Omidyar Network first entered the world of microfinance in 2004 because we believed that small loans, wisely made, could yield massive benefits for the poor. But we also knew that it would be difficult to scale the microfinance industry to reach the billions in need. The challenges of serving “base of pyramid” (BOP) markets are well documented: limited transportation, communication infrastructure, and product awareness and long timeframes needed to establish trust with customers.

Since 2004, we’ve invested more than $100 million in 26 microfinance organizations—12 for-profits and 14 nonprofits. Roughly half went to organizations working to supply credit to poor people. Another half went to build infrastructure for the industry itself—from MIX, a platform for information exchange, to MFX, an organization allowing lenders to reduce the risk of buying and selling in local currencies.

We know that grant capital was crucial to enabling microfinance to get off the ground—eventually reaching the 150 million-plus customers it has served to date. We suspect the same will also be true for the many other fields—education, health care, etc.—that impact investors work in. So we were pleased when Monitor and Acumen recently released, “From Blueprint to Scale: The Case for Philanthropy in Impact Investing.” This important report, funded by the Gates Foundation, has provoked a critical discussion for our field.

We heartily agree with the overall argument that philanthropy can be a catalyst for businesses that serve the poor. And we like many of the examples of firms—from M-Pesa to Driptech—that benefited from grant capital in early stages. But we also want to raise a few key questions not fully addressed in the report.

1. How can we distinguish between subsidies that accelerate growth and those that stymie market development?

We need to be smart about grant money to avoid distorting the very markets we hope to strengthen. The most obvious risk here is crowding out capital. Over the years, we’ve seen several strong for-profit enterprises serving the BOP that we were eager to invest in—but who ultimately found it too difficult to compete with other companies that had received large grant support from well-meaning philanthropists. Subsidies should be used only in situations when more sustainable for-profit models aren’t feasible (or can’t fully reach an underserved population)—and removed quickly when they are.

A related risk is propping up failure. Venture capitalists know that only some of their investments will pay off; they walk away from their losses quickly in search of the next win. We’re worried that enterprise philanthropists may have a harder time with this, and thus continue to provide grants to failing businesses instead of redirecting their funds to organizations that have the best chance of creating impact. As a field, we need to develop reasonable benchmarks and timeframes to evaluate early success—and develop the discipline to be able to walk away.

2. How do we coordinate limited philanthropic funds for impact investing?
 
If there’s one takeaway from the Monitor report, it’s that impact investing isn’t just about doing deals. It’s about scaling entire sectors and innovations. Such scaling up requires collaboration among policymakers, local entrepreneurs, philanthropists, and commercial funders. And it often requires a combination of grants and for-profit investments.

At present, grant funding in support of impact investing is severely constrained. That’s not likely to change in the near-term. It thus remains an open question whether impact investors can let a thousand flowers bloom—in education, agriculture, financial inclusion, and many other sectors—or whether we need to concentrate our resources in a few key verticals and geographies so as to truly move the needle. We tend to think it’s the latter.

Last year, for example, we worked with McKinsey to map the BOP market for med-tech in India. We found that coordination of market development efforts (certification bodies, consumer needs research, appropriate regulatory policy, etc.) could dramatically accelerate growth—allowing the market to reach a size of 10 billion dollars by the year 2020. Such acceleration would allow much-needed medical services to more quickly reach hundreds of millions of people in need. But it can’t happen without government, philanthropists, and impact investors deciding to concentrate on this sector—and working together in a committed fashion to move it forward.

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