This piece was co-authored with Nikhil Dandavati.
At a recent conference in Santa Barbara, the billionaire members of Bill Gates’ and Warren Buffett’s Giving Pledge discussed impact investing as a particularly promising approach to putting their considerable wealth into service in a way that would both do good and make money.
Many have made such investments before: the Skoll Foundation has funded industry leaders such as Root Capital and Acumen Fund; the Omidiyar Network has invested in groups such as Mango Money and Tree House. Though impact investing is a new, growing space, investors seeking social impact in addition to financial return will find organizations working to invest in enterprises in ever-more creative ways.
Here we highlight three types of innovation that can serve as models and entry points for newcomers looking to deploy capital:
1) Village Capital, the brainchild of Bob Pattillo and Ross Baird, is one of those innovative models. Investors pre-commit investment dollars to entrepreneur cohorts going through a peer-driven incubation process and then allow the entrepreneurs to select the enterprises to receive investment. Instead of creating a cut-throat environment, the cohorts tend to work together to provide the tough love necessary to increase the viability and investability of every enterprise. From an investor's standpoint, the beauty of this model is that a newcomer to the early-stage impact investing can put a relatively small amount of capital into a local cohort and learn an immense amount about early-stage social enterprises. To date, Village Capital has been able to screen more than 2,000 entrepreneurs for investment using this model and has deployed 26 investments.
2) Another set of funders looks to make working capital accessible to firms in order to avoid a frustratingly common occurrence: businesses using equity to fund low-risk working capital needs. Unlike in mainstream finance in the U.S. and Europe, there are a limited number of impact investment firms that provide strong debt products to growing organizations. Root Capital and Kinara Capital are two such organizations: Root, through partnerships with first-world buyers, extends loans to rural businesses in Central and South America and in East and West Africa that are "too big for microfinance, but generally unable to secure credit from conventional commercial banks." In southern India, Kinara Capital plugs into existing networks of agri-retail, artisan products, and auto-part manufacturing to fund the working capital crunch across these supply chains. Working with various players using references enables Kinara to manage their acquisition and due diligence costs.
3) A third breed of funders takes a different approach to supporting entrepreneurs: building entrepreneurial ecosystems in places that lack structures, including investments, supportive to entrepreneurs. To fulfill its mission of providing quality education to all students in India, Gray Matters Capital (GMC) takes a wraparound approach to affordable private schools by funding a nonprofit rating agency, a nonprofit fellowship program, and a for-profit investment fund to provide those schools with appropriate technology. GMC is also a partner of the India School Finance Company, a for-profit fund lending to affordable private schools. This model has produced high satisfaction among school owners, as they do not have access to any other formal channels to borrow for growth and improvements. Importantly, the joint work of GMC and ISFC has also served as a magnet for entrepreneurs offering services to these schools and for investors ready to deploy more capital to a growing ecosystem.
Much like during the early stages of venture capital and microfinance, impact investing is a hotbed of experimentation, with the added advantage of being able to learn from some of the bumps-in-the-road that those industries faced in their early days. In impact investing, and specifically in supporting and expanding innovative funding models in peer-based funding, working capital loans, and ecosystem-level support, Giving Pledge members will discover ample opportunity to impact the world and support a growing, promising field.
Nikhil Dandavati and Mark Hand have worked as investment analysts and associates at First Light Ventures, a fund affiliated with Gray Matters Capital and Village Capital (mentioned above). These views are their own.