27/02/2014 10:02 GMT | Updated 29/04/2014 06:59 BST

Impact Investing: Should We Take a Risk With Other People's Lives?

The UK Government has announced some very public failures in new models of public services this week, and this begs some questions about failure for all of us investing in social innovation.

First, we heard of the Department of Education's decision to kick academy school chain E-Act out of 10 of the schools it is running. Academies are state funded schools given considerable autonomy by government to innovate and develop their own distinct approach to delivering high quality education. Over 50% of all secondary schools in England are now academies.

Also this week, following the scandal of patient neglect and deaths at Stafford Hospital between 2005 and 2008, Mid-Staffordshire NHS Foundation Trust is to be wound-up with its services transferred to other NHS operators. Foundations trusts are also semi-independent "public benefit corporations" given autonomy by government to innovate and develop their own distinct approach to delivering high quality healthcare.

Both "failures" have focussed attention on the consequences for real people of experimentation and failure in life-critical areas like health or education. Undoubtedly, the consequences are desperately sad for the families of those who died, or for children who don't get the educational opportunities they deserve.

But isn't the acceptance of failure necessary if we are to invest in risky, but potentially life-improving innovations?

I run an impact investment fund, Nesta Impact Investments. We aim to invest in organisations run by exceptional entrepreneurs who have potentially life-changing innovations like: Oomph - improving social care for older people, Patchwork

- preventing abuse of vulnerable children, or Ffrees - improving access to financial services for the poorest in society.

We invest in innovations with very high potential for a positive impact, but where investment is needed to fund the next round of development, experimentation and testing. This is risky, so we have to accept there will be failure of some of the innovations and organisations in our portfolio.

Indeed, not only is failure inevitable where we are taking risk, it is also necessary.

The concept of the "creative destruction" of innovators and entrepreneurs has been around for a long time in private markets, where the downsides of the failure of old models are believed to be outweighed by the benefits of the incoming innovation; but as we've seen this week in health and education such an approach can appear brutal, inhumane or unethical in public services.

But as my colleagues at Nesta argued in The Art of Exit, the failure of services can be necessary, because if we are not able to "exit" from incumbent or ineffective solutions we won't create the space for new innovations to take hold and really achieve a scale of impact that is transformational.

This raises three important questions for us and other investors in social innovation to consider:

  • Is the risk we're taking with this innovation justified by the strength of the need? For example child protection is repeatedly failing vulnerable children because information isn't being shared effectively, so trialling a new tool to solve this is worthwhile.
  • How big is the risk? Or put another way, how strong is the evidence that the social innovation will have a positive social impact and do the claims stand up to scrutiny? Is it credible to believe it will work? Our standards of evidence for impact investing are our attempt to help us calibrate this risk, and they're being used by global education firm Pearson too.
  • How can we support the investment to give it the best chance of success? And, if things aren't working how can we intervene to ensure a managed transition to another approach rather than a catastrophic failure?

We mustn't be scared off innovation by the risk - we need it

In the UK and in most developed economies, big problems like an ageing population, or the skills and employability of young people aren't being solved effectively or in a way we can afford. We have to take a risk on innovators if we are to progress, and that also means there will be failures. The difference between the academies failure, and the hospital failure, is that in the first case there is a managed transition to another solution; in the second it took a catastrophic event to bring about change and that isn't acceptable.