This post is the second in a two-part series.

Recently, I wrote about a pair of questions that social entrepreneurs should be addressing when “Constructing the Case for Impact Investment.” Here is a third question that social entrepreneurs should also be thinking about and, while this questions relates to an issue that we have seen arise constantly, it should be noted that it does not apply to all social enterprises.

Question #3: How committed is the business to the impact—is it truly impact first? Note here that I am referring to the “business” rather than the management team because there may be other stakeholders (e.g., earlier investors) who have a say in charting the course of a social enterprise. It might seem that this question is fairly obvious, but I am thinking about a specific instance in which this question comes up in the BoP context— where there are multiple revenue streams and/or business lines.

When I talk to entrepreneurs outside the impact and social enterprise space, I love to talk about monetization strategies. My standard advice is that investors love to see multiple bites at the apple when it comes to revenue because it means the following: a) the entrepreneurs are actually thinking about revenue (though that’s not always the case, unfortunately), and b) for my analysis, I only need to find one revenue source to believe in, even if several or many others will not pan out. Put another way, you can show me a dozen revenue streams and I just need to buy into one as viable. Then, as an investor, we will work together to make sure resources are allocated where they belong (that is to say, the best combination of likelihood of success and potential magnitude). That’s part of what a good investor brings to the table. Yet, at first glance, it is nice to have a variety of potential revenue streams in the mix.

Again, the picture looks very different when making an impact investment, especially for the BoP market. We often find social enterprises with a primary focus on a product or service that has an “impact,” but that can subsequently be altered and adapted for mass markets outside the developing world. At first blush, this strategy sounds solid. Furthermore, our approach might contrast with other investors who do not see this issue as a potential problem. However, at the iiSummit in Chicago over the summer, there was a great investor panel where the conversation included concerns of impact being “shut down” post-exit by acquiring companies. Echoing these sentiments, I can confidently say that there is real anxiety in the impact space surrounding this issue on the investor side.

Given our focus on the BoP consumer, we are even more concerned than others about distractions from impact. Moreover, these concerns extend to pre-exit scenarios where securing an exit strategy could also result in shutting down impact. Our philosophy requires that investments need to be more than simply socially responsible, but also committed to the BoP consumer’s welfare. This philosophy is a long-term goal that will outlive any financial returns. That’s why we challenge any business we look at to answer the question of: it is truly “impact first”?

Here’s why we worry: imagine that the potential of the “impact” business line stalls or fades out, but the mass market opportunity remains. We call this problem the “REI-problem” because the first time our fund discussed this topic, it was in the context of a business that was creating a product to be used in rural India, but had plans for a second product (an adapted model) that could be sold to outdoor recreational enthusiasts in the developed world. Since we could see that product doing well on the shelves at the REI, it begged the question: are we comfortable funding a product that will be sold to this audience for their camping and hiking adventures and, if the BoP line failed, only to this audience? The answer for us is a resounding no.

This is not to say, we will not invest in a business with non-impact revenue streams or business lines. Yet, it has implications for secondary revenue opportunities. These opportunities must be truly secondary, and we have to be convinced that the business is impact-first and foremost. It should also be noted that the REI-problem rears its head in situations that are less obvious and require much more consideration than described in the example above.

It should be said that we can address our uncertainty around this issue in a variety of ways, including (among others): the management team’s commitment to the target (geographic) market (see Question #1), and the target audience; the height of the impact upside; and the strength of the business strategy and business model related to the impact business line(s).

In conclusion, this question, along with the two questions discussed previously, represents the start of a conversation between an impact investor and a social entrepreneur on topics of deep importance to the nature of the impact and the company’s ability to see it through execution. Impact investing is about long-term investing and investing beyond exit. Hopefully, thinking about these questions will help keep social investors and entrepreneurs on the same page.

Read the first post in this series, “Constructing the Case for Impact Investment.”

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