DECODING IMPACT INVESTMENT

In the 21st century, ‘truly great’ means being able to create shared value for all stakeholders, including customers, internal stakeholders, financiers, and future generations keeping people, planet and profit at the core of the operations. Today, the world needs more impact entrepreneurs and investors as co-creators of change with no stopping point in value creation with a strong purpose. In the last four years of my being in the impact enterprising space, I have come across many such co-creators of change. They believe if they had got the opportunity to pick purpose and mission driven investors, it would had been a different ball game and they could have created a different level of impact in the community. However, less attention is given in understanding the dynamics of impact investment and investors. Impact Investment is observed as the practice of injecting financial capital to create measurable social and environmental impact with financial returns on any initiative that creates triple bottom line. Impact investment is an integrated, holistic approach to financing that focuses on solving the complex problems of society focusing on the people ignored by existing market players seeing no maximum value in operating in that particular segment. Impact investors believe that their ability to improve human welfare and protect the planet depends on improving the quality and quantity of entrepreneurial activity and entrepreneurial ventures. Each investor focuses on certain core challenges of the people either in education, health and sanitation, food insecurity and others are able to relate with the purpose of the change. These co-creators of change are high potential impact entrepreneurs intending impactful ventures existing everywhere, in every community, in every industry across the world. The systems to find, connect and empower these impact entrepreneurs are still weak though we have progressed towards a more empathic world. Feebler is the structured capital markets and banking and financial systems to support these co-creators of change, functioning at an early stage operating mostly in underdeveloped countries. With 50 years of failed development practices, Nepal is no exception. Globally, impact entrepreneurs have shown enormous economic development by co-creating impactful ventures that have largely benefited people and the planet ensuring sustainability. Widely impact investment community has been among one of the contributors in getting capital to ventures at a critical inflection point when the values and growth trajectory of the ventures are at inception.

UNDERSTANDING IMPACT INVESTORS

Impact Investors are the people driven with a purpose to generate positive social and or environmental impact through investments. However, this is sometimes looked at as philanthropic investment. Impact Investors deploy financial capital either in the form of charitable donations, loans at a competitive interest or make investment at the low interest rate in the high potential, high quality and highly scalable ventures creating impact to recycle the investment or deploy the new ventures.

IMPACT INVESTMENT SPACE IN NEPAL

In the recent past, many organisations have focused in solving social problems that are at an inflection point and need capital to accelerate their growth. Impact Investors and Impact Entrepreneurs in Nepal have been functional for last 5-6 years in identifying, sourcing and investing in high potential ventures typically operational for last 2-3 years. Their intent is to be financially relevant to the ventures lacking access to banking and financial system and/or have limited access to the structured financial and capital markets. The sustainable impact and prosperity of a nation highly depends on impact investors and ventures. They are committed and clear with investors as they hardly trade off rate of return for impact. Often times they are quick in mentioning and loud in sharing that there is a strong intention to have social/environmental impact but this impact is assumed to occur as a byproduct and can be measured in tangible terms. Few of the organisations functioning to bolster the space of impact investment to breed more co-creators of change from the very beginning with seed fund to scaling up investment are Yunus Social Business Center, King’s College, Himalayan Partners, Rockstart, I-Cube, Women Development Advocacy Center, Dolma Impact Fund and Nepal Innovation Lab. When discussing the guiding principles of these impact investors in sourcing potential investees, the key observations in Nepal’s context is that the ecosystem is very narrow - both in the entrepreneurial ecosystem and entrepreneur’s ecosystem. [caption id="attachment_5033" align="alignnone" width="1000"] IMPACT INVESTMENT CYCLE.[/caption]

UNDERLYING ETHOS

Quality Entrepreneurs – They are the heart and soul of the venture investing heavily in identifying and working with the best people with highest potential, who truly understand the power of co-creation, and are committed to using business as a force for positive social change. Additionally, persistence and perseverance in the past definitely attracts an investment firm.  The focus lies in understanding the entrepreneur based on the core values of agency, empathy, curiosity, perseverance, his or her willingness to risk life for the venture and the larger good as a lifestyle rather than running a show with managerial intent. Community Of Shared Value – Investee and Investors are part of a growing community of entrepreneurs, mentors, fellows and staff that provide ongoing peer to peer learning opportunities. They are the pool to access fast growing networks that helps maximise the chance of post investment success. The most critically looked factors in each potential investee is a strong sense of shared values. Streamlined due diligence – Governance has always been a key factor in prospecting potential investee and the organisation. Impact Investors are not only using requisite tools and techniques, audited financials, organisation policies, board member guidelines and tracking the history or its non-compliance but also reaching out to the people who have an understanding of the shortlisted entrepreneurs’ entrepreneurial attitudes, behaviour, their good days and bad day practices, and vouching on the grapevine network. Impact Investors try to understand beyond the balance sheet and operating policies through a rigorous due diligence and readiness to make sure the effort and resources positively impact the communities. Standardised, measurable impact metrics: The conversation has been brought to the table that there has to be effective ways to understand, measure, manage and optimise the intended impact keeping the desired financial, social and environmental return at the core. The core engagement and deliberation between the investee and the investor has been seen and understood in going deeper and questioning what to measure, when to measure and how to measure to make sure the process and the inputs are agile in nature and forward thinking without comprising the financial return and the triple bottom line impact. Although the process is still in flux, the metrics used to measure are fragmented and sector specific and jointly agreed by both the parties for better results. The clarity in adopting financial return model, theory of change and logic model and mission alignment method or combination of all can act as impact metrics. Post financing consulting support – This input has been observed and seen as one of the fundamental catalyst for the growth organisation and bottleneck for many impact investment organisations as well as the investee. The investor on the one hand specialises in the investment space with quasi understanding of the investee business model and the operations model. On the other hand, the investee lacks professional management and governance leadership and know how. This demands both parties to critically understand and appreciate the post financing consulting support to make sure the venture’s efficiency drivers and pulleys are lubricated in time with utmost care. The need and relevance of post financing consulting support has not only been appreciated but has also created a new platform for existing mentors and coaches. This has led to create a new set of offerings for the existing investment ecosystem and investee ecosystem to accelerate operational and business efficiency of both parties removing the management bottleneck. Safal Partners in different industry verticals with a decade of proven track record strikes me as I write this segment. Though there is a strong desire to have more impact investors in the space, co-creators of change still fail to understand, appreciate the perspective of the investor and value system they are driven by. Potential co-creators of change should delve deeper understanding of impact investors and shift their energy in understanding that creating a vitamin is important for each one of us and not a painkiller. Co-creators of change should also be able to articulate their offering to potential impact investors and the larger good they will be able to create for all stakeholders post investment. It’s equally important for both parties to make a balanced effort and communicate values clearly to thrive and prosper.

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Nanda Kishor Mandal is Head of Yunus Social Business Center at King’s College, and the Founder/Director of Women Development Advocacy Center. He can be reached at [email protected] Head – Yunus Social Business Center King’s College Founder/Director Women Development Advocacy Center www.wdac.org Kathmandu