On Social Enterprise & Impact Investment

Readers – Here’s my first, one hour, 1,000 word, blog post. I will be examining a couple of facets of social enterprise, based on two sets of separate yet insightful conversations with friends out here in Nairobi. Hope you also find them to be interesting and insightful.

Posture on social enterprise

Social enterprise or impact investment is hot. There are obviously those who disregard it as “hippy stuff”, but among those who are part of the industry, or deeply interested in it, broadly speaking, there are two extreme positions (with lots of ground in the middle of course):

i)                    Strong belief and passionate advocacy

ii)                   Skepticism with highly critical judgment

Jacqueline Novogratz, the CEO of Acumen Fund, is firmly in Category I. Someone like yours truly is closer to Category II, but believe it or not, not all the way to the extreme. Both sets of positions are valuable – both sets of players have a contribution to make to this space.

Acumen Fund has attracted millions (and in the future it shall probably attract billions) of dollars of capital into this space, and inspired thousands of man-hours of top end talent to contribute to this broad cause. Jacqueline Novogratz would not be able to achieve this if her speeches in, for example, a large Acumen investor event, positioned her somewhere in the middle.

For someone like me, it would be counterproductive, if not downright immature to show strong intellectual discourse in these forums, even though some sweeping statements on social enterprise cause me to instinctively and reflexively cringe. And many enterprises would not get valuable counsel; help, advice and support were it not for the critical thinking and push which truth telling individuals like myself try to drive across the organizations that we support and serve (in a politically and diplomatically effective manner of course).

So there are the “marketeers” or “cheer leaders”, and there are the “critical thinkers” or “part-curmudgeons”. Intrinsically, the former set values fairness as an end more than anything else whereas the later set values truth-telling as the means more than anything else (notwithstanding the other many strange characters in this space e.g. those who are completely blinded by the coolade, or those who are chronically contrarian). I say – pick a position and fulfill your role.

What defines a social enterprise?

There can be many definitions for social enterprise. I don’t think even any of the large and well established impact investment organizations working in this space have a crystal clear definition. It varies by the individual you speak to. Here are two possible and fairly common definitions:

i)                    Any enterprise which serves customers or works with suppliers at the base of the pyramid

ii)                   Any “sustainable” enterprise  which solves a well-defined social problem

“II” is the more classic social enterprise, the kinds of investments you would associate with the Acumens and GBFs of the world. It includes entities which solve “in your face” social problems, such as financial inclusion, healthcare, clean water, sanitation, clean energy, housing development, etc.

“I” includes everything from telcos, to FMCG distribution companies and FMCG procurement companies to even SMEs– in addition to some of the enterprises which solve “in your face” social problems. Let’s throw in Celtel, MTN, Coca-Cola, Unilever and Nestle, a few unknown SMEs, along with some microfinance organizations, or healthcare service providers. These organizations are all creating jobs, and/or providing goods and services which consumers at the base of the pyramid demand and value, thus impacting the lives of the poor.

The big buzz-term is social enterprise is “double bottom-line” i.e. profitability and social impact. “I” are by definition truly sustainable and subsidy free. But for “I”, even though profitability is clear, social impact is often very hard to measure and market to the rest of the world – thus not even considered. These organizations therefore, often slip through the radars of the Acumens and GBFs of the world, even though they do not always have easy access to finance. As some of my friends working in this space will tell you, many of them are SMEs with good truly sustainable business models, but which are unable to get the financing they require, and thus not able to scale up and succeed.

For “II” true profitability is often missing, but they do tend to be “sustainable” – funded through indirect subsidies. Because their social impact is well defined and easy to measure, these organizations are able to market themselves very well. They are thus able pull on a lot of low cost impact investment capital, an indirect subsidy, and are also able to attract many volunteers and below market rate top talent, also often a significant indirect subsidy.

It’s not that their business models are necessarily flawed or cannot be made truly sustainable, even though sometimes this is the case. But because marketing “in your face” impact is relatively easy, they are able to attract value and transfer it to their customers at the base of the pyramid – tangibly this translates to reaching more customers and/or being able to provide a lower price. As one friend in Nairobi, who is heading one of these enterprises once remarked, “We now have access to so much low cost capital; we don’t need to charge higher interest rates, even though our customers would probably still pay.”

I am not saying that it is a bad thing to transfer value to the base of the pyramid – often it makes a huge difference in people’s lives, and that too very subtly. Instead of giving them simple handouts which destroy dignity and create a culture of dependency, we provide them with what they perceive to be a market driven service, thus preserving their right to choice and their dignity. It’s a very powerful and ingenious route to charity. And let’s not even use a strong word like “charity” – it’s at least partially market driven, so let’s just call it a “value transfer”.

Those funding the subsidy, either through the opportunity cost of their time, or the true opportunity cost of their capital are providing a valuable and selfless service. But let’s recognize these subtle differences, so that we are truly aware of what we are doing and what we are not – who we are able to support, and who gets left out – and thus be able to better accomplish what we set out or strive to do.