Contributed by: Joel Montgomery – Joel recently left Endeavor Global where he was the Director of International Expansion to launch The Secret Sauce Project. His aim is to discover the best practices that set apart the most successful values-based businesses.
Upon the completion of my MBA at Thunderbird School of Global Management, I joined Acumen, a pioneer in the Impact Investing space. I was immediately mesmerized by the promise of social enterprises that tackled difficult social problems with market-based solutions in the areas of housing, healthcare, energy, water, agriculture, and education.
I soon flew to Karachi, Pakistan, for my assignment with Micro Drip, a low-cost drip irrigation company that targeted farmers with less than 12.5 acres of land. I quickly realized my dream to leverage the power of business to lift the poor out of poverty would be difficult to realize.
While Micro Drip had successfully reduced the cost of traditional drip irrigation systems by four-fifths, the systems still remained vastly over-priced for our target market without access to subsidies. The Pakistani government had a massive subsidy initiative in place, but unfortunately, we were unable to access the funds, as it would require kickbacks to government officials. In short, we found ourselves with a product that was simply too costly for our customers.
With each passing year, Pakistan was nearing a massive water crisis and yet we were targeting farmers who had a tiny percentage of the total arable land. Wouldn’t it make more sense to target larger land-holding farmers, thereby placing significantly more land under drip irrigation and setting an example for smallholder farmers? Upon speaking with the other nine Acumen fellows in India, Pakistan, and Kenya, I realized we shared similar stories of struggle.
Business is an incredibly powerful tool for solving problems of all types, but the real power of business lies in its ability of scale. While there are certainly some great success stories of social enterprises that have scaled, they remain the exception to the rule.
In my view, the sector struggles in four key areas: limited pipeline, ignoring business fundamentals, accountability, and pragmatism.
Limited pipeline – There are hundreds of millions of dollars managed by impact investors, yet too few social enterprises.
Ignoring business fundamentals – Too often, impact investors fall in love with a story or potential for impact without conducting an appropriate amount of due diligence. They would counter by saying they do know what they are getting into, and if they don’t invest, no one will. This is true in most cases, but I believe there are numerous ways of having social impact without having to focus exclusively on social enterprises.
Accountability – Impact investing is incredibly sexy nowadays, tugging at our heartstrings and mind. Why aren’t more impact investors coming clean about the struggles in the field? In many ways that’s our fault. Donors that come from the business world are accustomed to the odds in business (venture capitalists are famous for looking for one massive success out of 10), but as soon as they put their charity hats on, most don’t want to think of one penny being “lost”. This causes impact investors to tread a very fine line of owning up to their failures without causing a panic among donors.
Pragmatism – During my impact investing days, I heard too many discussions about whether serving 20% of BoP customers was sufficient. (BoP means Base of the Pyramid, which refers to the 4 billion people who live on less than $2.50 per day.) Why should we fret if a business is serving middle-class customers? Unfortunately, middle class is not as sexy.
We should be careful at constraining ourselves by jargon like BoP, social enterprise, etc. and be more pragmatic about how we view social impact. Impact investing has a place, but I still believe that well-run, scalable businesses can have just as much if not more social impact as most social enterprises.