Cindy Chen

Social Capital Markets 09: Funding High Impact Ventures

One overarching theme of SOCAP09 has been the question: how can capital be appropriately allocated to the right people in the right format at the right time? Tuesday’s breakout session, Funding High Impact Ventures in Developing Markets, moderated by Pawan Mehra (founder of Intellecap) took a stab at answering this question.

It was an in-depth look at three different firms spanning the social venture fund landscape: Bamboo Finance, Innosight Ventures, and LGT Group. Keely Stevenson of Bamboo Finance kicked off the panel by describing one of their newest investments, Vidagas, which provides propane energy to rural health clinics in Mozambique. While Vidagas has been in existence for several years, Bamboo Finance found an opportunity for Vidagas to expand their propane distribution model from health clinics to low-income, rural households to use as a cooking fuel.

Elnor Rozenrot of Innosight Ventures described an innovative new approach to venture financing, one where the venture fund acts as an incubator and identifies opportunities in underserved markets, builds out the social venture using in-house resources, and then once proven, transfers management to local constituents.

The last panelist, Oliver Karius from the LGT Group followed a traditional social venture model, where the firm invests in social enterprises with strong management abilities and future scalability.

While all three ventures focused on social investments, they each served enterprises at different phases of their lifecycle. Innosight Ventures created entirely new ventures from scratch, using small investments ranging from $5K-$300K. LGT Group funded the next level of ventures around $500K. Bamboo Finance was interested in investing $1M+ in mezzanine ventures that could scale quickly and provide commercial returns. The diversity of social VCs and the lack of standardized approaches pointed towards the relatively nascent nature of the impact investing market.

As the conversation continued, a few key themes began to emerge. The first was the importance of understanding the cultural context of social entrepreneurship. Oliver challenged the audience to question the term “social entrepreneur” as a man selling apples by the side of the road hardly qualifies as an social entrepreneur when the person’s main motivation is survival. Elnor then cited an example of a local entrepreneur in India working at a laundry business for a few hours, making 2000 rupees, and then shutting down operations for the rest of the week as the income was sufficient for his needs. Unlike the western notion of entrepreneurship where one generally works tirelessly to see the business to fruition, entrepreneurs in developing countries can be motivated by an alternative set of factors and view success in a different light.

The second theme revolved around the role of philanthropic capital. All three panelists passionately believed in market forces and often saw instances where philanthropic money distorted the natural workings of the market. Elnor noted that if foundations were more clear about what their priorities were and helped segregate enterprises into different donor pools, it would help the entire social capital market get off the ground. Instead, by injecting grant money into situations where debt or equity financing was more appropriate, the end result was market inefficiencies and often wasted philanthropic capital.

While social impact investing has faced fallout from the global financial crisis, overall the discussion was optimistic and forward looking. For these firms, and the new social venture funds starting at both the global and more local level, it is a time for experimentation and innovation. I look forward to hearing about the new developments at next year’s SOCAP conference.