How donor grants may unlock billions of investment dollars for impact enterprise.
In 2010, JP Morgan released a figure that shocked the investment industry: the group estimated that the potential capital market for impact investing—putting dollars into enterprises that would deliver positive social impact—was between $400 billion and $1 trillion. Buoyed by the success of the microfinance revolution, philanthropists, governments, entrepreneurs and investors began in earnest to see how else they could do well by doing good.
Impact investors have surged forward with capital, ready to support the pioneering entrepreneurs creating fortunes and development gains at the base of the pyramid (BoP). There are now 200 impact investment entities poised to pour billions of dollars into impact enterprises in the next year. They have cast wide nets, but it is becoming increasingly clear that there is a dearth of enterprises that can deliver both the social and the financial returns the investors seek.
This week, more than 250 high-level investors, business executives, entrepreneurs, philanthropists, and academics are convening in Washington to ask the important question: how can public and private actors work together to unleash the potential of the impact economy?
It is a timely conversation. Monitor & Acumen Fund released a Gates Foundation-funded report this month, “From Blueprint to Scale: The Case for Philanthropy in Impact Investing” (pdf) that warned of an imminent lack of impact investing opportunities. The report breaks down the pipeline problem into three constraints investors of impact ventures face: especially modest margins, long times to scale, and high risk.
Meanwhile, enterprises face their own challenges: difficulty accessing financing, attracting and retaining human capital, achieving economies of scale, creating trust brands, selling to hard-to-reach customer bases with limited resources, high volatility in production, and building high levels of awareness and education—to name a few.
The report then made the recommendation that we at USAID know well: there is a real need for grant dollars and other philanthropic support to reach “pioneer” social enterprises, so that they can develop and test the new business models and forge new markets that will open the field wide for entry.
Put simply, these pioneers are providing public goods when they painstakingly develop new business models to reach the BoP, train a skilled labor force, and cobble together the necessary infrastructure, regulation, and customer awareness that other firms can use. Without initial support from government to test and scale their work, the report argues that “much impact capital will continue to sit on the sidelines or be deployed in sub-optimal opportunities for impact, and fail to achieve its potential in driving powerful new market-based solutions for the problems of poverty.”
We have an opportunity too great to be missed. So, to help impact investors identify winners, USAID, in partnership with the Rockefeller Foundation, Prudential Financial and Deloitte, launched a Global Impact Investing Rating System (GIIRS). The rating system measures the social and environmental impacts of companies and funds, to provide a credible, independent evaluation of impact, as S&P does for credit risk. In just six months, 53 funds with $1.9 billion in assets under management have joined to invest in GIIRS-rated enterprises.
Development Innovation Ventures does precisely what Monitor prescribed for pipeline support. DIV is a special USAID mechanism that directly supports and scales a growing portfolio of cutting edge “impact enterprises” – market-based social enterprises that have the potential to provide financial returns and yield positive social and economic return. DIV’s niche of providing direct grant (and early stage) support to impact enterprises to help them prove their business model and scale fills an important gap for the impact economy sector, and helps build the pipeline of viable enterprises that can attract investment capital.
There’s more good news. Today, at the opening of the Global Impact Economy summit, Secretary Clinton announced a new $44 million Global Development Alliance (GDA) between USAID and the Skoll Foundation and the Skoll Fund.
The alliance marries DIV’s pioneering approach at USAID with Skoll’s decade-long experience cultivating the world’s most successful social entrepreneurs. Through the new alliance, Skoll and USAID will identify high-impact entrepreneurs who have demonstrated innovations and sustainable business models that are ripe for scale. We will expect from every grant an evaluation of their impact using cutting-edge methods that will help deliver lessons learned about what works, to attract even more scaling support for the solutions with proven results.
Bill Drayton, the founder of Ashoka, once said, “social entrepreneurs are not content just to give a fish or even teach how to fish. They will not rest until they have revolutionized the fishing industry.” Inspired by their spirit, USAID is working hard to revolutionize the way we support the pioneers, giving them the chance to innovate, test, and grow. It is the key to unlocking billions of dollars that lie in wait.