Social Enterprise

The Trouble With Impact Investing: P2

Impact investors—especially those who consider investing an alternative to grant making—need to step back and think about exactly what problem they want to solve.

The Trouble with Impact Investing

There’s only one bottom line, and it ought to be impact. Impact investors need to step back and think about exactly what problem they want to solve.

I just got back from the Skoll World Forum in Oxford and it’s clear that impact investing is playing an ever-larger role in the world of social entrepreneurs. That is a good thing, but here’s a critical question for the would-be impact investor: Are you a private equity investor in emerging markets? Or are you focused on solving an important social problem at the base of the pyramid?

Much of the trouble with impact investing has been the result of fuzzy thinking about those two roles. They are not mutually exclusive, but how you make decisions, deploy capital, and support organizations is likely to be much different depending on which approach is primary.

At Mulago, we are focused on solving problems for the extreme poor. Our work became more interesting as the idea of impact investing invaded philanthropy and private equity. To make sense of the investment opportunities that clog our inboxes, we have had to think hard about financial sustainability, the role of capital in scaling ideas, and the needs of our portfolio organizations.

To find clarity we return to our mission, which is to make the very poor a lot better off. We don’t care whether an organization is a for-profit or non-profit. What we want to know is whether it will have a big impact on our target population.

When we look at the world of impact investing through this lens, we find remarkably few for-profit ventures that both reach our target population and have the potential to become viable business enterprises. Cash flow projections are wildly unrealistic, management teams untested, and market failures unacknowledged. There’s 10 times the risk profile of a standard US venture deal without the same potential upside.

All of this does not mean that market financing is not playing a big role in creating social impact. In emerging markets like India, Mexico—even Ghana—global investors (without the impact label) are driving big gains in livelihoods, healthcare, education, and access to energy. If impact investing is merely laying a social screen on money that is already targeted for investment, more power to all.

But there’s an elephant in this room.

Impact investing, and its seductive message of doing good and making money, is having a profound impact on philanthropy. The role and impact of grants is being questioned. Social enterprises with revenue models are having unrealistic economic expectations imposed on them. But most of all, impact investing creates the illusion that traditional business models can solve big problems in places where poor governance and huge market failures are the rule. In our experience, this is simply not the case. If you invest through the impact lens, the right capital structure needs to be applied to the right organization at the right time.

Three well known social enterprises—Bridge International Academies (BIA), Embrace, and One Acre Fund (which, full disclosure, are part of the Mulago portfolio)—illustrate the variations on this theme.

Jay Kimmelman, the founder of BIA, has a big idea: delivering a quality education to very poor kids in the slums of Africa at a potential scale that is breathtaking. The only way to achieve his mission, however, is to invest heavily—from the very outset—in very sophisticated systems and experienced management, because these are what drive the economics of the business. And the only way to raise the capital he needs to do this is through private equity investors. There really is no middle ground. When Jay got started, either he was going to build a big business quickly or he wasn’t going to build one at all. Jay took the gamble and, largely based on his previous success as an entrepreneur, was ultimately able to bring investors along.

Embrace, the product innovation company behind the Embrace infant warmer, started as a nonprofit, only to emerge four years later, as a for-profit company that will have an ongoing royalty relationship to the startup nonprofit. In 2008, moving their first product through R&D and clinical trials was simply not a good fit for debt or equity funding. There were too many unknowns and a relatively inexperienced management team, both of which would have limited their ability to attract investors. But now that they have a viable product, along with a more mature management team, debt and equity are the right forms of capital to fuel manufacturing, distribution, and future product development. Early stage, exclusive grant capital allowed the company to get past R&D and make private financing a realistic option.

Ironically, many social enterprises with rapidly growing earned revenues are actually organized as nonprofits. One Acre Fund, for example, generated $5 million in earned revenue last year (and is on track to generate $12 million this year), yet has no intention of morphing into a for-profit enterprise. Why? Because the leadership knows, based on iterations of field trials, that serving a market of rural, smallholder farmers requires long-term subsidies for agricultural extension, new market development, and product/service innovation. In this case, impact investors (i.e. donors) are not getting their money back, but their funds are highly leveraged and being used to solve very real problems that plague subsistence farmers all over Africa.

