WANTED: Investors in social impact start-up business ventures

The header sounds familiar to the experienced impact investors, nonprofit organizations, development banks, investment funds and many more in the field of business and poverty alleviation.

The purpose of this blog is to share my experience and views on bridging the gap between a business opportunity, the inclusion of the BoP and the social investors that can make it possible.

 

Throughout 2011, I had the pleasure of meeting a variety of US and European Investment Funds, Impact Investors, Foundations, NGO’s, Entrepreneurs and Corporate Foundations whom all are engaged in philanthropic activities and in impact investment related opportunities. The projected outcomes sometimes dazzles me– ranging from the beneficiaries reached (100.000) – the carbon credits generated (250.000) – to the projected ROI of the business (over 20%).

 

Now these numbers are excellent, even more if it means improving the lives of low income populations in developing countries. When asked for the risks involved, some investors noted that they will averse every possible risk. An minimum ROI and an average EBITDA margin of over 20%, with at least tripling annual revenue by year 3. Even more, with a return on investment of over 20%, after year 1, I wonder whether it is really bridging the gap between a business opportunity and poverty alleviation (the very poor).

 

Let me explain: Most of the proposals that were presented to me, concern service or product provided type of deals – (i) Small farmers have access to purchase (through microcredit) hardware to work their fields, (ii) Urban families have access to mobile banking (once more, microcredit), (iii) poor rural/urban families will use renewable energy (cooking stoves, lightning etc.), poor families will have the opportunity to move out of the slums and live in affordable housing projects, (iv) through microfranchising, the BoP has access to basic healthcare etc).

 

These projects have huge impact, are scalable and replicable as a model. However, the risk associated with (social) impact investing is not very feasible. Most of these projects are service or product related, tackling a need (or demand) from the (previous seen as unreachable) bottom billion.

 

I would like to challenge the impact investment community a bit more.

Think of a joint-venture between an (successful) Entrepreneur from a developed country – already having a profitable international business in high value niche commodity – and a local (producer/wholesaler) entrepreneur in a developing country. Both want to grow and expand their business, however with a CSR – pro poor approach. Meaning that they want to integrate small farmers into their supply chain. Comes along a NGO, that has the network of local cooperatives and farmers’ associations, providing (through international grants) capacity building training of the farmers and basic management of the cooperatives. By combining the strength of the private sector (the business approach) and the experience of the nonprofit working with poor marginalized communities, there a possible match made in heaven…

 

So far, nothing new or innovative, right?

Well, imagine that the nonprofit is able to invest (equity) in the joint-venture, hereby becoming a shareholder and monitoring the input and integration of the small farmers in the supply chain of the company. For the company the participation of the nonprofit with risk capital, gives a boost in the relation and trust that even the NGO sees the business as a viable and sustainable opportunity. Said that, the development banks hereby express their interest to participate, either with a grant (for the smallholders) and/or loan (to the company).

 

Now I’m getting there….

This is a start-up initiative (there is no financial track record more than 3 years of the joint-venture), between two companies (as it happens every day around the globe), the twist is that it entails more risk, because the suppliers are base of the pyramid communities, mostly in remote regions of a country and there is no track record of previous sales. Furthermore, doubling yearly revenue is not feasible, neither a ROI of plus 20%, more likely it will be around 5-10 percent. The estimates are based on current markets and future trends, as to financial records of the individual companies. The commodity irself, is of high potential for the next 10 years (booming industry).

 

Here’s the bottleneck…

With the commitment of the international nonprofit organization, the two companies, the development bank and perhaps one additional local angel investor, there still is a gap to be financed through loans and equity participation. The business plan (with GIIN IRIS indicators) entails the development of an environmental processing facility, including the needed logistics and certifications.

 

The impact generated: inclusion of 2.000 small producers in the supply chain (pilot phase), the generation of carbon credits (which will benefit the marginalized communities), income improvement of 2.000 families, the first business initiative in the Amazon region (with indigenous communities), an environmental friendly ecological footprint, no deforestation of the region.

The projected financials: Third year revenue stream over US$ 4 million and a three year average EBITDA of 12%.

