The term "impact investing" is only five years old--hard to believe considering how much the term gets thrown around today. The idea of investing in the hopes of reaping social and financial returns has been around much longer, but in the past half decade, interest in the sector has skyrocketed. There’s just one problem: Investors want to work with socially minded businesses that are already mature, and there just aren’t that many of them yet.
Omidyar Network, a philanthropic investment firm that has been in the space since 2004, believes the problem is fixable. But instead of investing in individual firms, they believe that investors should instead focus on scaling entire industry sectors. Otherwise, these mature businesses that everyone is hoping for will take a long time to arrive--microfinance, for example, has been around since the 1970s, and it’s only now starting to expand its reach.
I spoke to Omidyar employees at the SOCAP conference to chat about their theories.
"A lot of people are willing to invest in investments that generate a nice return. The challenge is that most capital is targeted at businesses that can generate market return and positive social impact. You can only get to that stage if you invest earlier when [companies] are risky, innovating," explains Matt Bannick, managing partner at Omidyar Network.
There are a few ways to "prime the pump" for impact investments, outlined in a series of white papers recently released by Omidyar. The first way, mentioned above, is to invest in early stage, risky businesses that could one day have big impacts on their sector.
Bannick gives the example of Bridge International Academies, a company pioneered a model of private education for the poor. The company’s school-in-a-box training program provides a standardized curriculum for students in the slums of Kenya for a cost of about $4 per month. Early investors got involved because of philanthropic intent--who could expect to make money off something like that? But it wasn’t long before Bridge, which launched its first school in 2009, expanded to 82 other schools. The business is now thinking about expanding to other countries. "Bridge is reaching millions of kids on its own, but its contribution is a pioneering model that others can copycat, refine, and improve on," says Bannick.
And that leads to the second point: According to Omidyar, investors should take more diverse risks using different kinds of capital (grants, high risk for-profit investments, etc.). Political capital should also be considered. In some places, for example, governments support the deployment of solar lighting, but in countries with kerosene subsidies, investors have to take a more active role. "Not everybody has to do both grants and investments, but the point is, investments are required across the returns continuum," says Bannick.
In the mobile money space, Omidyar teamed up with organizations including the Gates Foundation and USAID to create the Better Than Cash alliance, a public-private partnership working across the spectrum--garnering commitments from NGOs, governments, and the development community to implement mobile money; providing policy, financial, and technical assistance to find the best local approaches; and helping to develop new research products, among other things. Omidyar essentially looked at microfinance as a whole and invested across the returns continuum.
"Impact investing has been successful in raising awareness of business and driving positive change, but the emphasis has not been on how to grow innovations so that they’re investable," says Bannick. If investors start doing that, the next big thing in impact investing might grow a little faster than the decades-old microfinance industry.