Increasing the Impact of Social Investing

Shama Karkal, Madhavi Jayarajan, Swasti Health Resource Centre

Social impact investors generally want to “do good while doing well” - they want to make a return on investing in companies, products, and ideas that will benefit the world’s most poor or marginalized “Bottom of the Pyramid.” In other words, social investors provide capital to businesses that intend to generate social and/or environment impact, expecting financial returns. Social investors are ideally poised to understand both the commercial as well as the social aspects of the entrepreneurial model, and can provide the new endeavor with the money and time to prove its potential. The common term used to define social impact investments is Patient Capital.

A Forbes article claimed that “Impact investing is poised to change the trajectory of poverty, crime, homelessness, education, green energy and much more. It just needs to be unleashed.” According to the article, J.P. Morgan and the Global Impact Investing Network fund nearly $46 billion in sustainable investments under management

Social Entrepreneur Perspectives

The diversity of investment firms means that the relationship between the investor and their investments is varied and dependent on many factors such as ticket size, payback period, return ratio, work dynamics, and decision making. Given this lack of uniformity, we spoke with a few Indian social entrepreneurs in health who had either received impact investments or had been through the process of raising funds with an impact investor, to tell us about their experiences. We’ve summarized their responses on key questions:

Q: Is a social impact investor different from any other investor?

A: The obvious answer is the focus on social return in addition to the financial return. Due to this focus, impact investors provide smaller sums of money at an earlier stage, making it an advantage. Social investors usually expect a lower rate of financial return, have a say in decision-making, and have clear-cut social objectives defined as milestones, which are used to monitor progress.

Q: How is impact defined by social impact investors?

A: ‘”If there is no clarity on the social aspect then I would rather work with a commercial investor who is clear on his financial requirements and does not get too involved in the social impact the model intends to create’” says one of the entrepreneurs. The consensus among social entrepreneurs was that while social investors were interested in impact and social objectives, definitions and measurements were non-existent. This leads to two situations – one where the focus becomes the financial returns, making it just like any other investment relationship or two, where the investment becomes muddled because of lack of clarity on the social objectives.

Q: What would entrepreneurs like from impact investors?

A: First and foremost, entrepreneurs would like clarity on the intended social objectives i.e. impact goals and want them to be well-defined and measurable. It is imperative that investors have a comprehensive understanding of the complexity of the business model and the environment where it is being implemented. While higher returns can be delivered, the time frame and expectations are more reasonable when impact investors have an in-depth understanding of realities on the ground. For example, caste is still a reality in most of India and breaking this barrier is about social engineering, something that a lot of business struggle with. Social investors should see that money is not the solution to all social problems. Therefore, investors with a comprehensive understanding of the social issues and the goals they have for impact are more desirable to entrepreneurs.

Creating an Environment for True Social Investments

Our interactions with entrepreneurs and investors suggest that while there is intent with social impact investing, the social impact is yet to be achieved. Social investment is about identifying people doing good work and supporting them. A typical investor’s outlook is based on the 3Ms – Me, Money and Moment – but this outlook is a threat to the social sector. While increased risk often means higher returns, the 3M outlook has to give way to one that upholds the social objectives as well. Thus, we must redefine a social investor to reflect efforts to promote impact that truly does good, for the poor and the marginalized.

1. Who is patient.

2. Who looks for financial returns but looks at a long term return i.e. true patience.

3. Who comes with an understanding of both worlds – business and social.

4. Who has clear social impact vision that is not narrow but is framed through a thorough understanding of the social sector.

5. Who is able to understand the challenges of an entrepreneur in the social space.

6. Who is there to support ongoing good work and not just to push his own agenda on the ground.

Maybe it is time to redefine social investing. An investor need not necessarily have to bring money if he is able to help generate money and improve people’s standard of living. Investors who don’t just see fortune at the bottom of the pyramid, but who aims to bring people up the pyramid are true social investors. Investors and entrepreneurs need to understand both worlds – the world of finance and business as well as the world of social development – so that decisions are made which are favourable to the goals of the social enterprise, ideally benefitting the poor and marginalized. There is a need for clear frameworks for social investments that look at impact with a people-centric approach and give clarity to the purpose of social investments, thus strengthening the means to the services and not just the services.

The development of this article would not have been possible without the valuable inputs from programs namely Nationwide, Mera Doctor, Life Spring and Sevamob (CHMI programs) and Neurosynaptic Communications Pvt Ltd. on their experiences of working with social investors. Internally we would like to thank Mr.Sandip of Catalyst Management Services for providing insight on impact and its understanding, Emily Madsen for editorial support and the founders of the catalyst group - Mr Shiv Kumar and Mr. Raghunathan for their guidance and support.

References:

"When Can Impact Investing Create Real Impact? | Stanford Social Innovation Review”, Paul Brest and Kelly Born. 2013. 

"Is Social Impact Investing The Next Venture Capital ? Forbes Opinion”, Sir Ronald Cohen and Matt Bannick . 2014. 

 

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