Bottom of the Pyramid: Throw Out the Cookie-Cutter Investment Approach

By Abby Callard, Beyond Profit

So, you have an innovative business model that you think will improve the lives of millions of people living on less than US$2 a day? Next step: finding capital.

Finding, and maintaining, capital is one of the most challenging aspects of running any new enterprise, and businesses operating in the Bottom of the Pyramid (BoP) space are no exception. As I pointed out in my first post in this series, reaching this market often requires creating a new business model altogether, and investors tend to shy away from completely new ideas, said Naushir Colah from Aavishkaar at the Srijan Financial Inclusion Forum 2010, because they see them as risky.

Jessica Seddon Wallack, Director of the Center for Development Finance, urges those to “think beyond traditional investments.” Those investments might come in the form of a new type of capital. Two new buzzwords have come out of this idea: impact investing and patient capital. Both of these shun the idea that an investment is a way to make a quick return.

Impact investing rebukes the traditional idea that investing is all about financial return. In this model, investors are also interested in the social benefit generated by their capital. So, they might not see a great financial return on investment, but the social return—such as seeing children from the slums get a good education—is great.

In a presentation to the Indian Philanthropy Forum earlier this month, Ashish Karamchandani of Monitor, stressed that investing in the BoP space is not for those wishing to make a quick buck—even though the recent SKS IPO has investors seeing billions in the business of loaning to the poor.

“No one remembers all the money the World Bank gave [to MFIs], all they remember is SKS and Compartamos and all the money they made,” Karamchandani said. “Microfinance should not be the benchmark.”

Investing in BoP businesses requires patience and an interest in the double bottom line: financial return and social good. Acumen Fund, one of the pioneers in the social investment space, labels this idea “blended value.” Each business is a mix of economic, social and environmental elements.

Acumen Fund, which was founded in 2001, operates as a non-profit that seeks out charitable donations and invests them in private enterprises that promise long-term financial viability, scale and social good. All profits generated from these investments are used to invest in new enterprises. As of 2007, Acumen had invested in 21 organizations that created 16,000 jobs.

Acumen functions as a test of sorts. If the organization can prove its financial sustainability with an investment from Acumen, it can then move on to more traditional types of capital: banks, venture funds, etc.

In a 2007 article in innovations, MIT’s journal, Acumen Fund CEO Jacqueline Novogratz stressed that there is no “cookie-cutter approach” to funding businesses that address poverty. Different goods require different capital. For private goods, where individuals benefit from investment, such as drip irrigation, the market can support the endeavor eventually. But for public goods, such as clean water, the market can never fully support projects. For this reason, diversified capital—high-risk philanthropic capital, high-return capital, government funding and aid—is key.

Finding capital for BoP businesses involves engaging investors who are interested in more than just the traditional return on investment (ROI). More and more investors are looking at ways to get the most out of their money, and that might just be investing in the social space.

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