In his book, ‘A World Of Three Zeroes’ Muhammad Yunus discusses the concept of social business- a new form of enterprise based on the human virtue of selflessness. Investing in a social business thus appeals to both our sense of altruism as well as pragmatism. So it is no surprise that impact investing has been emerging strongly and attracting record amounts of capital in recent years.
How Are Impact Investors Different From Venture Capitalists?
Unlike venture capitalists, impact investors focus on the ability of a social startup to meet its impact goals. For instance, if an impact investor invests ‘x’ amount in a social startup delivering baby incubators to healthcare centers in rural areas, then the investor would want the startup to reach large number of villages and districts with its products and monitor the outcome in terms of reduction in neonatal mortality rates. Such an investor would not necessarily focus on the effect on net profit margins associated with expansion in different target geographies.
“Returns from social enterprises cannot match those from mainstream investments. But impact investment now has a better strike rate than before. Returns may also take longer. It is for this reason that investment in this space is called ‘patient’ capital,” says Amit Bhatia, CEO of Impact Investor Council.
There are many different models that have sprung up around this concept. Bangladesh’s Grameen Bank – founded by Muhammad Yunus, the father of microfinance – do not even expect profits. They only want their principal back. Another model is Acumen’s, which gathers its corpus from philanthropic contributions.
Whatever profit it makes is used on enterprise initiatives and to sustain the fund’s activities. But the majority of impact investors raise funds commercially and believe in profit. Around 70 per cent of their investment is follow-on funding, which indicates their satisfaction with the companies they chose to back. – Source
What Questions Do Impact Investors Ask A Social Entrepreneur?
1. What is your big idea?
For an impact investor, the vision for impact of an entrepreneur should match the investor’s investment goal. Most of the time, investors have priority sectors where they prefer to make investments and are open to promising ideas from entrepreneurs within the target sectors.
2. How scalable is your business model?
Many social enterprises are highly effective in a limited environment, creating a prototype in one village or targeting a niche and narrow consumer segment for their products. As an investor, it is important to understand the organization’s capacity for growth and scale—be it through market penetration, geographic or product extension. Eventually, sustainability is necessary for a long impact delivery process.
Social entrepreneurs are a rare breed. They have a strong willpower to go through the ups and downs before becoming successful. The entrepreneurs who have the conviction to their idea, succeed faster. Focus and the ability to constantly reinvent is what we look for in an entrepreneur. – Dr. Neelam Malleshwari, Deshpande Foundation
3. What is my return on investment going to be?
Although, impact investors give higher preference to the realization of impact goals, eventually, they need to know what their returns are going to be.
Leading organisations like Google, Microsoft, Mahindra, DeBeers, donate grant money to social enterprises on a monthly basis. Their purpose is generally to manage their taxes and don’t look for profits. However, they are keen about knowing how and where their grant money has been invested. Annual reports are deemed necessary by investors and grant makers to know the use of their capital.
There are several individuals and institutions investing their capital in businesses that are creating social change–and these basic questions that they typically ask might help if you are a social entrepreneur.
Cover Image: Students at Acumen.org Fellowship Program