Every week at ID we scan the web for articles and posts about what we do and what we like. This week we read a lot about impact investing.

Morgan Simon emphasizes the importance of measuring investment impact carefully and critically. Organizations like GIIRS are “creating a verifiable standard” and contributing to the professionalization of impact investing. Simon reminds us that not all investments in emerging markets are impact investments. Getting people to invest is not the challenge-- it’s getting people to invest with impact. Thankfully, as we’ve stated in our blog post, we think that there is hope in today’s youth and the many social entrepreneurship initiatives that are popping up in universities.

On the flip side of impact investing is divesting in companies that don’t live up to socially responsible standards. That’s just what Harrington Investments, Inc., a California-based “investment advisory firm specializing in socially responsible investing” did this week.  They divested their holding in Chesapeake Energy Corporation, a natural gas producer, “due to the corporation’s poor environment record and its lack of accountability to shareholders.” This makes room for Harrington to reinvest their money elsewhere. We’d suggest investing in alternative energy in emerging markets rather than energy solutions that are quick, cheap, and unsustainable.

Cardenau of Next Billion asks impact investor David Green about his thoughts on the constraints to “'market-based solutions’ for the world’s social ills” and the barriers that social entrepreneurs face. Green points out that “there are few examples of organizations that maximize distribution for social good while being self financing and profitable.” Most companies are profit driven with a little CSR thrown in for good measure or the other extreme, non-profit. Businesses that go “beyond CSR and can be defined as ‘socially transforming’” have social interest at their core values just like non-profits, but seek to exist in the market. Green says that these "socially transforming" organizations need to be their own asset class. They need impact investors and seed-stage financing. At ID, we agree with Green and seek to invest in seed-stage, for-profit social enterprises.

These two articles are present an interesting debate on impact investors' use of the Capital Asset Pricing Model (CAPM) to assess risk in social valuation. Bowerman argues that impact investors should not use CAPM, while Levin argues that the tool is inherently valuable. CAPM measures beta, which represents non-diversifiable risk, the kind of risk that can’t be avoided in the market. Bowerman argues that beta inaccurately measures risk, and therefore CAPM inaccurately prices assets. Rather, social investors have many other factors to consider because the ultimate value they’re trying to create “cannot be reduced to a spreadsheet.” Levin’s counter argument is that the comprehensive value-risk assessment that CAPM produces articulates “social value to investors, who will continue to speak in dollars, and … [helps] us generate an economy that balances social and financial returns.” Levin’s firm created a modified CAPM especially for social enterprise that uses beta “to calculate the impact on various beneficiaries.” Each side has a fair argument. Read each article and let us know where you stand. Should impact investors embrace CAPM or run from it? 

A long-time impact Angel Investor recently told us that he thought firms like ID and First Light Ventures are helping professionalize the field of seed-stage impact investing. His comment was based on the more systematic diligence and portfolio management that comes with paid investment management. In his experience, the only people funding high impact start-ups where individuals that lack the time, focus, and (let’s face it) personal motivation to make sure each investment has real potential.

That got us thinking. Initially, it scared us because we don’t like the idea of over-professionalizing the field. As soon as protocol trumps practical we are looking for the fire escape (we saw that happen in the microfinance industry where professional investors forgot that “the map is not the territory”[1]).  Thinking about it a bit more we realized that there are positive aspects of professionalization, like academic recognition.

There is probably no better indicator of the rise of impact investing than the explosion we have seen in social entrepreneurship related programs at business schools. A few social enterprise programs like the Social Enterprise Initiative at Harvard Business School have been around for well over a decade. Today it’s virtually mandatory for top-tier business schools to have a social entrepreneurship program. An MBA admissions researcher was recently quoted: “It used to be that a business school’s social entrepreneurship program was just an office, but now it’s often a whole department.”

In Boston we are lucky to not only have Harvard’s SEI, but also the Legatum Center at MIT, and the 400+ students involved with Northeastern’s Social Enterprise Institute. That’s where professionalization really begins.

In our years involved with impact investing (and microfinance before that), we have seen a lot of reformed bankers trying to make nice. There is a need for that, but reformed bankers will never really create a new field. They will never forget what they learned and will approach impact investing as an empty canvas, free from the business methods that have dominated Western society for over 100 years.

Luckily, there is a rapidly growing crop of young minds that don’t suffer from our bias. They are clean slates, educated in impact maximization, not profit maximization, and in social benefit, not individual gain. It’s not the first time that we have seen the youth embrace and eventually lead a revolution, but it might be the first time we have seen them do it leveraging capitalism and wealth.

Every week at ID, we read a lot about what we do and what we like. This week we read a lot about mobile technology at the base of the pyramid.

Focus on Product, Pricing, and Agents to Drive Adoptions by Mark Pickens @mwpickens @CGAP

CGAP focuses on branchless banking, and this post focuses on the three levers of adoption:  product, pricing, and agent. We’re particularly interested in the product lever, since we’re always looking for investment opportunities in start ups in the areas of mobile technology and alternative energy. CGAP’s product lever includes providing a product for low income customers that enables them to move their money and pay their bills (i.e. the Base of the Pyramid). FrogTek and SlimTrader, two BSP Fund investments, offer products like this. CGAP basically points out that the existing products and services are inadequate – 27% of BoP customers in South Africa have lost money using mobile wallets. In general the market is underserved and needs improvement. In fact, there is a need, an opportunity, for more companies like FrogTek and SlimTrader.

Diego using FrogTek's technology in Bogota Photo Courtesy of FrogTek.

