At a recent large social enterprise forum, I couldn’t help but ponder some of the hype around impact investments and social enterprises: “Are we creating a bubble ecosystem? Are opportunists capitalising on the hype? Is this sustainable?” According to recent statistics, in 2009, the impact investing sector in India was valued at $50 million. In 2013, impact investors committed $390 million in India. That’s a whopping 680% increase and any industry would be proud of this type of exponential growth in five years. India is a lucrative market for impact investments because of its large population, a multi-layered economic class structure and for the unique needs of its urban versus rural communities.
In the last decade, concepts such as social impact and impact investments were talked about with more certainty. Investment circles started to believe the idea that societal impact could be made by commercial investors, who were willing to take a smaller return in exchange for social good. Business education has also seen major changes. More B-schools today teach entrepreneurship as a subject or as a module and increasingly social entrepreneurship is making its way to most B-school curriculum, both in India and abroad.
Impact investment brings together three groups. The impact investors, who believe they can earn financial return (albeit less than commercial investments) while investing in firms that deliver significant social return, the social entrepreneurs who own or operate a business that has a specific focus on delivering social and environment benefits over and above generating financial returns; and the deprived denizen of lesser developed nations who either expect their governments to provide for them or make do without it.
Over the course of the last decade, interest in this space has increased with a crop of new impact investors who look to social impact businesses for that ‘feel-good’ factor while earning back on their investments. In fact, the social impact investing landscape has exploded: more investors, more types of investments: seed funds to social bonds, more ecosystem players: from incubators, accelerators to associations and membership groups, and ultimately more entrepreneurs attempting to solve many of the world’s pressing challenges.
I should be feeling nothing less than high optimism about leading a successful social impact business in India given the industry’s growth. Then why did I find myself perturbed with the goings-on at the recent forum? Even global philanthropy is diverting capital away from traditional charities to impact investments. And now, according to a new law that just passed in India, all firms of a certain size will have to set aside 2% of their net profits as part of corporate social responsibility (CSR). This is spinning out a new industry of experts, of consultants, of grant writers, all focused on helping social businesses access CSR funds.
As with any new industry, as soon as there is some buzz, an ecosystem evolves — international conferences, technology platforms, incubators, accelerators, fellowships, etc. They all serve a purpose and help connect learners, entrepreneurs, educators and investors.
At any conference, the discussion remains: how do investors in San Francisco or Switzerland locate a good social business in a developing nation to fund? This has spawned the use of technology platforms for connecting global investors to global social entrepreneurs. However, entrepreneurs still needed help getting their deals in front of the right investors. Fee-based impact investor circles were created where entrepreneurs/ideas were vetted before being presented to a closed circle of investors. Often the same investors were part of multiple circles, which was advantageous for social entrepreneurs because if they convinced one investor, that person had the ability to influence in other circles. Of course, it could go the other way too.
For investor circles to have good deal flow, social entrepreneurs needed to learn their language — business models, hockey sticks, scalability, sustainability, etc. This generated a need for incubators and accelerators specifically for social enterprises: each one trying to provide education, mentoring, business model refinement, and access to investors.
Early-stage social enterprises with limited capital and lots of work also need cheap talent to expand their ideas. Many internship and fellowship programs have come up with the mission to channel resources to developing countries, giving young talent an opportunity to learn about the world and giving enterprises cheap (or free) labour to fill this gap. This young talent truly believes they can “change the world” or at least have a good story to tell for their business school application.
This ecosystem expansion is creating a buzz that being a social entrepreneur or impact investor is hip. Some impact investors without a clear understanding of ground realities are easily swayed with fancy PPT presentations and polished presenters even if the idea is untenable. Eager investors are now often investing in just concepts without any evidence that the social entrepreneur can execute on their ideas. These same investors would critique a commercial business idea and the credentials of its entrepreneur with a magnifying glass.
The buzz is also creating a cadre of opportunists — bright, passionate and articulate minds — who skillfully convince investors to part with their money. Some of this new crop of self-labeled social entrepreneurs look at it as a stepping stone towards a career bump, some are satisfying their ego by spending it on personal publicity and some are seeing this as an easier way to fund their ideas.
A social impact business, in a nutshell, is one that measures its success with the social change and benefits it brings to its customers, and not just with the net monetary profit earned. Many social impact businesses straddle both sides — driving social change and making a profit for their employees and investors. There is nothing wrong with this model, it helps those who want to change the world with their ideas do so by running an organisation efficiently, setting quarterly goals and answering to a board, like a viable business.
However, the social impact ecosystem, as it is now, is no different than the traditional enterprise space in terms of incubators, platforms, investor circles, conferences, measurement tools, consulting services, membership organisations, etc. Where economic gain is to be had, economic actors will always act to maximise their benefit. Even the noble idea of ‘doing well while doing good’ has bred an entire industry of economic actors.
Increasingly, my observation is that the true impact-driven entrepreneurs are quietly operating successful businesses and are committed to sticking with their idea for years. Is it finally time for us to drop the label of ‘social’ business and ‘impact’ investor, integrate our do-good mission in our company charters and focus on delivering value to our customers?