Impact investing refers to the investment practice that looks at environment and social impacts beyond financial return. Nowadays, many social venture funds are looking to fill the gaps between micro-capital and commercial bank by serving the 'missing middle class'. The target investee/borrower is usually of the size that is bigger than a typical micro-finance client, yet not big enough to be a commercial bank client; however, these social venture capitals are standing exactly where micro-capital stood about 7-10 years ago - they rely solely on donors' contributions and grants to remain operational because the high operation expense, credit risk, FX and country risks if lending to organizations in developing countries.
Such kind of social venture fund usually provide full-fledged finance, advisory, or both services to target clients. One of the most typical yet successful fund in this spectrum is Root Capital with clients in Africa, and Latin America. The Cambridge, MA based has three main business lines - Finance, Advisory, and Catalyze.
(William F. Foote, Founder & CEO of Root Capital)
Financial services extends loans of various sizes to borrowers for different purposes. Root Capital runs two types of portfolio - Sustainable Trade Fund (STF) Portfolio, and Frontier Portfolio. The STF portfolio consists of two major kinds of loans - mostly small loans to farmers for trade credit and pre-harvest purchase, and a small portion of large loans to farmers for equipment and infrastructure. While STF is the flagship lending arm of Root Capital, Frontier Portfolio is an experiment field for them, boosting sub-portfolios for Haiti, Food and Security, and Innovation.
Root Capital runs a very risky business because of all the underlying risks. While demanding financial return, Root Capital lends money to clients who carry a high credit risk in the regions with high country and FX risks such as Nigeria, Uganda, and West Africa.
The debate starts from whether Root Capital could achieve OSS. Half a year ago when they were trying to attract commercial money, they claimed that they could achieved OSS in he second half of 2013. Just a month ago, their plan was changed to 2016. While it is always good to be conservative, it does raise a flag to potential investors about its ability in doing so.
While most of these social venture capitals are still suffering operational loss due to the high operational expense and low yield, they are gaining support from social investors such as Gates Foundation. Many of them are trying model their business after the success of Root Capital but in different regions and target clients. This is the spot where international development organizations should step in the way like what they did for the micro-capitals for the past decade - provide the financial and operation to social venture fund to boost their growth, and prepare for this second wave of social enterprises.
This comment has been removed by the author.
ReplyDeleteIn any social enterprise, I think values are always a driving force which differentiate itself from private companies that maximize profit. Therefore no matter what form social enterprises are of, values should be not only incorporated into the management systems but also rooted into the ownership structure and culture. They can be an organization's greatest asset, building community support for the organziation, as well as customer and employee loyalty. They can also be a liability, when the explicit value statements raise false expectations and utopian visions. Thus among the greatest challenges when starting a social enterprise is how to foster and integrate proper values into the new organisation. This will require not only a dedication from the social entrepreneurs to ensure that messages are hard-wired into the operation, but also a shift in mind-set by those who will encounter and do business with these enterprises during their operational life-span. Only by fostering the growth and proliferation of social enterprises and showing that they have everything they need to compete in the market place and more, will this be achieved.
ReplyDeleteI think it is very good to know that venture capital is shifting its targets a little from high technology industries such as biotechnology, IT, and software into other field, as the blog mentioned, agriculture. However, the most critical features of venture capital is high profit potential and high risk. That is why they invest money and technical support to clients to get them go into the "role" faster. Regards to if they could also rooted into organizational culture, I think it really depends on their investment form. If they are part of the actual operation of the company, then they could consider doing it after finishing their primary missions. If the form is that they are not part of the operation system, they better not involve too much, or at least taking actions based on active communication with the actual management team.
ReplyDelete