. They would probably be looking for significant financial returns to compensate them for the risk they are willing to take, and will require the project to demonstrate significant impact. Here is what a development funder whose mandate is to build a market could look like. They would be looking at high impact and high risk. But might be willing to take lower return in exchange for crowding in more capital into the market. This would be measured in their impact category. Here's a pension fund that is just getting into impact. They have a low risk appetite and are interested in moderate returns and moderate impact. Now, these axes aren't perfect. There are ways to split the matrices and actually make them more complex. There are resources this week to read if you want to dive a bit deeper. The important thing to know is that different funders come to the table with different profiles. As the person that is responsible for creating your project, it's important to understand your project's risks, return and impact potential. So you can match your project with the right funder or set of funders. The advantage to taking an innovative financing approaching is that you can use this knowledge to create financial structures that help to address some of the risks in your project, and create different risk/return scenarios for different funders. For instance, you might have discovered a source of revenue that is quite stable, like rental of a building, that we talked about previously. If you have funders that are looking for a low risk investment into your work, you could have them fund the debt to buy a building and pay them back by renting it out to partner organizations, and potentially yourself, hopefully at a discounted rate. You might have another funder that has a much higher risk/return impact preference. They might be a good funder for incubating start-ups inside this building. Instead of funding debt, they would take equity in the start-ups. So if they scale, they will get the upsides in return in impact. And if they fail, they'll lose their capital. Now, I'd like to draw attention to the fact that the type of impact is extremely important. If you are approaching a pension fund for South African retirees, they're likely going to be interested in things like affordable housing and access to healthcare in South Africa, the area where their beneficiaries live. If you bring them a deal that is impacting low-income communities in China and has a similar risk/return profile to an investment in South Africa, they're likely to pick the South African investment. If an impact investor is focused on financial inclusion and you approach them with an opportunity in conservation, you likely won't get in the door. The resource mapping that you did last week is essential to understand who is interested in your outcome area and actively looking to provide resources. You can always pull in new types of capital by making the investment attractive enough. But innovative financing is not a magic trick. It doesn't make money appear. [MUSIC]