Published on: 09/09/2014
Understanding the difference between charity, venture philanthropy and impact investing is key to getting businesses and programmes funded
Billions of people are living on just a few dollars a day. There are a growing number of entrepreneurs eager to tap into this market and to create products and services that are targeted at this segment of the population which is often called the Bottom of the Pyramid.
If you seek to raise money from impact investors you will be asked about your financial performance, about your exit strategy. Even if much of it is guess work you need to address it.
If you work in development, one day you may be talking to a traditional charity about the urgent need to reduce poverty and the next to an investor about opportunities and markets to reach those at the Bottom of the Pyramid. Just make sure you use the right script for the right audience.
As relationships between corporations and charities are taking new forms in the water and sanitation sector, it is becoming harder for non-experts to distinguish between the different forms of finance being made available and what they mean in practice. Let’s look at the difference between traditional charity, impact investing and venture philanthropy and what needs to be the focus of the pitch to the latter. These three types of financing can be plotted against the level of financial returns and the social or environmental impact expected.
On one side of the chart, traditional charity can deliver high social and environmental returns but has a negative financial return – in other words, profit is not expected. This is the traditional financing for most NGOs and non-profits in the water and sanitation sector. On the other extreme, impact investing can also deliver high impact but it is expected to deliver a positive financial return – profits are expected. Venture philanthropy is somewhere in between, but for these investors the impact on society is a priority over financial return. This is something that the development banks (i.e. World Bank, Asian Development Bank) and some private foundations seem to be aiming at.
Venture philanthropy differs from impact investing because it tends to value measurable impact more than financial return (which can be negative too). In addition to the elements mentioned in impact investing it also includes:
For water and sanitation businesses for the poor, the main problem seems to be the funding of the “pioneer gap” moving from proving that your idea can be turned into a real business to full product/service introduction at scale. Overall, the impact investor/venture philanthropy industry benchmark is that only 1% of proposals get to be funded. Impact investing and venture philanthropy for the water and sanitation is a young industry so we can expect that either investors become willing to take on more risk than other business areas or given the long term and uncertainty of many water and sanitation businesses, this becomes a less interesting area for these new forms of investment.
I'm convinced that solving the global sanitation and water issues will always require some level of public finance
Starting to talk the right language with the right people will save time and effort. An investment is different from a grant. Some sort of financial gain is expected. En Lee said “I get 40-50 proposals a week, in the few minutes that you have to make the pitch you need to speak the right language for your proposal to be considered.” The type of financing choices will need to evolve as the business evolves, so the sources of funds should not be static either.
There is still a big gap in how NGOs and entrepreneurs in the water and sanitation sector make their pitches and what the impact investors want to hear and see. Surely water and sanitation entrepreneurs can improve their pitch skills, but from the other side of the table there needs to be a genuine willingness to understand why investing in water and sanitation is such a complex and risky business that requires long-term frameworks to deliver real change and maybe with little scope for considerable financial returns.
With this in mind, I’m also convinced that solving the global sanitation and water issues will always require some level of public finance, both for initial investment costs and most critically for recurrent costs. National campaigns to promote hand washing, development of regulation for sanitation chain (from containment to treatment), set up district level maintenance teams to name just a few cannot be expected to provide financial returns within a generation and need financing nevertheless.
These type of activities imply the need for complex business models, involving a mix of public and private funds – the kind of thing that in our experience at IRC for which there is not an easy or straightforward pitch. So, there is also a need for venture philanthropy and impact investors to understand these complexities and look for innovative blends of public-private funding partnerships.
Reading materials for water and sanitation (all the links below)
Support to BoP business development in water and sanitation (all the links below)
Thanks to an excellent lecture by En Lee from LGT Venture Philanthropy and Philo Alto from Asia Value Advisors during the BoP World Convention in Singapore, for outlining how things look from the investor perspective (and supplying many of the quotes in this blog).
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