Impact Investing

Financial-first Impact Investing

Rethinking the target market.

Much has been written about a perceived shortage of return-oriented capital available for impact investments. These articles (including the recent “Closing the Pioneer Gap”) generally lament that social returns pay lip service to financial expectations and that the risk appetite for investors is too limited to suit the “realities on the ground.” At the same time, the authors toe the line and recognize the benefit in supporting the need to apply market-based solutions for addressing poverty with the kind of scalable solutions that only business—and the capital structure it implies—can bring. The fact that these two positions are fundamentally contradictory is often lost in glossy arguments calling for blended returns, which can overweight difficult-to-measure social indices.

This does not have to be the case, and return-oriented impact investors need not reduce already low (relative to risk) financial expectations to promote increased social benefit in otherwise underserved markets. But they do need to be coaxed.

Thus, the key to bringing scalable solutions to underserved markets is not to beseech capital providers to unnaturally lower return expectations, but instead to help lower the risk profiles they rightly perceive as characteristic of informal markets. This places a high premium on fund managers and entrepreneurs who understand their respective markets and work to minimize the many types of business risks that young enterprises routinely face.

To broaden access to capital, first narrow the investment field.

The wonderful thing about the impact investment space is that it is comfortable in any part of the so-called economic pyramid comprised of the roughly 7 billion people who inhabit the planet. The illustration below—created by a graduate student of mine, Abi Olivera—depicts this “pyramid”, and is based on household survey data from the World Bank (PPP adjusted). Let’s parse this pyramid, beginning at the bottom.



In an article published by the Harvard Business Review in 2011, “Segmenting the Bottom of the Pyramid,” the authors offer an important observation about the poorest 2.5 billion of the world’s population. At the very bottom, where 1 billion people live in extreme poverty (less than $1/day in purchasing power), there are no existing, practical functioning markets, and it’s not likely that there will be in the near future. Further up, the next 1.5 billion (up to about $3/day) are living and working with very informal markets at best. Lacking any real income, these two population segments—representing almost 40 percent of total world population—require massive assistance from governments and nonprofits for access to even the most basic services, including water, sanitation, and education.

Businesses that are capitalized to provide a return to shareholders cannot survive in these segments because—despite the “demand”—there is no way to bring “supply” without a massive intervention of subsidies. Here you need government, philanthropies, and NGOs doing the best they can to “push” services into desperate communities. This is important work, but it is also expensive, inherently unstable politically, and certainly not scalable economically. These efforts in aid and support may be humanitarian imperatives, but they cannot drive economic growth nor are they sufficient to help eradicate poverty. This is a useful distinction as far as it demarcates one boundary of the impact investing space, where there is virtually no constructive role for return-oriented capital unless it is heavily subsidized.

The upper boundary is less important to demarcate as return-oriented impact investing can play a role right up through the most developed economies where regional poverty levels are persistently difficult to eradicate. But for our argument, let’s draw a line under the top 20 percent of income earners (1.5 billion) who make on average more than $16/day (still below relative poverty lines in the United States). Arguably, the population above this line already lives in a society with highly functional, if not always efficient, markets. By the very nature of national wealth, the poorer members of this segment are also highly underwritten by government support programs. While return-oriented impact investors can find many opportunities in this segment (such as social impact bonds and CDFIs), here we restrict ourselves to developing economies.

In-between these boundaries, there is a middle population—3 billion people—with tremendous investment opportunity for return-oriented impact investors. Above the $3/day level, formal markets begin to coexist with informal ones, and true businesses emerge. Here, adults have some job skills. As you move up to the income scale, this only gets better—particularly when you consider that the working class has a very good sightline to the advantages of economic wealth. Particularly in cities, people across income levels interact with one another on a daily basis.

Here is where “financial-first” impact investors have the greatest opportunity to earn a return on deployed capital while building financially sustainable businesses to pull up under-represented markets. Some will argue that focus on this segment excludes the most impoverished and that return-oriented emerging market investors already dominate this space. This is partially true, but by no means exclusionary when it comes to opportunities to provide enhanced social benefit to selected communities within this income band. In future articles, I will address these concerns with explicit examples of successful investments that are specifically designed to strengthen disadvantaged communities without sacrificing return expectations.

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  • Laura Asiala's avatar

    BY Laura Asiala

    ON July 24, 2013 09:10 AM

    Interesting post and clearly demonstrates extraordinary opportunity of need which can be served through market-based businesses—and garner an acceptable return.  Thank you!

