Car buying is an ordeal for my wife. She wants a 4-door bright color car, compact and cute but safe, with sun-roof, rear view camera, adjustable seats and a gazillion other features but does not want to pay a whole lot. None of the cars meet the requirements and so she settles for one, drives it and grumbles about it for a couple of years and then starts the process all over again.
In many ways, the ecosystem of for-profit social impact resembles that. An ideal company in this space must meet various requirements:
1). BOP: It must serve the bottom-of-the-pyramid customers.
2). Impact metrics: It’s not only enough to sell its product or service and measure the number of customers and the revenue. It must track its impact. For instance, if it makes products used at child birth, it must track how much maternal mortality it reduced.
3). Growth: In order to keep attracting the equity investors, it must show at least 3X growth year over year.
4). Revenue: It is not enough to be growing. The transaction size and the revenue must be large enough when compared to the regular commercial plays.
4a). Source of revenue: The government should not be the source of majority of the revenue, which is hard because it’s the largest payer for the target market.
5). Sustainable: It goes without saying that the business should be sustainable.
6). Investment: Requirements from 1 to 5 should be done with investment amounts, which are smaller than the regular commercial investments for most sectors, especially during the early stages. If one manages to score a grant, along with much more rigid impact and operational requirements, most grant makers want to see a path to sustainability.
7). Exit: Equity investors want exit but between the journey of BOP and Investment, there are few exit options. The ecosystem has not developed to the point where a number of bigger fishes can gobble smaller fishes or the big profile investors can drive the deal making like in the regular commercial space.
The task is equally difficult for the investors. The type of companies, innovations and the business models in different sectors are fairly limited.
Only a few companies are able to scale quickly while meeting requirements from BOP to Exit, while the sources of funds for these impact investors demand impact tracking as well as exit multiples.
There is one way to break this logjam. Consider Bharti Airtel. In my opinion, it is one of the largest social impact companies in India. Its cellular service has transformed the lives of millions of rural consumers but it did not start as a BOP company.
It went after the lowest hanging fruit in the urban areas and then drove adoption in the rural areas. To the best of my knowledge, it has always tracked commercial metrics and not been shackled by impact metrics.
In my humble opinion, more for-profit social impact companies must follow Airtel’s example. Others should stick to a non-profit donor funded model. Similarly, the impact investors should invest in regular commercial businesses, which have rural as one of the customer segments. When they do find such businesses, they should invest with full conviction.
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