Putting the ‘impact’ back in impact investing

This is part of a blog series that focuses on how the Michael & Susan Dell Foundation approaches impact investing. In this series, you will read about the foundation’s investment strategy in a particular ed tech solution, and each company’s mission to solve an existing problem in education. You can find the full series here.

In 2011, our India-based team came across two brilliant young brothers in Bangalore – Harsha and Soorya Mahabala – who had formed an organization called Edutel. The two brothers discovered they could broadcast lessons given by high-quality teachers to affordable private schools that serve low-income students across urban and rural Bangalore using spare government satellite bandwidth. At the time of initial conversation, the brothers had piloted the concept in about 50 schools and were seeking funding to expand the program to over 150 schools.

Given the stage that Edutel was in their lifecycle, we did not feel that a debt or equity instrument was suitable; rather, we provided funding to enable the company to pilot and iterate various parts of its model such as the technology, operations, execution, different pricing models and, most importantly, the impact on learning outcomes for low-income students.

In 2014, once Edutel began to show some initial success in reaching their goals, we began to consider whether they were suitable for equity investment. Edutel had proven out its initial impact hypothesis, had early evidence of a paying customer base and was starting to ramp up efforts in sales and marketing capabilities and product development. By providing an equity injection, we hoped that it would support the company in building a sustainable venture that could deliver strong social  returns and reach a greater number of schools.

The growth of our impact investing

Our collaboration with Edutel is emblematic of the foundation’s approach to impact investing. In a previous blog written in 2014, Geeta Goel laid out the foundation’s thinking about impact investing.  At the time, the foundation already had an impact investing portfolio of $24 million across 22 organizations – 21 of which were in India and only one in the U.S.

A lot has happened since then: We have made ten more impact investments, including five in the U.S., growing the total portfolio size to over $40 million across 31 organizations. Our portfolio in the U.S. now spans three of our programmatic focus areas – Data-Driven Education, College Success and Health & Wellness.

As the landscape for impact investing continues to grow and change, so do we.

A shift in our thinking

Through these recent investments, we have refined our thinking as to when and why to undertake an impact investment.  All of our impact investments have two things in common:

  1. An impact investment should always start with impact. Social impact is not just a by-product to the investment, nor an extra filter in the investment criteria – it has to be core to the organization’s mission and vision as impact intentionality matters.

Each program team within the foundation has its own ‘theory of change’ with respect to the mission of the foundation. The first filter in considering an investment, therefore, is whether a particular organization aligns with the beneficial social outcomes that the particular program is trying to drive or support.

  1. We look at the stage the organization is at in its lifecycle along a spectrum of impact, scale and sustainability and try to deploy a tool that is most appropriate given that stage. If an organization is trying to prove out its impact, like Edutel was in 2011, a grant is likely the most suitable instrument, as it enables the organization to experiment with approaches that maximize impact (as opposed to scale or financial sustainability). Where an organization is thinking about scale and/or financial sustainability, like Edutel was in 2014, an alternative financial instrument, such as equity, debt, a convertible note or a recoverable grant may be more relevant. We have learned that it is best to think about organization lifecycle first and financial tool second.

Source: Michael & Susan Dell Foundation

What’s next?

As the landscape for impact investing continues to grow and change, so do we.  We are open to the type of funding needed at any given time, in any given situation.  We know that context matters and we continually seek to find the best ways to drive better educational and health outcomes with our investments.

But how does this work in the real world?  Besides Edutel, when would we choose to invest through grant making or through an impact investment?  Through a series of blog posts, we will dive deeper into these stories by telling you about some of our recent US-based ed tech impact investments.  We will highlight different aspects of our investing framework and how it has played out in practice from the end user’s perspective (usually the teacher.).

As impact investors, we must be flexible with our choice of capital to maximize the social impact of our giving. While our impact investing approach will continue to evolve as we learn from our on-the-ground experiences, we’ll continue to use this framework to underpin our investment approach.