[twitter-follow screen_name='Sequoia_Lab'] by Eva Yazhari
I have just returned with a fresh perspective from SOCAP/Europe, a conference that brought together leading investors, entrepreneurs, philanthropists, government funders, and innovators in Amsterdam for a dynamic conversation on social impact investing. When analyzing an investment over a range of asset classes social impact investing focuses on the triple bottom line of people, profit and planet. (Think SRI, venture capital, hedge funds, fixed income,...)
SOCAP/Europe’s tag line is “Moving Minds, Moving Money”. During three days spent in a state of constant learning and connecting I am sure many minds were lifted to new heights considering how money can change the world. I am also confident that there is a significant market opportunity for impact investing over the next ten years, as cited in J.P. Morgan’s impact investment research published early last year.
But the cold hard cash has yet to move off the sidelines en masse, and I see this as more of an opportunity than a problem. The question is not how much money will flow, it’s where and when the money will flow.
There is a gaping hole in many developing countries’ small and medium enterprise landscapes due to a lacked access to capital. In research conduced by the Small and Medium Enterprise Development Authority in Pakistan, 53% of applications for bank loans were rejected over a two year time period. Moreover SME’s get priced out of the market in countries like Pakistan where commercial annual interest rates reach 18%.
Many small enterprises in developing nations have built financial and social returns into their bottom lines, the challenge facing such enterprises however is how these social enterprises will be funded in their early stages.
Take some time to think from an investor’s perspective: Which would you rather fund? A business with a clearly defined market for selling solar lamps, a proven concept and tested revenue projections ready to scale to thousands of households? OR An idea and a team of social entrepreneurs that has done extensive research on clean water distribution, and are working in the field to deploy their pilot project?
The answer is simple. VC’s and financial institutions have been investing in the more mature start-ups for decades and there are a handful of well-endowed social impact investors also playing it safe.
One of my colleagues safe guarding billions of dollars recently complained that there are not enough mature social enterprises to invest in. What the market also needs to acknowledge however is that without early stage financing social businesses will never reach maturity.
I am asking investors and philanthropists to think holistically about engaging in social impact investing. Early stage social enterprises should not be left out of the funding continuum that businesses must access to survive. If we do not nurture the best ideas from the beginning, there is no hope of achieving the large-scale change everyone boasts about.
Rigorous due diligence and an intelligent approach to portfolio management should mitigate many of the teeth clenching, sleep taunting risks that come with early-stage investing. Furthermore, foundations and charities are the best positioned to pioneer early stage investing because their capital is seen as grant money not seeking a return. Generating a holistic return would be a bonus to current grant-making strategies.
I applaud some of the early stage funding pioneers such as E+Co and the KL Felicitas Foundation. Their work has served as an example for many, however more players need to participate to move the needle. If we all agree that sustainability is the way forward, then market-based solutions provide one of the most efficient strategies for sustainable development. The steps it will take to solve some the most difficult challenges on Earth require more than talk, more than thought, more than an idea, they need attention from the very beginning.