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Impact Investing

The Trouble With Impact Investing: P1

There's only one bottom line. It ought to be impact.

The Trouble with Impact Investing

There’s only one bottom line, and it ought to be impact. Impact investors need to step back and think about exactly what problem they want to solve.

For all the hoopla, the definition of impact investing is still a dog’s breakfast. Inclusive definitions throw in everything from small donations (huh?) to investments that provide a market rate of return or above (which sounds a lot like plain vanilla investing). Here’s our—the Mulago Foundation’s—working definition: impact investing is the practice of putting money—loans or equity—into impact-focused organizations, while expecting less than a market rate of return. Investments that provide a big return don’t count: the market will take care of those, and we don’t need conferences to get people to put money into them.

On its face, impact investing seems like a great deal—organizations get cheap money (er, “patient capital”) and investors get real impact. It’s great when it works that way, but the case for impact is often dubious, and there is a lot of confusion about when impact investing works and when it doesn’t. What worries us in that not-for-profit organizations in our portfolio are under increasing pressure to take loans, and some have even lost donors to the impact investing camp.

Both philanthropy and impact investing are valid ways of doing good, but applied in the wrong way, either can do harm. For us, the right funding structure is the one that provides maximum impact for the target population. Mulago works to meet the basic needs of people in some of the poorest countries on Earth, and we’ve ended up with a portfolio that is 95 percent philanthropy. Here’s why:

1) Few solutions that meet the fundamental needs of the poor will get you your money back.

Scalable rural livelihoods, basic health care, basic education solutions, clean water—with very few exceptions, you don’t make money off this stuff, sorry. For example, the one education organization in our portfolio is Bridge International Academies, a remarkable for-profit company that provides a high-quality education to Kenyan kids for $4 a month. While they hope for market rate of return, it’s going to be a long time at best, and there are multiple levels of uncertainty. Investors are piling on, though, and why? Because there are very few deals like this out there! Fully unsubsidized clean water for really poor people? Essential services to millions of one-acre farmers? Saving lives from the most common diseases? Forging new distribution channels? Forget it—you’re not going to make any money. These represent profound market and government failures.

2) Overcoming market failure requires subsidy.

A businessman in Africa told me that Coca-Cola lost money there for 12 years. In other words, it required over a decade for one of the most competent companies on Earth to break even on the sale of a mildly addictive sugary drink that is absurdly cheap to make. Imagine what it takes when you’re focused on impact. Microcredit, the iconic impact investment of the last decade, required more than $100 million in subsidies before it became a profitable business—and the impact has been disappointing at best.

When overcoming market failure to reach the poor, it takes subsidy to do the R&D, launch the business, build the market, and sometimes even to deliver the product or service over time. Delivering at a price point the poor can afford almost always translates into very small margins. A good example is D-Rev, a small organization designing products that improve the health and incomes of poor people. They use donor subsidies to design products to the point where they are ready for manufacture and distribution at scale by for-profit companies (and sometimes not-for-profits). Because D-Rev can receive royalties via licensing agreements, funders they approach for grants often want them to take loans. Bad idea. To reach the target population, the margins—and hence the royalties—must be small. D-Rev is designing products that would never be designed otherwise: saddling them with loans simply means that they a) have to jack up prices and/or b) produce fewer designs more slowly.

3) Revenue does not equal profit.

Organizations in our portfolio that make crop loans to smallholder farmers, sell essential medicines, or market tools to improve rural incomes are often badgered to take loans and/or structure as for-profits. There seems to be this idea that if a revenue stream exists, it could be turbocharged to make a profit. That’s simply not so: the best organizations out there—the ones under the most pressure from impact investors—are already operating efficiently, squeezing out as much revenue as possible while serving the target population well. Think of them as businesses generating the most impact, while losing the least amount of money possible. Just give them the money.

4) Impact investing can drive organizations off mission.

All talk of double- and triple-bottom lines aside, there really is only one bottom line. It’s either impact or profit—and the demands of investors can pull an organization away from the target population toward those able to pay more. We’ve seen it happen, and we’ve seen more than a few organizations start in more affluent markets with the intention to move down-market to the real target population when the numbers are right (they almost never do). One thing we’ve never seen is an investor pulling a loan, because of a lack of impact or failure to reach the target population.

