Impact markets made concrete

Check out our demo at impact-exchange.org

In 2022 the Long-Term Future Fund donated $343,000 to MATS; on our impact exchange, that would now be worth over $4 million.

Back in 2017, EA Grants (run by CEA) made an $86,000 donation to what became Lightcone Infrastructure; on our exchange, that donation was worth $6.5 million at its peak.

“Wait”, you might ask. “How are you calculating the return on a donation?”

The problem

We’ve talked before about some reasons we want to bring impact markets to the AI safety funding ecosystem:

• markets incentivize funders to act on good opportunities, rather than playing chicken
• markets have feedback loops, rewarding wise funders with more capital

There are a lot of different ways you could design something along these lines — how would it work in practice? Scott Alexander previously explored ”the annoying details”; this post is our attempt to respond to those and make our vision for impact markets more concrete.

Our proposal

We’d like an impact market system that mirrors how startup funding works:

• Donating to an organization becomes buying impact equity in an organization.
• Early donors to an org can hold onto their equity and watch its value go up as the organization does great things, or go down as it fizzles out. Or they can sell to a later funder.
• The existence of markets gives us real-time info on how funders value the impact of orgs.
• It also lets us measure the records of funders by the value of their impact portfolio.

In this world, people who made prescient early donations would be able to sell out and have a lot more to donate. And the first funder in would get impact equity at a lower price.

How the demo works

It would be great if we had been running an impact market for several years and were now able to look at the results. Sadly, we haven’t. But in our demo, we imagine we had.

The system we use:

1. Pick an AI safety nonprofit.
2. Compile all public donation records.
3. Group into annual rounds.
4. Say that the charity did the following:
   1. Started with 1m shares of impact equity.
   2. In year 0, sold 1/5 of its post-round equity.
   3. In year 1, sold 1/6.
   4. And so on, selling 1/(t+5) each year.
5. Allocate the impact equity proportionally to donors that year.

If an organization raises $1 million in a round in exchange for 20% of its impact equity, that implies a $5 million impact valuation. Existing shareholders’ portfolios are marked at that valuation.

Say that the Widget Research Institute raises $1m in its first year, $200k from Aria and $800k from Ben. In our retrospective model, we say that WRI started with 1 million shares, created 250k for the round, sold 50k to Aria and 200k to Ben. Its current valuation is $5m, because it sold 20% of its equity for $1m.

If WRI raises $1.5m from Charlie the next year in exchange for 1/6 of its equity, its new valuation will be $9m. 250k more shares will be issued and sold to Charlie. Now Charlie owns 17% of the equity. Aria and Ben have been diluted from 4% and 16% stakes down to 3% and 13%, but the value of their holdings is up to $300k and $1.2m respectively, since the valuation has increased.

A system like this is obviously an oversimplification, since in practice orgs and funders would be able to trade at any terms (valuation and amount) that were mutually agreeable. In practice though, in the startup ecosystem, terms for early funding rounds are often fairly standardized. If this becomes an actual market, this could be a reasonable default for new orgs to start your pricing from.

Results

We created a website that does this for five orgs on impact-exchange.org! Right now you can see the markets, leaderboard, and users’ donation records.

You can see the valuation of most of them go up over time. Lightcone’s funder-implied valuation has gone down over the past few years, as Coefficient Giving pulled back from funding them—someone watching the market might see this as a good buying opportunity.

The leaderboard is topped by Coefficient Giving and Jaan Tallinn. You can also see many smaller individual donors who have done well—this includes many Manifund regrantors, as well as Eric Rogstad who made one of the earliest donations to LessWrong 2.0 (which became Lightcone Infrastructure).

Of course, since this only has five orgs, it’s far from showing the full portfolio of donations. We started with Timaeus, MATS, Lightcone, Tarbell, and IAPS to cover some orgs that we had good data on, and are well known in the AI safety space. We’ll be adding more as we refine our approach.