  • BY Evanna Hu

    ON July 29, 2013 03:13 AM

    My name is Evanna and I am the Co-Founder of g.Maarifa, a mobile software company that aims to increase access to educational and training content in order to develop human capital where it is needed the most and hardest to access in developing markets. We engage with organizations in both the public and private sectors that want to train their own set of end users.

    I ran across your blog post in SSIR about impact investing and was intrigued by two points. The first is your point about risk mitigation. For entrepreneurs in the space, what are the top three risks that impact investors are . Secondly and more importantly, do you think it’s ever possible that impact investment can affect the poorest of the poor? For example, we work with organizations such as aid agencies and nonprofits that want to train and educate their target constituents who are teen pregnant mothers to microfinance institution borrowers in rural East Africa on HIV/AIDS and entrepreneurship respectively. By working with these nonprofits, aren’t we transcending the different levels of poverty despite the fact that we are a scalable and sustainable company? Can’t impact investors invest in similar “intermediary” companies that, by working with organizations that do reach the poorest of the poor, do indirectly impact the BoP?

  • Bo Hopkins's avatar

    BY Bo Hopkins

    ON July 29, 2013 08:29 AM

    Dear Evanna: 

    Thank you for your email and its thoughtful questions. 

    To your second question about impact investment affecting the poorest of the poor?  Yes, I believe it can, but I consider it to be a very risky proposition for impact investors who are primarily concerned with a return on their investment; the so called “financial-first” investor.  Generally speaking, among the poorest populations there is not enough purchasing power to overcome the overwhelming costs associated with delivering a “good or service” that does not create some immediate satisfaction to the customer (e.g. cell phone service).  Exceptions to any generalization like the one I just made always exist, but not often enough to attract a new class of money for investors who primarily interested in a return of capital.  Furthermore, my contention is that no alternative metric system (SROI, blended returns, etc) is likely to change that.

    Nevertheless, NGOs, foundations, philanthropies and government can work together to bring non-return oriented capital to these populations and use elements of market-based thinking to make a real difference.  This seems to be the space where you operate.  As I understand your service, you are helping to provide a link between service providers (in health care, education, etc) and the target customer by leveraging the existence of the cellular technology already deployed.  Here, performance measurement tools (not necessarily financial return) are the key indicators for your success. 

    In sum, my purpose in writing the article was to highlight this confusion – that very good organizations can use elements of “market-based principals” (including good performance metrics) in their approach to impoverished communities, but that does not mean there are “market-based solutions” in these approaches that will command the attention of return-oriented investors.

    Your first question about risks is more challenging, as every circumstance is unique.  But the main point to understanding the risk profile of the return-oriented investor is to answer the simplest question of all:  how will they get their money back?  If you can answer that question (forget about what rate of return, just how they will get money “out” once it has put “in”) then you are beginning to address the specific aspects of risk inherent in the investment.  I hope to write about this some more, so please stay tuned to the SSIR blog.

    Good luck with g.Maarifa – and I look forward to hearing more about your initiatives.

    Bo Hopkins

  • Tony Berkley's avatar

    BY Tony Berkley

    ON August 8, 2013 12:07 PM

    Bo and Abi, thank you for a very illuminating teaser on the larger sweep of your thinking.

    The chart Abi created may be the most impactful single image I have encountered in recent memory. I assume that the the little blip around $100 dollars a day is where the US middle class starts?

    I manage a $100M impact investing opportunity fund at the W. K. Kellogg Foundation and would concur with your characterization of the field and where it focuses. I am also an anthropologist and lived in a Maya village in Southern Mexico with families in the base of the pyramid living at well below $3 a day or 30 pesos a day.  Here I dissent with you a bit.

    I am more optimistic about the potential of structuring return-generating impact investments for even the poorest of the poor, at least among the communities I know well in Southern Africa and latin America.

    In fact, I think it would make a wonderful challenge: The Bottom of the Pyramid Impact Investing Challenge. Structuring a competition rather than a debate could bring resources and attention to the challenge of how best to invest in the poorest of the poor.

    I am sure my friends in Yucatan would appreciate our deeds more than our words.

  • Bo Hopkins's avatar

    BY Bo Hopkins

    ON August 12, 2013 02:16 PM

    Tony -

    Thanks for your comments.  You are correct about the blip near $100.  I am pleased you are optimistic about return opportunity further down the pyramid, but I fear there is much confusion about just what opportunities there are.  My background, admittedly much different than yours, is that money is never in tight supply - it is just poorly allocated .  When the ideas, infrastructure, and management is available, money should be least concern.  Let’s chat sometime about your investment experience - I am eager to be converted!

    Bo Hopkins

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