There’s more and more talk of blended capital, of a host of investors out there awaiting the emergence of profitable enterprises that will improve the lives of the poor in fundamental ways. The thing is that they’re mostly waiting, and waiting longer than anyone thought. In the real world of the poor, real change still means stepping up with money that you don’t expect to get back, while demanding maximum returns in the form of impact. When you find someone who can do that, just give them the money.

Read more stories by Kevin Starr.

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COMMENTS

  • I agree with all these aspects Kevin, hence finding a balanced portfolio is important if you have to return money back to the investors. If not, then I think this is the perfect opportunity to learn from failures in providing basic services to the poor by taking more risks in disruptive business models than investing in the 5th solar lantern distribution chain.

  • BY Kevin Jones

    ON January 25, 2012 12:45 AM

    I think the choice of impact or profit is far too binary. it can be less profit in exchange for impact, but then you seem to say it’s either impact or profit. which is your real point, Kevin S? And then there are cases where the impact adds to the profit, as in the case of Better World Books, where our costs are lower because public and student libraries and people putting their used books into our growing network of collection bins do that because we can show them what we do with those books; at this point we are giving $5.07 per minute of every hour of every day, or $50,000 per week to literacy; nearly $11 million so far to literacy non profits like national council of family literacy in the u.s. world book in south and central america, books for africa and room to read in east asia. if you immerse your social enterprise in the sharing economy and use philanthropy as an an input, your mission can drive down your costs as people give you things because they trust and see your impact. but that’s a side note to the two points you seem to be making in this piece. is it donation, or simply compromising profits for impact, where necessary that you are advocating?

  • Harry Seymour's avatar

    BY Harry Seymour

    ON January 25, 2012 06:17 AM

    I am about to launch an impact investing organization in Burundi, Africa, and believe that by combining a “return to investors” along with a “social good” more money will be gathered for more good. The impact desired in this model is economic growth (with profit) and the specifics of that growth are determined by the recipients, not by outside organizations. Thus, investing in economic growth activities leads to a return that can be shared. Therefore, it seems to me that some activities fit a business model which can provide a modest return to investors (e.g. local business development) while other activities do not (e.g. dispensing healthcare services). Impact investing and philanthropy can both work to promote better lives for the world’s poor and help ameliorate human suffering.

  • BY Philo Alto, Asia Value Advisors

    ON January 25, 2012 10:02 AM

    With due respect, I’m a bit confused by the article.

    There is no question that certain social issues require government subsidy or philanthropic intervention that commercial investors would not otherwise consider on their own due to market failure or other issues.

    There is also no question that it is a moral obligation as human beings to help address these issues when they can and Mulago Foundation’s work is commendable in focusing on and advocating for providing philanthropic support to organizations that tackle these social issues.

    However, the article begins to be confusing when it conveniently advocates for “impact investing” to also include funding support towards these issues where you are unlikely to get your money back but you’ll have maximum impact. At the same time, it mentioned that for these cases, “just give them the money.”

    This is where there the author seems to want to have it both ways—attracting the impact investment funding into the social issues hounded by market failure while positioning such impact investments as “purely for impact” and acknowledging that one is unlikely to get money back on a risk-adjusted expected return. By framing it in a binary only-impact versus only-profit approach, this will risk alienating the same mainstream investors that the sector has worked hard to attract.

    For example, if one is an institutional investor who subscribes to a blended value approach by investing in an impact fund. This fund has a fiduciary duty to its own investors (such as pension funds with pensioners’ life savings) and it strives to identify socially impactful organization while ensuring it provides flat to market rate of returns on a risk-adjusted basis. If we advocate for this tool—impact investing—to be defined more loosely, it would be a setback for the social ecosystem as more skepticism develops about what the impact investing tool really is, and it can and cannot do.

    It is important that we recognize that not all philanthropic funding tools are appropriate for impact, across the board. While impact investment seems to be buzzword in recent years (it was coined in 2007) that has gained some traction and significant mindshare in the social capital space, it may not be the appropriate philanthropic funding tool for the examples mentioned in this article. There are other tools (and players such as Mulago) whose risk-reward-incentives-motivations may be more suitable to addressing the social issues aforementioned.