The bottleneck lies in the fact that there is still US$ 2 million needed, of which US$ 1 million is equity and/or debt finance. I’ve spoken to many impact investors, well known foundations (think of PRI’s), however the project is to risk full in their views. I chose not to provide the details of the investors, but here are some of their feedback comments:

 

“It looks like a very interesting and unique model, and one that we hope takes off! After some initial internal review, it looks like the opportunity to co-create with you on these types of projects is not a fit for us.”

 

“Exciting loan prospects this year include a charter school in, a fast-growing company that converts weeds and crop waste into eco-packaging for the food and consumer products industries, and an award-winning non-profit that keeps tons of waste out of the landfills and employs over 30 recovering drug and alcohol addicts.” – United States

 

“From our side, the types of businesses you are describing sound interesting from a social impact perspective. At the same time, these companies would not yet qualify (due to their start-up nature) for our standard loan portfolio. The standard portfolio only invests in companies that have a stable track record, are profitable, have audited financial statements, etc. Therefore, we could only potentially invest in them once they are well past the start-up phase.”

 

 

The model I’m presenting is a different approach on impact investing, it does not concern the distribution of a service or product among the bottom billion clients. This project is value chain integration of the poor. For me it’s the ultimate model of (corporate) social entrepreneurial responsibility. How to include the base of the pyramid, providing them with a sustainable income, training and access to markets through the direct participation of a private sector company with a pro-poor approach of doing business.

 

The return on investment is lower than the average investment in emerging markets, however the social return on investment is just as rewarding. Even more, an experienced entrepreneur with international expansion expertise, will never invest equity from the company if the business opportunity were not to be viable. These are not junior social entrepreneurs that want to make a change in the world – partner up with an entrepreneur that has seen and done it all and now wants to go for the next challenge, within their range of business and expertise (sector).

 

OPIC – Challenge on Sustainable Development

OPIC: Expanding US companies in developing countries through Impact Investing

OPIC has developed excellent tools to challenge the U.S. private sector to invest in developing countries, focusing on niche opportunities in various sectors, combining critical issues and needs into opportunities for the private sector in creating economic growth in emerging countries. Of course, the outcomes have to be sustainable and generate impact to the local communities through jobs, inclusion into the supply chain and transfer of knowledge & technology.

With the development of a new call for proposals focusing on impact investing, OPIC is pushing the boundaries once more, challenging even further the U.S. private sector to contribute in obtaining a higher social return on investment, creating a sustainable model of investing, where low income communities can be integrated in the value chain of a company or industry.

Impact investing involves other stakeholders in the process (proposal), like nonprofit organizations, local governments, multilaterals and civil society organizations. The outcomes goes beyond the creation of jobs or transfer of technology – to create impact on social and environmental level, the private sector needs to collaborate with one or more of these entities mentioned above. Collaboration in knowledge, network and expertise is of important value for the proposal to succeed and guarantee sustainable outcomes for the company (ROI) and impact to the communities in a developing country. Bottom line is that the private sector can’t do it alone; it needs to collaborate with others to achieve impact. I hereby like to point out a few key criteria (in 3 categories) which I recommend to include in the concept or as tools for this call for proposal:

EASY

1) Profile should contribute and/or follow: (i) International standards – OECD Guidelines for international Enterprises on CSR, (ii) ILO declaration on fundamental principles and rights at work, (iii) UN Convention on biodiversity and (iv) Millennium Development Goals.

MEDIUM

2) Supply chain responsibility: The company must be aware (and act) on their role and the role by their stakeholders in the supply chain. For instance: FSC compliance, child labor, quality standard, environmental impact, certification (fair trade) etc.

HARD

3) Multi stakeholder approach: How to include low income communities in the supply chain (?), who is needed for collaboration? If you take an agricultural project where a company invests in setting up a local production facility – how can the company involve small farmers as their main supplier (?), how can the company guarantee production (volume etc) and quality? With whom does the company need to establish a partnership and is there other funding available to assist these low income producers?

4) The role of OPIC in assisting in the multi stakeholder approach: Can OPIC create linkages with institutions (like Inter-American Development Bank, Foundations, NGO’s etc).

5) Joint Venture opportunity with local counterpart: Instead of establishing a local entity of the U.S. company, provide the opportunity to form a joint venture with local counterpart, which has established an excellent track record and is ready to grow into the next phase (the Gazelles). Identification and matching can be done through the U.S. embassies – trade representatives, local federations or chambers of commerce.