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Get your pitch right

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.

How to talk to an impact investor

  • When you seek to raise money from impact investing you need to talk “investments” and not “grants”. These investments are made with the intention to generate measurable social and environmental outcomes.
  • You need to demonstrate intentionality. When you are developing your pitch consider for instance to demonstrate that your team has the genuine skills and experience to address the problem you are trying to address. Investor En Lee from LGT Venture Philanthropy said: “The last thing I want to do is to fund an organisation that later on changes its mission, I fund them intentionally to create specific outcomes, if they change to a different model, we move away from those outcomes.”
  • You need to show measurable impact across scale and depth. What problem does your business address? What’s the scale of the problem and the size of your future market? En Lee explained: “What I see in pitches is that many of them have a great passion in what they want to do, but when I ask how entrepreneurs intend to report on impact they seem to be more concerned with the outcomes which are short term and lack scale.”
  • Be clear about the expected financial return. “If you seek to raise money from impact investors this question will come up, 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.”

Now let’s talk venture philanthropy

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:

  • Venture philanthropy is geared towards funding experimental ideas and innovations where financial return is not the first priority. When pitching to venture philanthropists, highlight the social and environmental impacts.
  • There is a high level of engagement from the donor in the form of financial and human capital to support the growth and development of the business as well as building core skills of the entrepreneur. It is important to make clear what type of role and opportunities do you foresee for the venture philanthropist, and how far you are willing to go in accepting a partnership (i.e. advisory role, part of board, equity or debt stakes)
  • The funding tends to be long term (3 to 7 years) therefore the focus of the pitch on the long term theory of change is relevant. 

The lucky one percent

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. 

And the rest

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)

  • Infographic from Aqua for All, WASTE and BoP Inc where obstacles and opportunities for scaling sanitation solutions are described (2014)
  • Access to safe water for the base of the pyramid:lessons learned from 15 case studies (2011)

Support to BoP business development in water and sanitation (all the links below)

  • IRC can support in the understanding of the life-cycle costs and assess sustainability constrains to development of businesses
  • Africa Funded empowers entrepreneurs to develop fundable business plans to flow their business in emerging economies, they work with Aqua for All to support the development of water and sanitation businesses
  • BoP Innovation Centre in Utrecht develops and accelerate inclusive businesses that serve the demand of low-income groups at the base of the pyramid with affordable, quality products and services.

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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Disclaimer

At IRC we have strong opinions and we value honest and frank discussion, so you won't be surprised to hear that not all the opinions on this site represent our official policy.