(You can also see this spreadsheet for the data behind the website. Some funders like Longview and Macroscopic don’t generally publicly release their donations, so we don’t have their information for the leaderboard.)

Next steps

We’re hoping this demo gives people a better idea of what an impact marketplace would look like. Here are the next steps we imagine:

• Feedback.
  • This is a first draft; we’re super interested in people’s thoughts on how this should work!
• Good donation data.
  • It was surprisingly hard to get good, complete donation data for this demo, which is the bottleneck to adding a lot more charities. We appreciated grantmaking.ai and Vipul Naik’s donations database, but neither were complete, and the rest of the information was scattered across different websites in different formats.
• Paper trading.
  • We hope to soon have a Manifold-like system allowing people to start placing bids/offers on impact equity, denominated in charity dollars (or completely fake internet points).
• Funder collaboration.
  • We’d like to work with all kinds of funders, from individual angels and donors to large philanthropies, to register their donations on our platform and get credited for their good choices.
• Buy-in from charities.
  • The best test of this model would be charities using a platform like this to conduct their fundraising rounds. This would provide a lot of useful data on how the process goes, whether it makes it easier to find funding, and whether secondary trading emerges.

Please comment below, jump in our Discord, or email [email protected]!

FAQ

What does impact equity measure?

If you own 1 share of a charity, that means you own 1/(shares_outstanding) of its impact, past and future.

Why 20% in the first year?

The norm for startups is similar to this, and it seemed like a reasonable starting point. If someone funds a charity for $1m in the year it’s founded, and the charity exists for 5 years doing $1m worth of good per year before shutting down, then the initial funder makes back their investment, which sounds about right.

Longer term, we hope that funders and charities can negotiate on what % impact is being sold, and report that value to us.

Why does the fraction of equity sold decrease every year?

We think this makes sense for a charity that banks impact over time: the longer it’s been running, the less your donations this year are going to do for its total impact.

How does this work under a 501c3?

In our model, buying into the impact funding ecosystem would be a tax-deductible donation to Manifund. From there, traders can grow their charitable dollars, analogous to investing within a DAF.

Sadly, this means that any amazing forecasters out there who want to speculate on impact equity and blow the proceeds on expensive wine won’t be able to. You won’t be able to get rich in the sense that translates to consumption. But if you invest well, you can get rich in the sense of having lots of funds to redirect to charities! And not having to appeal to purely profit-driven investors makes things easier in various ways.

Who are the final oracular funders?

Idk, who are the final oracular funders in the stock market?

In our vision, there isn’t necessarily one final funder. As we learn more, valuations can get more and more accurate over time. If a funder thinks an org is undervalued at any point in time, they can express that by buying on the market. In our vision, if an org does some research that 10 years later unexpectedly pays off in some way, then 10 years later their valuation will shoot up.

Making the entire ecosystem charitable means there’s less of a need for kickstarting it with final oracular funders already in place. Purely selfish investors might be unwilling to invest without confidence that someone will buy their shares later, but if you’re a donor who wants to maximize their impact, you’re also happy to end up holding impact equity that is worth far more than you bought it for. And in a public market, this can also get you bragging rights.

Of course, we do hope for retrospective funders to provide liquidity, since that’s what allows good early grantmakers to redeploy more capital. (And speculatively, we think the future aligned ASI will be quite happy to pay for your impact.)

How will trades actually happen?

Impact shares can be traded on an exchange or directly between counterparties. Given the analogy to early-stage startups, it’s probably unrealistic to expect impact equity to trade super-liquidly on an exchange. But we think having all trades print on a public exchange would be valuable for dissemination of information.

Will this cause negative-EV projects to get funded?

Because the profits can only be used for more charitable donations, we think this is less of a worry. Someone who is primarily focused on impact won’t want to fund a project they think is net negative. Impact equity could even trade at negative prices.

Of course, normal charitable donations can and do end up funding a lot of things that turn out to be bad for the world. We just don’t think this design particularly exacerbates that problem.