    In short, we need to get people to take the right bus for their desired destinations. The most we can do is to let them know what their options are (destinations or social issues tackled), or help create them (social finance tools, including impact investing being just one of them).

    I have also previously written about this topic in my research brief last September 2011 entitled “Impact Investing in Asia: From Definition to Pathways to Scale via Impact Giving”:

    http://www.bellagioinitiative.org/submissions/impact-investing-in-asia/

  • BY Tapan Parikh

    ON January 25, 2012 04:03 PM

    Great, great piece. thanks for making these important points.

  • BY Kevin Starr

    ON January 25, 2012 05:10 PM

    Govind:  Thanks, good points.  We’d love to see impact investors “taking more risks in disruptive business models.”  In our experience, and in the places where we work, impact investors - with some notable exceptions - have been more risk-averse than we’d hoped.

    Kevin Jones:  The case of Better World Books would seem to buttress my point.  BBW is a for-profit company that maximizes profit, then gives a lot of it away.  That makes you, in effect, a donor.  The organizations you fund in order to have an impact are all non-profits reliant on philanthropy.  The fact that people give you their books for free would seem to indicate that they want to be part of subsidizing those charities. 

    Philo:  You don’t seem confused at all.  You put it beautifully: “we need to get people to take the right bus for their desired destinations.”  Financial structures should be designed to achieve maximum impact for the target populations.  Sometimes that means you have to give away your money, sometimes you might be able to get it back, and occasionally (rarely, in our experience) you might even make a bunch of money.  It’s just that in the places where we work, the latter two have achieved a lot less than many would have you believe. 

    There’s no binary impact vs. profit relationship implied here.  Sometimes you can have real impact and make a profit, and even non-profits should be worried about their cost of impact.  However, impact and profit usually exist in a kind of dynamic tension, and when push comes to shove, one is going to take precedence.  We think that if you’re going to call it impact investing, then the one that takes precedence ought to be impact.

  • BY Philo Alto, Asia Value Advisors

    ON January 25, 2012 07:51 PM

    Kevin Starr: Many thanks for clarifying your position.

    It is just that from where I sit focusing on advising philanthropic funders (whether through grants,  impact investing, or other more innovative structures such as social impact bonds) in Asia and encouraging them to be less tools-focused and more issues-focused, the impact investors coming in from the mainstream investing space (institutional types, private banks serving UNHW clients etc) are less tolerant of narratives and want more “show me the money” proof that impact investing is coming of age as an emerging asset class.

    For these investors, when push comes to shove, they’ll focus on their fiduciary duties, as they should !

    However for family offices and philanthropists irrespective of the $$ amount of funding, their motivations, incentives, and risk-reward appetite can be a bit more flexible, and personal, and it is indeed important to increase the awareness of social issues that require a true “impact” funding where one is not likely to get their money back. I just wouldn’t call it “investing.”

    On the flip side, with social enterprises and social entrepreneurs, I’ve always advocated for them to be very clear at the outset as to their SE mission intent and target social issue(s) tackled - to avoid mission drift.

    For your examples mentioned, these SEs should definitely stay focused on impact to be able to serve the most vulnerable/marginalized/poorest segments of the community that the market on its own won’t be able or willing to address (and ignored by government looking at more populist issues to maintain their political legitimacy).  If they lose sight of their mission in order to attract impact investments, they could begin serving one or two steps “upstairs” the BoP pyramid in search for profits and that could be problematic.

    However, if they scale up horizontally serving a broader segment within the same target social issue, then it is indeed good if there will be more Mulago-types of foundations or funders who will help sustain these SEs to scale their mission’s impact more broadly.

    For other SEs, where the social issues addressed are at the tipping point of gaining commercial and/or government funding support, this is where an SE scaling upwards to “exit” into new philanthropic funding sources (including impact investments) would be more socially impactful since the SE has achieved its mission. Not doing so will risk distorting the market at a later point in time when commercially viable businesses can start sustainably providing the same service.

