“Impact” Investor and “Social” Ventures

by: Miguel Granier

There has been a lot of talk recently about what makes a “social” entrepreneur or an “impact” investor. It’s an appropriate conversation at this stage of the game. Neither term is well defined. Unfortunately, ID has neither the resources nor the clout to move the needle on the bigger debate, but we can (and do) define both for ourselves.  More importantly, we put our money where our mouth is. 

We invest in businesses that have to make money to sustain themselves and eventually provide a return on capital to investors. That latter part is the point of controversy for many involved in the field (and related development fields).

For us, the controversy is misplaced. Profits aren’t bad if the company is good. In fact, when a company is good, profits amplify the benefit in two essential ways:

  1. Profits reward investors and managers who take on additional risk. The more they are rewarded, the more risk they are willing to take. That’s important because starting a business in inherently risky. The risk is even higher in less proven markets, like the BoP market.
  2. Profits create local wealth. Good companies (we will get to that definition next) keep management local and compensate them fairly. That creates wealth locally, which in-turn impacts the local economy. It also creates role models who provide inspiration, mentorship and capital for the next generation of entrepreneurs and managers.
So the debate shouldn’t be about profits, but about what makes a good company.
Our philosophy is to keep things simple, focused and to never forget that aligning incentives is more important than predicting outcomes (because the latter is largely impossible).
For its simplicity and focus, we like Michael Fairbanks’ and Seven Fund’s COW-F acronym for good business:
C:    Customers receive a product they value at a competitive price;
O:    Owners receive an above average return for treating people well, taking rational risks and making investments that spur innovation;
W:   Workers are in a clean and safe environment; and receive training and a high and rising wage;
F:    Future generations are served because the company pays its taxes, and doesn’t pollute; unborn generations will inherit clean air and water, and improved opportunity.
One thing to notice about the COW-F is that it doesn’t confine businesses to a given market segment or even to the provision of “beneficial” products and services. That might stir a whole new crop of controversy, but we think it’s still right on.
Our fund, the BSP Fund, is committed to supporting innovative start-ups with mobile and alternative energy technology for underserved markets. That means we do look to serve a specific target market. However, we accept that it’s not always possible for start-ups to immediately address the needs of the underserved. In these markets, distribution is costly, margins are slim and pricing trumps quality/utility and even customer service. 
Instead, we focus on the culture of the business. Specifically:
Do the founders/management…
  1. View their enterprise as an economic development engine? (Or a personal wealth machine?
  2.  Have the will to keep top executive positions in-country? (Or will they be parachute executives?)
  3. Believe in spreading ownership across the enterprise? (Or hoarding as much as they can at the top?)
  4. Have the commitment to forgo personal short-term gain for long-term company growth?
  5.  Have the wherewithal to avoid corrupt, exploitive, and expedient practices?

In short, a good business is one that maintains a sense of responsibility for and service to its employees, customers and surroundings. This is harder then it sounds in a competitive environment that rarely limits negative externalities. Good businesses internalize many more costs then those that are simply profit maximizing, so they have to be more efficient, better managed and retain access to more affordable capital (you can read more on impact maximizing vs. profit maximizing firm here).