Yesterday, Economic Times in India reported that while the country is still recovering from the recent burst of the micro-finance bubble, a new one may be in formation. The social entrepreneurship and more importantly, impact investing bubble. India is believed to be a crucible for innovative social entrepreneurship and any sway of interlopers can be disastrous.
Within the report, three key concerning insights around impact investing in India were shared that are worth noting:
1. Two Approaches to Impact Investing – Impact First v/s Profit First
Economic Times states, ” Within the sector, the principal segments are the ‘impact-first’ types, focused on social good and willing to give up some financial return if need be. Then, there are the ‘financial-first’ type commercial investors who would like market returns while doing some good.
In an industry that has grown rapidly, the problem is that impact investing continues to mean different things for different sets of people and geographies. Investors fall into different parts of the investing spectrum, but all swear by impact. However, the impact-first types are a minority and that is part of the problem”
It is for this reason that at Ennovent, we give priority to impact. This priority should not be just a statement but rather proven through actions. For example, several investors claim that their priority is impact but they commit commercial returns to their investors and their investors (LPs) may not be “impact first”. Ennovent works with like-minded investors and stakeholders to ensure there are no pressures to deliver on financial returns that compromise on impact. We commit muted returns to our investors which are aligned with the expectations of this sector.
2. Blurring Impact
Economic Times further adds, ” The noise around impact investing reached a crescendo in November 2010, when JP Morgan categorised it as a distinct asset class and estimated an investment opportunity between $400 billion and $1 trillion (about Rs 20,00,000 crore to Rs 50,00,000 crore) over the next decade. The study also indicated that in emerging markets, impact investments could fetch annual returns of 8-11% for debt investments and 20-24% for equity investments. It was music to all kinds of investors.
However, this new community of investors means that social entrepreneurs get deeper into the fundraising trap by focusing everything they have on generating revenues. Further, the measurement of impact continues to remain an area that lacks rigour with many investors getting away by appropriating the combined outreach of their investee companies as their impact. This, says Vineet Rai, Founder and Chairman, Intellecap is a questionable approach”.
At Ennovent, we believe that it is important to have quantitative and qualitative impact measurement methodologies put in place to ensure tracking of impact. Moreover, to tackle the issue of blurring impact, we spend a lot of time with entrepreneurs to make sure that “impact” is important for them and they are not looking for easy fund-raising for their enterprises. We understand that balancing purpose and profit can be a fine line to tread whilst scaling which is also why we ensure that future round of capital raising is done by like minded investors that will ensure that the company doesn’t change it’s mission in due course.
3. Diluting Ownership
In the jostle for fund-raising the article continue to report that “Entrepreneurs are diluting equity holdings, some to the extent of 70-90%, exposing themselves to the risk of being marginalised within their own companies. For social entrepreneurs, this could translate into a mission drift, as they begin to cut corners and follow investor directives that may be inimical to the long-term interests of the company and the sector.
However, when a promoter is diluted, it can lead to the appointment of a new CEO who may be driven only by his salary and the usual top and bottom lines.”
At Ennovent, we take this gap quite seriously. It is not about maximum stake but rather about investing what is justified for the enterprise to reach its milestones. We keep in mind that company will be raising further rounds of capital in future and the promoter will be diluting their capital. We therefore work backwards and ensure that the promoter is incentivized for the long term in the company.
Bill Drayton, chair and CEO of Ashoka-Innovators for the Public, who coined the term ‘social entrepreneur’ decades ago, has an answer for the tremors beginning to rock the sector. He likes to look at the big picture and insists that it is about time businesses, social enterprises and even governments organised themselves differently. The old order has to give way to the new; and the new value is “contributing to change.”
The report ends by claiming that a combined, collaborative approach to problem solving is therefore the way to go. From being competitors to occasional collaborators, social enterprises have to become active contributors to building a whole new field of activity. And, at Ennovent we agree with this thinking.