    We need to think more long-term about the development of the social sector and social finance tools, in addition to highlighting an important segment of social issues that you have importantly brought up.

    This means having a more disciplined usage of terms such as impact investing so that the various stakeholders in the space can decide for themselves how and where they can focus their limited resources and mandate scope.

    This is both the price, and benefit, of mainstreaming impact investing as an emerging asset class.

  • BY Isaac Holeman

    ON January 26, 2012 02:38 AM

    Another solid post Kevin! I agree that the number/severity of market failures your organization confronts (related to where you work) often predicts whether you’ll be forced to make decisions in which you have to pick your top priority.

    I also appreciate the comment that revenue is not the same as profit. Earned income has filled a lot of gaps in my nonprofit’s budget, even though we work in a market where relying exclusively on earned income in the foreseeable future would slow our impact waaaaay down. Developing the capacity to earn revenue takes a lot of work though; it’d be very hard to make time for it if we were only funded by granters with no concern for revenue. Is there a term for grants or philanthropists focused on building an organization’s capacity to earn some revenue but not expecting eventual profitability?

  • BY Jonathan Jackson

    ON January 26, 2012 06:02 AM

    Great article Kevin. 

    We often struggle with this at Dimagi; well, we don’t struggle, we openly choose impact, team satisfaction, and profit,  in that order, as our bottom line.  We struggle to fully align all three of those but it may be impossible because our software can’t typically make more impact if we just give it away and provide free enablement services. 

    A goal we aspire to achieve is having relatively high confidence that another dollar in revenue necessarily means more impact, related to your 3rd point.  So, we try to set our corporate goals to maximize every dollar Dimagi spends to have a high value to impact or team satisfaction, and let the profit take care of itself.  This has proven to work really well so far, but isn’t at all an appealing thing to an “impact investor.”

  • BY Gilberto Ribeiro

    ON January 26, 2012 09:50 AM

    I’m anxious to read part 2. Kevin has made a valid point and I agree to parts of the article.

    I just don’t feel comfortable to agree with its binary vision of “impact or profit”. In this case the analysis should be more country, sector and time specific, because in some regions and sectors there is a lot of work to be done in agriculture and sanitation before talking about disruptive ventures addressing education or financial services for the poor.These places are great targets for donations.

    In some emerging markets (such as Mexico or Brazil) we have economic indexes from 1st class countries and social indexes from 3rd world countries. In these scenarios I believe it’s possible to have a double bottom line approach without harnessing the social impact of market solutions.

  • BY Kevin Jones

    ON January 26, 2012 12:07 PM

    Kevin, we got each of our limited partners in GoodCap’s first fund to sign a waiver of the prudent man rule; which states that our fiduciary responsibility is to pursue maximum financial return, if we decided that we had to back a company’s decision to reach scalable social impact in a way that would compromise some profits. Every fair trade investor based in the U.S. has to make that choice (and there are not many of us) does that because American’s just don’t care enough brown people in foreign countries. Another question is what gets maximum impact without having to back for donations, which, ultimately come from someone making a profit. We have giving baked into our companies at every point in the supply chain. If you do not achieve a profit with your social enterprise you are financially dependent on siphoning off profits from somewhere or getting a subsidy. Appropriate profit can be seen as innately virtuous, or at least that’s a position i can maintain for a moment, because it makes the entity generating the impact financially self sufficient. Then how much profit you harvest and who gets it is another question.

  • BY Caroline Smalley

    ON January 28, 2012 12:18 PM

    Great post!

    How about advocating ‘Social Impact Investment Credits.’

    Why this makes sense? ‘The indirect profit investment loop’

    http://thecitizensmedia.com/pub/blog/the-indirect-profit-investment-loop?id=2155

  • Jim Fruchterman's avatar

    BY Jim Fruchterman

    ON January 31, 2012 03:36 PM

    I very much enjoyed this perspective. Criticism is a powerful force for improvement.  I like Kevin Starr’s identification of sub-market returns as a key indicator.  I think that most of the folks who think they can solve poverty and make returns comparable to venture capital are mostly going to be disappointed. 

