Impact Investment Catalyzes What? Why?

Let’s imagine that one of our desired “Impact Outcomes” is to reduce poverty. How can we reduce poverty? When we look at impact investment (#ImpInv) models, are we financing things that sustainably improve quality of life or aiming for windfall profits with a bit of doing good on the side?

First I’d ask that you accept that the “poorest of the poor” at the very base of the pyramid (#BOP) are not an appropriate target for market-based interventions. This may change in the future, but I think there is a “basic needs” challenge here that can best be served through public-private partnerships and philanthropy. So we’re aiming for the “near BOP” and possibly the #MOP (middle of the pyramid) – basically the working poor and lower income populations that are in some way part of the market economy but not enjoying a very good quality of life. How can we help these people help themselves? Access to affordable health care, housing, education are key pieces to the puzzle, but the linchpin is having a stable source of income.

Figuring out HOW to create affordable access to health care, housing, education etc is indeed an innovation challenge. We haven’t –until recently– tried finding market solutions to help the economically disadvantaged, so it will take some trial and error to figure out what works and what does not. Framed in terms of “poverty reduction”, however, the bulk of our efforts should probably be channeled toward creating sustainable economic opportunity rather than invention and innovation. We do indeed need new inclusive business models whether they focus on disruptive or incremental change, but we also need tools that help grow and sustain local development. We don’t have to choose one approach or the other! We do, however, have to prioritize how we allocate and structure our support.

At the recent IDB Group-GIIN Impact Investment Forum, two interesting points stuck with me regarding financing social enterprise. First, Beth Rhyne of ACCION’s Center for Financial Inclusion highlighted the fact that disruptive innovation can mean changing an entire ecosystem, not just creating a scalable business. Referring to CFI’s Microfinance and Energy Poverty research, she noted that the best solar lantern or cookstove in the world won’t succeed unless the company can convince customers to use the product, develop appropriate payment systems so that customers can pay usage fees, find bankers to finance product acquisition, and convince regulators to permit product use and possibly access to the electrical grid. This “educate everyone” requirement around innovation has costs. Is it fair or reasonable to think that first-movers will cover these costs in a commercial start-up venture? Or that they can deliver excellent results around industry-building activities just because they’ve invented something new?

The second point was raised by Mildred O. Callear of SEAF. SEAF has over two decades of experience financing small and medium enterprises (SMEs) around the globe. Mildred is an EVP at SEAF, so when she talks about enterprise financing challenges, she knows her subject matter. Essentially, Mildred argued that the focus on innovation and scale constrains funding for SMEs. From a policy perspective, single round interventions create expectations that cannot be fulfilled. The SME gets an initial infusion of capital and perhaps some governance or other value-added support. Regardless of how rational and sustainable the company is, mainstream VC/PE investors don’t get excited about high single digit returns and traditional banks still find numerous reasons not to lend medium-term. Financing development requires a continuum of products, not a single point of intervention. In essence, Mildred’s point is that if we keep pushing “sexy” scalable disruptive models, we may or may not get to an “aha” moment, but we will definitely miss opportunities to foster strong and stable economic development.

Key questions here:

1. Are we trying to finance innovation or social change? Are we trying to use the same methodologies and financial instruments to do both?

2. We know VC can work for tech innovation, is it the appropriate financing methodology for other sectors, or for social change?

3. Where incubators and accelerators can play a catalytic role in innovation or social change, is there a viable path to sustainability or just a homerun pipedream? What if sustainability is a very long-term proposition? How does the catalyst cover operating costs in the near term?

4. If job creation is a key social change indicator, do we know what it costs to create a job through one of these catalysts? If we can figure this out, could efficiency of job creation be a good impact metric?

5. If VC funding for companies graduating from a catalyst is the desired outcome, how can we improve post-graduate funding?

Lauren Burnhill, @LaurenOPV

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2 responses to “Impact Investment Catalyzes What? Why?

  1. All excellent questions to be asking. To respond to the first; I think that while financing innovation is still discussed, many have come to the conclusion that impact invest is really best deployed for scaling social change rather than innovation. The risk involved in the latter is just too high. This has led to the trend of making social enterprise startups “investment ready” through accelerators and incubators. I think that many have realized the fundamental differences of financing innovation vs social change and have accepted that different methodologies are required. Beyond this “acceptance” however, (as your following questions so aptly convey) is a completely different story. The ‘how’ , in my opinion, is now the primary debate.

    • You’ve hit on the big need “scaling social change” – I’m just worried that we’re too focused on scaling the enterprise rather than scaling change! There are probably certain things that lend themselves to scale, even international scale – but not everything works that way. “How” is indeed the million dollar question – whatever we’re trying to scale, operational excellence is going to be a core driver of success. I think innovation is important too, but it needs to be part of creating impact rather than the end goal. Thanks for sharing your thoughts! I’ll be throwing out some of my wild “how” ideas in future posts…

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