There are huge opportunities for philanthropic capital and resources to complement and magnify the impact of impact investment capital.
This is part 4 of a 4-part series titled Impact Investing Reaches a Tipping Point in India. In part 3, we looked at how impact investing is fueling change in India. In this part 4, we look at how philanthropy can operate in a collaborative role with impact investing to accelerate the ecosystem and realize more impact.
While philanthropy aims to achieve social impact with no financial return, impact investing puts financial returns at par with, if not above, social impact. The vast majority of foundations and corporate social responsibility initiatives use grant-based models to create social impact. According to the 2011 Bain & Company Philanthropy report, philanthropy and private giving in the US and UK accounted for 2.2% and 1.3% of GDP, respectively. Americans give 9% of their annual household income to charity. In developing nations like India, this number is much lower with private-charity contributions at 0.3-0.4% of GDP. Indians contribute only about 1.5-3% of their annual household income to charity. Globally, we have seen many stories of philanthropy over the past 100 years. While organized philanthropy is still an emerging concept in emerging markets, HNIs and corporates in countries like India are definitely jumping onto the bandwagon too. The next question now is whether there is a case for philanthropy and impact investing to work together. While both have their distinct focuses (only social vs. financial & social), they have a shared end goal – to provide social improvements to society, help low-income families, support the environment, and generally provide opportunities to people in need.
Are Philanthropy and Impact Investing Compatible?
Why should philanthropy and impact investing be combined? Many would argue there is merit in keeping certain activities purely philanthropic without burdening them with expectations of returns and the vagaries of capital markets. However, a case can be made for philanthropists to join hands with impact investors.
For one, many existing investors may not be ready to bite the impact investing bullet all at once, especially given the unknown nature of the sectors and perception of risks. Philanthropic organizations, given the nature of their goals and vision, maybe more willing to make early-stage and risky investments associated with entering rural geographies or catering to the most challenging segments of society. Thus, there is a strong opportunity for them to create the path for such investments that eventually will encourage more investors to take part. A classic example of this is the microfinance industry which was jump started in this manner, with Ford Foundation and Unitus Labs being early supporters, long before commercial capital was available.
Recent Examples of Philanthropic Support of the For-Profit Impact Sector
We are already seeing examples of philanthropy organizations and impact investors working together. One example is the African Agriculture Capital Fund (AACF) funded by J.P. Morgan’s Social Finance division in partnership with USAID, the Bill & Melinda Gates Foundation, the Gatsby Charitable Foundation, and the Rockefeller Foundation. This partnership aims to improve the lives of smallholder farmers in East Africa through impact investing.
Another example is the partnership between the Rockefeller Foundation, philanthropic investment firm Omidyar Network and strategic philanthropy foundation Dasra to launch an Impact Economy Innovations Grant Fund in India of INR 4.8 crores ($800,000 USD) in 2013. The aim of this fund was to develop the overall ecosystem of impact business models in India. Omidyar Network, an anchor investor in Unitus Equity Fund and Elevar Equity Fund II, is looking to invest INR 600-1,200 crores ($100-200 million USD) in India over the next 3-5 years, across both for-profit and non-profit ventures. This is another example of a global philanthropist, Pierre Omidyar (eBay founder) and his wife, investing to make a difference. Additional examples:
- Jim Sorenson (Sorenson Foundation, Sorenson Impact Foundation) has been a pioneering impact investor in India through both funds (Unitus Equity Fund) and direct investments (Unitus Capital, Kinara Capital) for microfinance, SME finance and other sectors.
- Bob Pattillo (Gray Ghost Ventures, Gray Matters Capital, Village Capital, First Light Ventures, IDEX Accelerator) has been a leadership philanthropic investor in India-focused impact investing starting with microfinance, technology for development, the impact investing ecosystem and more.
- Mike Murray (Crystal Springs Foundation), one of the co-founders of the Unitus Group, has been an active impact investor in India-focused early-stage impact venture funds including Unitus Equity Fund, Elevar Equity Fund II and Unitus Ventures (formerly Unitus Seed Fund), which has catalyzed bringing billions of dollars of capital into businesses serving BoP clients in India.
- Lisa & Charly Kleissner (KL Felicitas Foundation) have been active impact investors in many impact businesses in India, in the impact investing ecosystem in India (Dasra), and in developing Toniic, a network for angel impact investors.
Multiple Approaches for Philanthropy to Support Impact Investing
Philanthropic organizations can be involved in the impact investing space in multiple ways. They can provide capital directly to the impact business, they can support the ecosystem around impact organizations, and they can invest in/partner with a fund. They can also partner with government organizations (for example, NSDC) that provide impact investments. In addition, volunteering time, effort and advisory services is also a way to be involved.
The best mode of involvement is up for debate. For example, providing directly to the impact business can raise the question of whether philanthropic organizations have the ability to identify and support the most sustainable and scalable for-profit models. Given their work within the non-profit space, it may be better to partner with a fund that specializes in these investments.
For example, The Michael & Susan Dell Foundation invested INR 10 crore ($1.6 million USD) in IntelleGrow, a venture debt financing company for small and medium impact businesses. IntelleGrow will be accountable and responsible for identifying the enterprises to disburse loans to. Other foundations such as Rockefeller Foundation and Crystal Springs Foundation have invested in funds managed by experienced Indian fund managers. Other foundations such as KL Felicitas Foundation have chosen to invest directly and indirectly into impact businesses and to support development of the impact investing ecosystem.
Accelerating Beyond the Tipping Point
We see many factors driving impact investing forward in India, far beyond the great beginnings of the impact already created through funding of microfinance organizations:
- Impact businesses ranging from Aravind (eyecare) to MokshaYug Access (milk distribution) are growing and delivering impact at scale.
- The new Companies Act is driving a dramatic increase in spending and connections between large corporations and the NGO sector.
- Philanthropic donors and aid organizations are seeing that their impact can be amplified through partnerships with and grants to for-profit impact businesses.
- Capital is flowing into the sector again, from angel financing to seed investing to growth equity.
We’re optimistic that the ecosystem of impact, including all of the above actors and more, will deliver profound improvements to the lives of Indians at the BoP on a sustainable and scalable basis for the foreseeable future.