    My experience with the typical impact investors fall into several bins:

    1. Affirmative action investors.  Also known as “not one basis point for social good.” These are the people who are looking for the big returns.  But, as Kevin Starr points out, deals that make big returns will get done without the social benefit whipped cream on top. 

    2.  Talking about loaning money where it doesn’t make sense.  Many kinds of companies aren’t good candidates for loans.  Companies without good assets for collateral, for example.  A software company needs capital to pay for developers and marketing and sales.  Venture capitalists don’t lend money to software companies because the software source code is not good for securing a loan: they want equity and a big upside for their investment.  So, I try to stop the conversations before we waste too much of each other’s time, because I don’t think any investor in their right mind should provide a loan for software development.  Real estate deals, receivables, microcredit loan portfolios are much better impact investment opportunities for debt (and I think rightly so).

    3. Impact investing uber alles.It slices, it dices, it makes julienne fries.  We have a new hammer, and everything looks like a nail.  Impact investing is great, and I think it’s fabulous when someone loans money at 1-2% interest and that money gets used to power up the scale of a great enterprise that builds assets for the poor.  Or when Kevin Jones of Goodcap convinces a group of investors to take a much bigger risk of sub-market returns to go after deals other investors won’t do (and then makes market returns: that’s pretty cool!).  But, it doesn’t solve all problems. I haven’t run into an impact investing deal that directly deals with large scale human rights violations.  There are simply many social goods that haven’t yet proven amenable to a venture that will attract impact investors.  That doesn’t mean we shouldn’t try to solve those social problems.  Which brings me to my last group.

    4.  If you only did X instead you could be a candidate for an impact investment!  Also known as: forget that market failure you’re targeting, there’s a juicy market over here.  Yes, I know there are juicy markets over there, but as social entrepreneurs we’re interested in fixing the market failure and making impact at scale.  I recently pitched an impact investment person with what I thought (and still think of) as an incredible opportunity for impact helping local governments.  Their response was that I should target big companies, not local government.  And, they were right.  Of course, I know there’s already at least one big venture capital-backed startup going after that big company market.  I have no interest in duplicating their work: the market is already working there. 

    From my experiences, I certainly get where Kevin Starr is coming from. 

  • BY Jessica Thompson Somol

    ON January 31, 2012 07:51 PM

    This is the most refreshing piece I have read in a long time.  As Development Officer for Containers 2 Clinics (C2C), I am constantly challenged to articulate how our model will be financially self-sustaining while reaching the maximum number of women and children with our maternal child health clinics.  Health care is notoriously a “loss leader” in the financial investment sense yet, I would argue, yields the largest “returns” for women and children since the cost of primary care delivery and education is minuscule when good health pays dividends every day. 

    We are aggressively trying to determine what the right balance is between basic fee-for-service models which can recoup some clinic operating expense and long-term sustainability models such as franchising.  I am not convinced that the number of successful “exits” to franchisees is the goals here.  Shouldn’t it be to treat as many as women and children as possible in the most financially-sustainable way possible?  It’s very easy to succumb to the demands of donors/investors who are looking for a certain financial return when most of the population we serve lives on less than $2 a day.

  • Nachiket Mor's avatar

    BY Nachiket Mor

    ON February 12, 2012 03:18 PM

    As somebody closely involved in developing solutions for the provision of comprehensive primary health care on the ground in rural India, much of what Kevin Starr has to say resonates with me.  However, the challenge in India, with its very large population, is that pure philanthropy simply does not have sufficient resources nor does the impact investing group have sufficient investment capital, to deliver solutions at the scale needed.  This reality to me suggests that while these two spaces are perfect for fundamental design and innovation work and perhaps immediate relief work, scaled solutions will have to come either from the government or the traditional for-profit corporate sector.  And, if the largely risk-averse Indian corporate sector has to get involved, then I feel that we may have no choice but to overcome the challenges outlined by Kevin Starr and actually find ways to make it profitable to address these markets. 

    The Indian experience of the telecom sector and for-profit Grameen Replicators suggests that it may well be possible to compensate for low per-customer margins with the very large volumes to produce profits that would be attractive to mainstream investors as long as the customer margins are at least slightly positive.  Both these sectors charge some of the lowest rates in the world but have become extremely profitable because of their efficiency ratios and very large volumes to the point that some have even been accused of profiteering and usury.

