Triple Pundit recently teamed up with SoCap10 to explore the opportunity and challenge of impact investing. In partnership with Myoo Create, we put a call out to bloggers asking: What’s Next? How will social enterprise unlock the $120 billion market opportunity for impact investment?
Leading up to SoCap10 October 4th-6th, we’re featuring the best answers here. Enjoy!
By: Tevis Howard
Since 2006, I’ve been founder & CEO of KOMAZA a social enterprise that helps African families earn life-changing income through tree farming. We have uncovered 5 key rules to unlock investment capital to deliver maximum impact:
Increase Incomes. The number one need of a poor person is to make more money. People need money for everything: food, education, healthcare, clean water, etc. A social enterprise focusing on only one sector – say, clean water – solves one problem but leaves others unchanged. Only by dramatically increasing incomes can you help poor families solve all their problems. Other good lessons from KickStart. Critically, focusing on income is well aligned with impact investing. Providing healthcare, education, etc. costs money, whereas increasing incomes creates money that can be directed to beneficiaries and investors.
Focus on Impact-First Investors. There are two classes of impact investors. Impact-First investors aim to maximize social/environmental impact while generating a minimum ROI, whereas Finance-First investors strive to maximize ROI while adhering to minimum impact. Many companies, from bednet manufacturers to multinational agrochemical companies, provide goods that have a positive impact. Their traditional business models attract capital from market investors and Finance-First impact investors. In this sense, most Finance-First impact investors are just intelligent traditional investors replacing traditional market capital. While they may claim “impact,” it is not attributable. On the other hand, Impact-First impact investors are unique in accepting greater risk and longer horizons, unlocking otherwise impenetrable opportunities. If we want to maximize impact, we must foster investors who put impact first. The Monitor Institute explains more.
Consider investors’ perspective – develop simple deal structures. Practitioners are experts at developing imaginative workarounds to day-to-day challenges. However, complex agreements are not amenable to investors – while we can bend the philosophies of investment, we cannot break them. Learn how investors would evaluate you and build investment models to fit their frameworks.
Build a World-Class Team. Success is 1% idea, 99% implementation. Implementation requires an awesome team that can deliver. Investors look to see (1) Does the idea have huge potential? (2) Does the organization have a team that can deliver? The founder’s job includes setting strategic vision, fundraising and hiring. Everything else is done by your team.
Reach massive scale. One of the greatest impediments to impact investing is the paucity of deals at sufficient scale. Impact investors can’t afford to hand out $100,000; they may spend that on due diligence and they strive to maximize ratios of action to overheads. In the early days of KOMAZA, I met with a partner at a large fund. He was extremely supportive, but at that point we were too small: he said, “come back when you know how you’d spend $30 million.” Impact investors say they must constrain capital to available opportunities: there is far more money than there are organizations of sufficient scale. In order to attract impact investors you must build an organization capable of successfully spending tens of millions of dollars. Think BIG or go home (or stick to philanthropy). See realgoodnotfeelgood.org for scaling.