The fact that different kinds of companies require different kinds of investment is one that we see on the ground all the time.
On 18 December 2014, the Global Impact Investing Network (GIIN), in partnership with Dalberg Global Development Advisors, released a report that provides a “state of the market” landscape analysis of the impact investing industry in South Asia. The Landscape for Impact Investing in South Asia looks at the $8.9 billion in deployed impact investment capital in six countries – India, Bangladesh, Pakistan, Myanmar, Nepal, and Sri Lanka – and paints a picture of a “diverse but growing impact investing market across South Asia.”
As the report has circulated amongst the Upaya team, four main points have jumped off the page. Some of them mirror observations we’ve seen through our own experience investing in India, and others shed light on issues we are wrestling with. In no particular order:
Two of the top five areas for impact investment in South Asia – Manufacturing and Agriculture/ Food Processing - are directly contributing to livelihood enhancement. That said, they are still only 17% of the identified market.
Broadly speaking, manufacturing and agri-processing are two broad areas under which our team has focused its livelihood development efforts and we are excited to see them crack the top five areas for impact investment.
However, the fact that the two segments combined are still a smaller percentage of the impact investment market than each of the top two categories - Financial Services and Energy – shows that we still need to expand the conversation about job creation and its social benefits in the impact investment community.
“There is also a need to bring less-exposed enterprises into the fold in a number of countries. Even in India, where formal networks of entrepreneurs exist, it is difficult to find enterprises that are not part of these networks.”
This point really hits the heart of one of the biggest challenges in the impact investment space – pipeline. Right now, too many impact funds are only looking at the businesses that self-identify as social enterprises, and are only doing due diligence in that limited pool. The result is a sort of “social venture ghetto” where a subset of entrepreneurs are continually showcased together at business school competitions and conference panels, thus creating the impression that they represent the full scope of social ventures in the space.
Not coincidentally, the investors who have been successful are the ones who have not limited their purview to that ghetto. For Upaya, the majority of entrepreneurs we support do not necessarily self-identify as social enterprises, but simply as businesses operating in poor communities. Friend of Upaya Artha Initiative has taken a similar view of the issue with their Artha Venture Challenge, a competition that has uncovered several great companies outside of the mainstream social enterprise conversation. In both cases, Upaya and Artha have had success in finding the types of investment opportunities that were sitting outside the standard impact investor conversation but are having a positive impact through their work.
“[In India] funds are shifting toward a less opportunistic and more hypothesis-driven approach to selection; in this new approach, these funds start with the identification of a problem in a given sector, then identify a potential solution (hypothesis), and subsequently seek organizations that contribute to this solution.”
Among the team we’ve long been wary of the proliferation of impact investing funds whose portfolio companies are united only by a broad notion of “positive impact” rather than a specific type of change they are working toward. Our concern is that, without a unifying objective, funds will scatter investments across a variety of issue areas and miss the opportunity to aim significant resources at a specific problem.
Of course, Upaya has developed its own hypothesis – support Small & Growing Businesses that can be large scale employers in ultra poor communities – and are pleased to see that others are starting to bring their own theses into sharp relief. I would certainly point to our friends at Omnivore Partners as a great example of what can happen when a fund pursues clear and measurable outcomes in a specific area (in their case, agricultural supply chains).
In India, “foreign funds are prohibited from investing in debt and, as a result, most of the capital from [foreign] impact funds is deployed through equity instruments. Consequently, small domestic funds are emerging to fulfill the need for early stage debt.”
Accessing affordable working capital debts is a continual challenge for many SGBs in India, including some of Upaya’s partners at various points in their early lifecycle.
For much of the past year, our team has worked with domestic lenders to find creative and effective working capital solutions for our partners. What they are now coming to see that, while smaller domestic lenders are playing a role, these funds still have a big gap to bridge if they are to fulfill the credit needs of SGBs. It is an issue that Sreejith, Tanya, and the team are working hard on, and we are all glad to see this observation in the report.
A few interesting articles and a podcast from around the internet.
Exhibit A for the “too much money is chasing too few entrepreneurs” case:
“An April 2014 study by Intellecap, a strategy advisory firm, highlights the gravity of the situation. Of the $1.6 billion invested in social enterprises since 2000, around 70% was in the financial inclusion space (both microfinance and non-microfinance). Of the investments that went into other sectors—including agriculture, energy, education, healthcare and livelihoods—about 67% was in just 15 enterprises.”
The article also does a great job of breaking down fund economics to explain why more patient investments in ecosystem are virtually impossible. Overall, it is a great look at the challenges faced by early stage entrepreneurs in India.
This article is a nice look at how small investments in quality control and chain of custody management allow dairy companies and farmers to profit more from their efforts.
The connection between pro-poor business models and higher-end goods is growing. Here in Seattle, we have Theo Chocolate, a company that is working hard to create maximum social benefit in their supply chain. To absorb the higher costs Theo has had to create a $4 chocolate bar but rather than cutting costs, the company’s founder Joe Whinney has set out to create the best darn luxury bar he can. And Theo is not alone – the work Arthur Karuletwa is doing with Starbucks is very much in the same spirit
This is a fascinating interview with Intellecap’s Aparajita Agarwal as she talks about social enterprise in India, the differences from working in Africa, and the constant battle entrepreneurs face when they’re trying to differentiate themselves.
Most interesting for me was the point about entrepreneurs trying to make their idea feel truly unique. I suspect much of this need is driven by interactions with impact investors and the benefit narrative those investors are trying to build around their work. Unlike traditional investors who can look simply at the financials and management team in their due diligence, self-defined impact investors often need to have their imagination captured by the social benefits of the business. As such, entrepreneurs often try to tell a story about how their product or service is “revolutionary” or “innovative,” when the reality is that their business might be most socially beneficial and profitable if they could focus their efforts on the fundamentals.
There is a saying that has been floating around Upaya for a long time that seems relevant here – sometimes a business is not innovative for what it is doing, but for where it is doing it. This interview shows we might not be alone in that thinking.