Nobody wants to be dependent on donor subsidies. Relative to private investment capital, the dollars available are tiny and the process to secure them is ridden with inefficiencies.  But if the objective is social impact at the true bottom of the pyramid, then entrepreneurs need to think hard about the kind of capital they need, given the mission, stage, and scale of their enterprise. At the same time, impact investors—especially those who consider investing an alternative to grant making—need to step back and think about exactly what problem they want to solve and how best to deploy capital to do it.

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  • BY Steve Hutcheson

    ON April 19, 2012 01:13 AM

    When I was working in Afghanistan, at one time I looked in at a small plant that was cleaning raw cotton in order to export it to Pakistan where it was then converted to thread and then fabric and then re-imported back into Afghanistan at around five times the value added cost. That inspired me to think of how could I find investment funds to establish a cotton mill in this region to keep this value adding in the country. Afghanistan exports 300 million a year and imports five billion of finished goods.

    The answer is not in micro-finance for vocational exercises but could be achieved by directly investing and maintaining an active role in small enterprises that develop secondary and tertiary industries associated with the local primary production.

    Moving to the next stage however is problematic. Finding impact investors prepared to risk venture funds in small social ideas that can ultimately scale is as rare as hens teeth. It has to be operational and risk free before the funding can be made available. I can go to my local bank and apply for that sort of funding. The same can be said for disaster recovery. Humanitarian aid invests in developing temporary alternative economies through new logistical programs or by training people in new vocations instead of getting previously existing industries destroyed in the conflict back on track so that they might employ people permanently and much longer than they can in a fully funded cash for work program.

    In the past decade and half I have been in charge of more than 300 million in dispensing major program funding mostly on public infrastructure and shelter where little if any residual impact occurs other than some improved real estate. I could have achieved ten times that with one tenth of the money had it been available in the way it is needed. Proving it requires funding. How does one do that?  I explain it more on my website.

  • BY Steve Hutcheson

    ON April 19, 2012 01:17 AM

    I thought that last comment would link to my website. It doesn’t. The website is

  • BY Steve Hutcheson

    ON April 19, 2012 01:28 AM

    Not a good day with the internet. That was supposed to be

  • BY Jose Gomez-Marquez

    ON April 19, 2012 10:49 AM

    I was on track with most of the article until you got the the R&D part. Assuming that you have to be a non-profit to create R&D deliverables ignores the long legacy of programs like SBIR funding, private startups developing products, and the fundamental reality of investing in product development. If social impact driven missions assume they can dodge this (and the evidence shows this is more and more the case), then we will look forward to bland technological solutions propped up by novel social interventions. I believe that the developing world also needs a jetpack, even if we don’t have one back in the developed world.

  • BY Luke Disney

    ON April 20, 2012 12:39 AM

    Well said. Liked both your articles in this series as they resonate very soundly with our experience. “Nobody wants to be dependent on donor subsidies. Relative to private investment capital, the dollars available are tiny and the process to secure them is ridden with inefficiencies. ” +1 that.

  • Antony Bugg-Levine's avatar

    BY Antony Bugg-Levine

    ON April 20, 2012 04:11 AM

    I totally agree that impact investing must take its place as a means not an end. The best impact investing work arises from people and institutions organizing around the social challenge or opportunity not the capital deployment tool.

    But I just don’t see that impact investing has yet had a “profound impact” on philanthropic practice. Sure, we’ve galvanized a lot of attention and some great pilot investment by a few pioneers. But if we step out of our little bubble, the much larger philanthropic world is still almost entirely stuck in old ways of operating. What evidence do you draw on when you assert impact investing has cannibalized grants?

    If impact investing has “invaded” philanthropy as you say, it’s still a guy in a little wooden row boat taking on the Pacific Fleet of foundation world (and I prefer to skip the military metaphors entirely and see impact investing as the screwdriver sitting alongside the grantmaker’s hammer—both essential and complementary tools to construct the more just and vibrant society we all seek to build.)

  • BY Thien Nguyen-Trung

    ON April 21, 2012 04:43 AM

    Laura, thanks for the follow-up to Kevin’s last post!

    Antony, allow me to offer a counterpoint to your concerns and comments, respectfully as always.