FrogTek’s latest post is a report from the ground in Bogotá, where their product is being used every day. FrogTek provides mobile software applications for small retail shops, restaurants, or other micro-retailers at the Base of the Pyramid to manage their inventory efficiently and effectively.  Check out their blog for the first hand report at Damaris and Diego’s shop, where they use FrogTek’s application Tiendatek, saving them time and money and allowing them to grow their business.

This article reflects on the ironic high speed adoption of mobile phones in a country, Bangladesh, which lacks the electricity to charge said phones. This is exactly why at ID, we are committed to investing in the areas of alternative energy and mobile technology. Each is essential to the development of emerging markets, and the eradication of poverty at the BoP.  This astonishing fact: the mobile phone “sector will grow seven-fold in rural areas by 2015 despite a lack of an electricity network to feed the technology device,” is a call to entrepreneurs.  The article offers more staggering and frankly, encouraging, facts about the future growth of the industry and the need for mobile technology and alternative energy to come together.

This article is a good example of a big company innovating specifically for the base of the pyramid.  Smart Communications Inc., a Filipino company, is launching a “Panalo Phone” specifically designed for the segment of Filipinos – the BoP -- that cannot afford mobile phones.  A simple design with basic features, the Panolo Phone will allow for the BoP’s inclusion in the mobile world. 

Every week at ID we scan the web for articles that relate to what we do and what we like. This week we read a lot about innovation in energy with a social impact.

“The New York Times Writes About 'Doing Good in a Bad Economy'” by Lara at Echoing Green

“seToolbelt Equips Social Entrepreneurs with Knowledge, Research, Support” by Tristan Pollock

“The Egyptian Revolution & Social Entrepreneurship” by Inji El Abd

We’ve all been watching citizens in the Middle East fighting for political reform. Lately, there has been a lot of buzz that these Middle Eastern countries are going to need reform on more than just the political level. Beyond Profit’s article claims that social entrepreneurship came before the Revolution of 2011 in Egypt, and will most definitely follow. “…The recipe for a social entrepreneur is:  social entrepreneur = social conscience + entrepreneurial spirit + creative thinking + persistence + obsession with a cause.” All of these “ingredients” are present in Egypt, and a recipe for social progress is brewing.

“2 Benefits of Impact Investing for Social Entrepreneurs,” by Matthew Alberto

This blog posts says that there are two undeniable benefits of impacting investing: 1) “Passive Income and Passive Social Impact”, and 2) “Impact Investing & the Power of Compound Interest.” Overall, impact investors have the power to increase the impact that a social enterprise aims to have. It’s a win for the investor, a win for the entrepreneur, and a win for society. Win-win-win. 

We recently talked about the softer side of impact investing in our Weekly Review. This post is inspired by Booz&Co’s report “Understanding the Forgotten Billions: Meeting the World's Least Advantaged Consumers Where They Live,” by Sudipta Bhattacharya, Ganesh Panneer, Vikas Sehgal, and Edward Tse (2010). The report discusses the Base of the Pyramid (BoP) – a segment with underestimated buying power and the dire need for social change.

Forward-thinking and social-minded entrepreneurs are jumping on the opportunity to create products and services for this underserved segment. Similarly, investors and fund managers (like us) know that there is a huge potential for high returns and high impact. The softer side about the BoP’s desperate need for change, where a little change can go a long way, speaks for itself. At ID, we are firm believers that the heart of the social sector combined with the efficiency of the free market can create radical progress in the eradication of poverty. However, this post is to remind entrepreneurs and investors of the valuable potential that lies in emerging markets and at the BoP, even if they do not consider themselves to be social entrepreneurs or impact investors.

The BoP segment formally consists of those who earn between US $2.50 and $7.50 a day, although with varying costs of living and inconsistent access to goods and services, poverty is measured in ways beyond monetary value (for more on defining poverty, read this article). Either way, the BoP make up a segment that “includes more than 1.5 billion people.”(2010, p. 1). That’s about a fifth of the world! To get an idea of how big the base of the pyramid is and how close you are to top, click here, and you’ll find out just how rich you really are (you may be surprised).

The Booz&Co Report acknowledges that is difficult to communicate with the BoP, or in their words, “hard to reach by conventional communication and distribution methods and have little access to traditional credit,” (2010, p. 4). In other words, there are challenges for those looking to serve the BoP, but with a little bit of innovation and a lot of guts, anyone can overcome these challenges. 

Regardless of the challenges, the BoP is a giant group of consumers that entrepreneurs can turn into customers. Consider their spending power:

“China’s 286 million lowest-income households have a total annual income of about $691 billion, India’s 171 million poorest households have spending power of about $378 billion a year, and Brazil’s poorest 25 million households have an annual income of about $73 billion,” (2010, p. 6).

This income is not disposable, but rather will be spent on basic needs like nutrition, clothing, shelter, lighting, transportation, and communication (2010, p. 7). Bhattacharya et al. (2010) wisely point out that products and services should be appropriately positioned for the BoP segment (p. 7). For example, Danone, maker of Dannon yogurt, modified their product for their BoP customers with great success. As a result, they have reported “that 42 percent of its sales come from emerging markets – up from just 6 percent 10 years ago,” (2010, p. 8).

Social entrepreneur or not, there is a huge opportunity for success in emerging markets, and ID is here to help. We are always looking for new, seed-stage investment opportunities for entrepreneurs with great business ideas for alternative energy and mobile technology. Even if you’re not into the “saving the world” side of entrepreneurship, you can’t deny that they’ve got potential.

Hey, it’s possible to earn money and do good at the same time. Remember, bees do it for the honey, too.