    Can this experience be taken to other sectors such as clean drinking water, rural tourism, craft and agricultural produce marketing, distribution of rural energy products, rural tourism, vocational training, and rural healthcare?  It is not clear to me that it can, for all the reasons that Kevin Starr mentions.  However, abandoning the search for such solutions, for the reasons that I mentioned earlier, to my mind amounts to concluding that these products are services simply cannot be delivered to most Indians in the foreseeable future.  I find it hard to accept such a conclusion.

  • BY Thien Nguyen-Trung

    ON February 12, 2012 04:00 PM

    I feel two points made in this comment dialogue are worth re-stating because they are indicative of the confusion of expectations around impact investing.

    First, Philo’s comment, which I quote: “[...] it is indeed important to increase the awareness of social issues that require a true “impact” funding where one is not likely to get their money back. I just wouldn’t call it “investing.””

    Second, Jim’s comment: “I think that most of the folks who think they can solve poverty and make returns comparable to venture capital are mostly going to be disappointed. “

    They boil down to an issue of getting too excited about a label without being careful about the consequences (i.e., confusion): impact investing too early promised too many people that the sweet spot for social and financial returns exists and is sizable.

    At the same time, little progress has been made to clarify where the work of social entrepreneurs ends and the work of small/medium size traditional businesses starts (usually in developing countries). I have a feeling that people were most excited about impact investing as it could refer to targets among the former (SEs).

    As for the latter, I think we have had plenty of investors in emerging market SME space who have made attractive risk-adjusted returns, like Small Enterprise Assistance Funds (SEAF), for many years already. As far as I can tell, they don’t think they call themselves impact investors.

    Yes, there are instances where financial return is “juicy” as Jim Fruchterman puts it, but it is rarely those places that we would consider the domains of social entrepreneurs anyway. Hence, philanthropy continues and will remain a critical player for the foreseeable future. Sorry to the media if the term “philanthropy” simply hasn’t been as exciting as “investing” - but it still does the work!

    On the other hand, I feel that the same philanthropists, while conceding the term “investing”, have a tendency to want to “own” the definition of the word “impact”. For them, “impact” appears to usually not be the work of SMEs named above as much of heroic social entrepreneurs.

    The result, I suppose, is a market place where the majority of so-called “impact investors” are likely left with philanthropic portfolios like Kevin Starr’s while turning over every rock to find those “juicy returns” with which to appease the investors among their funders. In other words, I don’t think the market is there yet anytime soon. Thus, financially driven impact investors should either simply stretch their definition of impact to the SME model or otherwise risk being disappointed as Jim Fruchterman aluded to.

    But having their cake and eating it is just not likely going to be in the cards for today’s impact investors.

    Kevin, I don’t know what your Part 2 will deal with in this series, but I would answer that one real “trouble with impact investing” today is that we all seem so wound up about trying to find for the “big” institutional investors some meat to chew on (juicy returns) that we get desperate if we can’t seem to find enough that qualify. But if we rush this and start “investing” in the wrong firms by giving them loans, etc. that are just not the right instruments, we risk causing failures down the line from which it will be difficult to recover from in terms of credibility with already skiddish investor types.

    On my blog, Good Generation, I recently featured a “6-step process to impact investing careers” article series which essentially tries to tell young professionals interested in working for impact investors to thoroughly assess their employers’ attitudes, beliefs and assumptions before joining them.

    One conclusion is that I simply feel we need a little more humility here by practicing fund managers to recognize that we cannot yet speak about “investing” the way we have used the label in terms of returns. In the end, there is no immediate revolution that will yield social entrepreneurs who will produce those terrifically profitable firms. Hence, I’d rather the impact investing “field” grow slowly and carefully with credible and consistent stories than trying for slam-dunk investments that go sour later.

  • For me, impact investing is an experiment in persuading capital that otherwise would not be available for a social entrepreneur or enterprise. The intention is to attract new capital from the mainstream investing space. If it works, it will add billions of capital to complement philanthropic grants.