    How about another analogy for starters. Perhaps it is true that the impact investor is a “screwdriver” or a “little wooden row boat” compared to the ocean of foundations in actual funds deployed - but the issue I (and perhaps Laura) take is that given the pint-size of his heritage, Mr. Impact Investment at times behaves as if he were a lot bigger animal than he actually is.

    While I agree that impact investment should probably not be (just yet) accused of crowding out or cannibalizing grants (which I don’t think was Laura’s exact point), its proponents and the media are certainly making very loud claims towards its enormous promise to bring better “blended value” to the social sector than the tools today would indicate.

    At the risk of sounding a little tongue-in-cheek on this, I would point to Antony’s and Jed Emerson’s book “Impact Investing”, which I am currently reading and enjoying, as somewhat of a very loud proposal to make the screwdriver into a hammer - and that brings with it all the expectations that the tools of investing and the return that should come with it hold this dormant potential that will sweep the “social” world once we have found just the right way to use it.

    To that end, if my understanding is correct, Laura and Kevin argue that:

    1) impact investing’s enormous tooting of its horn may have an adverse impact on the traditional grant-making model in the way of its perception in public discussion forums and

    2) many of these “pioneering funds” are trying very, very hard to fit the square pegged impact investment method (aka added requirement for strong financial returns) onto the round-shaped business models of social enterprises that would better be served with interest-free grant-funding than some sort of jazzy/mezzanine/hybrid debt or equity instrument.

    Certainly, there has been ample evidence around the world that not all impact investment proponents accord grant-making models its proper respect. A simple Google search on the blogosphere will yield plenty of articles about “tensions at the borders” with commensurate finger pointing and, at worst, disrespect shown towards those “old-fashioned foundations”.

    To be clear, I am no staunch defender of “the old-fashioned ways” for their own sake, but do strongly believe that we require more books, panels and articles in major publications that educate the public and wannabe investors on the limited applicability of impact investing as a method in certain environments. For instance, those environments inhabited by social enterprises taking on extreme poverty - and where no BoP marketer can ever promise to extract enough cents from the wallets of the poor to make an impact investor commercially happy. That balanced view simply does not exist yet given the enormous interest in impact investing.

    So to be fair to all, while supporters of grants acknowledge the “un-sexyiness” of creating dependence and going against the business holy grail of financial sustainability, champions of impact investing need to tone it down a little in their promises and pitches to the CALPERS and TIAA-CREFs of the world on where their billions of dollars can be directed realistically - and where not.

    To close with yet another analogy: the consequence of not managing impact investment expectations here is that we will break the financial water reserves of institutional investors (alike to the quantity held by a Canadian dam) and pour them out over a small coffee table with little shot glasses (i.e., the few social enterprises that are eligible for impact investing). If we’re not careful, we’ll waste the water all at once, violently sweep away the shot glasses, and take the table with us out the door all at the same time.

    As Antony admitted, the best way perhaps to prevent this is to start framing impact investing not as this paradigm-shifting methodology of epic promise, but as the occasional introduction of debt and equity financing instruments to the SE funding toolkit currently dominated by the big boy named “Grant”. And to please Laura - let’s take some time to acknowledge why Grant remains our daddy for the foreseeable future - and that this is not necessarily the most terrible thing as it is made out to be.


  • BY David Floyd

    ON April 23, 2012 12:17 PM


    This: “But most of all, impact investing creates the illusion that traditional business models can solve big problems in places where poor governance and huge market failures are the rule. In our experience, this is simply not the case” is absolutely true.

    In the UK, as you may have heard at Skoll, we now have an institution called Big Society Capital - a government-backed scheme to put £600 million into the UK’s social investment market (which is currently worth around £160 million).

    So far, the leaders of this project are conveniently ignoring the issue of why social ventures start ventures start in the first place - usually at least partly because challenges faced by a group of people or particular local area are not being solved by mainstream business on a straight commercial basis.

    So the plan is to invest 100s of £millions in economically viable social ventures that can repay investments at slightly lower than market interests in slightly less time than high street banks would expect - while demonstrating a clear social impact. 

    These social ventures don’t currently exist on any meaningful scale. Existing social investment funds in the UK have often struggled to spend their cash in situations where it hasn’t been at least partly accompanied by grants.

