The recent devastation wreaked by Hurricane Sandy acts as an acute reminder of the importance of critical services for daily survival – energy, water, sanitation, healthcare, housing. Yet for many of the world's poor, the lack of such services is the prevailing norm. In the absence of public good provision, and with the conventional markets largely bypassing the poor, charities and social enterprises are playing an increasingly important role to fill this gap.
Yet even the most innovative organisations tackling global poverty issues face tremendous funding pressure. Organisations are increasingly being asked direct and tough questions: "What will happen to this programme when our funding ends?" "If I help to grow an organisation delivering critical services, how will it be sustained in the long-term?"
At Acumen Fund, we aim to support financially sustainable and scalable social enterprises that provide critical goods and services in South Asia and Sub-Saharan Africa. Our growth over the past 11 years has coincided with an increasing interest in the field of impact investing as a way to develop new business models with the potential for both social impact and financial viability. The sector was incubated by leading foundations such as Rockefeller, Skoll and Gates, but is increasingly constituted by for-profit funds seeking market rates of return. This has resulted in a growing number of philanthropists seeking to better understand their role in this shifting approach to tackling poverty.
With a portfolio of over $80m invested in 70 social enterprises across south Asia and sub-Saharan Africa, we felt that we had a lot to learn – and share – by closer examination of the types of funding our investee companies had received. We worked in conjunction with the management consultancy Monitor Group, who published a report analysing our decade long work as a non-profit impact investing firm, entitled From Blueprint to Scale.
Without philanthropy, the report concludes, many developing-world businesses serving the poor would never have been able to move towards a point of sustainability or scalability. Local entrepreneurs need funding to iterate their models, which are trying to operate in an area of public good and private sector provision failure. Yet given the high level of risk and the relatively low prospective rates of financial return in these areas, Monitor's Africa research found that relatively few – just six of 84 African investment funds it evaluated – offered such early-stage capital. To address this gap, philanthropy-backed capital can step in and help progress enterprises from earlier stages to where they are capable of attracting growth capital and better delivering social outcomes to the poor. The report calls this funding 'enterprise philanthropy'.
An illustrative example is provided with the increasingly well-known enterprise, Husk Power Systems (HPS) in Bihar, India. HPS developed a pioneering technology to transform readily-available agricultural waste product, rice husk, into gas that generates electricity to a rural household at a monthly cost of 100 Rupees (approx. £1.50), for two bulbs and mobile phone charging station. HPS is on a rapid growth trajectory, having closed a Series A round of funding earlier this year – but to get to this stage of growth, philanthropic-backed capital has played a key role. Since 2008, the UK-headquartered Shell Foundation provided targeted grants of approx. £1.5m ($2.3m) linking to key business step changes and technical assistance support. This enterprise philanthropy, along with other philanthropy-backed investment including from Acumen, has helped HPS to iterate its model so that it can move forward to deliver electricity to more villagers and achieve even greater social impact.
The channels for deploying enterprise philanthropy can be either direct to a company and/or entrepreneur, or through intermediaries such as grant-makers and impact investors. 'Success' can occur in different forms and take years to achieve, but when it comes, it can be transformational. The report notes for instance that the microfinance sector received an estimated $20bn in subsidies in its first two decades of development, allowing "thousands of cycles of trials and error" to refine and test the model.
Achieving successful outcomes for the poor will also come with failures, and patience is essential for this type of work. Yet I believe that in spite of (or maybe even because of) such challenges, philanthropists and philanthropy-backed capital have a critical role in taking on these risks to unleash the potential of impact investing and enable transformational social change.
Vinay Nair works for Acumen Fund in London (@vinaynair @acumenfund).
This version of Vinay's article replaces an earlier version which was published by mistake.
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