    But most of us in the field know that there is no holy grail. Talk about above market returns is just that. More likely the returns are below market for the risk assumed. Hence the need to add social and/or environmental impact to the equation. In other words, don’t worry if your financial returns are below market because you should be looking at total returns (or blended returns) that include social impact.

    For this experiment to succeed, we do not need to demonstrate “market returns”, which is a rather ambiguous term anyway. The challenge is to show uncorrelated returns to other asset classes. If this can be proven (and this will require many more years of data then we currently have), mainstream money will flow in.

    Until then, the trouble with impact investing is that many people are either misunderstanding or worse misrepresenting what it. Kevin should be applauded for pointing out some of these common misconceptions.

    But please don’t get be wrong. I firmly believe impact investing is an experiment worthy of all our support.


  • BY Aaron Hurst

    ON March 19, 2012 02:44 PM

    We look a lot at investment of start-ups but much of the problem is actually with converting the GE and Apple’s of the world into impacted oriented organizations.

    Was interested to learn recently about Bosch and how the majority of equity in the company is owned by the foundation and not private or public investors.  This creates a cycle of investment and enables the shareholders to be more patient and looking for corporate outcomes more aligned with community need.  Might this approach be a way to have already successful companies have an exit strategy that is more compelling than an IPO?

  • BY Ruban Selvanayagam

    ON March 23, 2012 07:46 AM

    Much of what has been stated here seems to revolve around the conflict of balancing bottom lines which, to me, demonstrates the immaturity of the impact sector and the ongoing prominence of philanthropy in dealing with issues in the poorest parts of the world.  Related to this, there have also been very few impact business models which have demonstrated clear results at a scale needed for it to be measured and progressed as a mainstream asset class.  Bearing this in mind, I believe that to rule out a genuine triple bottom line strategy in sectors such as health, education, water supply etc. is a premature assumption.

  • Definitely appreciate the piece, particularly Philo’s contribution to this discussion.  I’m of the mind that “impact investing” is within its infancy, and is currently transitioning away from its philanthropic roots (which was never scalable), and is evolving into an additional market-based mechanism of accountability within existing capital markets.  Under this application, we will see the greatest rewards - those being social, environmental, and financial.

    I’m anxious to see what’s introduced to the discussion in Part 2.

  • BY Martin Short (Lions Head Global Partners)

    ON April 20, 2012 12:58 AM

    My experience with this sector to date can be summarised as follows.
    VC’s/Philanthrocapitalists may present the rhetoric of a Damascene conversion on the road to Impact Financing - yet the belief in endless growth and security in a capital structure lies just beneath the surafce….

  • If one were to ‘segment’ the poor market into very poor, poor, and not so poor, then different strategies would be needed to accomplish the same good for all. For the very poor, the basics ought to given, a handout if you will, so that they have food and shelter and protection and then skills taught for livelihood. For the not so poor who might have a little bit of income and a place to crash we would need more advanced skill development, a trade so to speak, and connection to systems such as employment bureaus, education, basic health care and finance while they build some capital to put down on a home etc. The poor would have some combination. At some point in this development profit motivation can creep in and that is OK, but probably not at the bottom and not right away.

  • If there is sufficient revenue flowing through the sector then impact investing can trigger a profitable cycle that scales. In cleantech, healthcare, and agriculture in mature economies impact establishes new patterns that are profitable. In bottom of the pyramid there is not enough revenue for impact to be an investment.

  • BY Amin Beg

    ON April 10, 2013 03:24 AM

    The morality of giving and philanthropy and the efficiency and effectivness of applying such money to create high impact vs the cruelity of market and market forces towards micro and small investors, as well as vulnerability populations and habitats, and the failures of government regulatory systems, led us to a hybrid environment, which gave birth to impact investing.

    This is called emerging market, which has obviously emerged in this vaccum, and has seen growth over the last decade or so, and is projected to be growing over the next decade.

    However, as the efficiency and effectiveness of applying aid money improves, and creates larger impacts by slashing large bureacracies of charity organizations, as the markets become socially and environmentally responsible, and as the governments redefine their regulatory and fiduciary roles, meaning as they mainstream impact investing in their current systems, space for such markets as separate identities will decrease, giving birth to new ideas like impact investing plus.

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