    The theory is apparently that pumping loads of social investment into the market will enable new social ventures to start-up to take advantage of the cash on offer but, as you suggest, there’s some serious questions about whether they will be organisations that will have a high level of social impact where it’s needed most.

    The problem here in the UK - where the social enterprise/social venture sector is dominated by government - is that social investment is such a boon politically that it hasn’t been in anyone’s interest to focus too hard on the practicalities (at least, not before deciding it’s worth putting £600 million into).


  • Thien,

    Thanks for your great response. Rarely do I encounter someone as excited by extended water metaphors as I can be. Love the dam opening onto the coffee table with shot glasses. Respect.

    I am writing this on the train on the way to the Global Impact Investing Network’s Investor’s Council meeting. I am struck at these kinds of meetings how serious leading impact investor are about discussing and resolving the complicated, nuanced work we do. Everyone should be reassured that we spend little time in self-congratulation or superficial celebration. This work challenges us intellectually, emotionally, and socially to synthesize what we know, work in unusual partnerships, and constantly learn and improve.

    Along the way it’s great to be able to challenge each other and learn from experience. Thanks to you and the Mulago team for pushing our thinking.


  • Jenna Nicholas's avatar

    BY Jenna Nicholas

    ON April 25, 2012 07:11 PM

    Thank you for this.
    I also recently attended the Skoll World Forum. I was intrigued by a comment that was made that we have to be careful that we do not become so focused on the inputs in terms of capital sources that we lose sight of the outcomes that we are looking for, in terms of tangible social impact.
    One of the challenges that I find with impact investing is seeing the extent to which impact investing measurement tools are successfully measuring and demonstrating this tangible ‘social impact.’
    I hope that this is something that will be achievable through IRIS, GEARS or some other yet to be created measurement system.

  • BY Ruban Selvanayagam

    ON April 28, 2012 07:14 AM

    Laura´s point with regards to the “seduction” of impact investing is very relevant.  There are of course very few investors that would turn down an opportunity to achieve healthy returns complemented by environmental / social benefits.  Yet, whilst it can be argued that the impact investing has created an “illusion” - considering that very few business plans are convincingly fitting its established criteria, it will not take long for most funders to see the wood from the trees.  There are indeed a wide range of socio-economic and political variables that make the task of establishing an authentic “impact investing objective” challenging - particularly in the developing world (where donor models are currently the most effective mechanisms to use). 

    Nevertheless, as Laura concludes, the over-dependence of donor funding is not the best way to move forward - not only from the perspective of the sector’s inherent inefficiencies but also from the fact that there is an increasingly wide range of potential financial sources available for viable impact business models to thrive.  As alluded to by Thien, therefore, more of a collaborative approach is debatably a positive way to move forward - where each case is analysed individually and viewed as to whether more donor, public subsidy, impact finance or multiple pronged approach would be most appropriate for all involved stakeholders.  These variables and priorities may alter as the business objectives develop - but the important factor is for the various interests in the BoP sector work together to iron out the key issues and focus on achieving maximum benefit.

  • BY Martin Theuri

    ON June 8, 2012 10:44 AM

    Thank you Ruban for summarizing it up, that a blend of “Investment” approaches is what is needed.For example, in healthcare (especially diagnostic and curative),would a pure grant model work?,I hardly doubt given the massive infrastructure and other resources required.Since Laura has profiled examples,I would like to look at two of them,One Acre Fund and Bridge Academies.I will take a shot at them from a field perspective.Bridge runs on a model that is yet to be proven and that might or could be facing challenges.By just by looking at one aspect,Land - land in Kenya,especially in or close to towns is a hot asset,with mind boggling valuations.A grant+loan mix or government subsidy would have been a better approach.But there’s is “Free”(it’s not exactly free) Primary eduction in Kenya!, so public schools are a competitor.I still do not understand why OAF cannot move to a more sustainable model.I would tend to re-look at their cost/Extension officer that cannot be met by even a fraction of revenues, say, (25-30)%, typical Net Income ratio to Revenue, given that it can now extract economies of scale and has a ‘business’ model that is proven.Disclaimer,these views are my own as I have interacted with both OAF and Bridge at Acumen Fund and Village Enterprise.

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