The philanthropic value of impact investing

One of the questions we are continuously grappling with is how to maximize the impact of our giving. We want to know that the products or services we are investing in actually meet the needs of beneficiaries. To this end, we are learning that the market can serve as a powerful mechanism to ensure that products or services are responsive to and meet the needs of beneficiaries.

This is exemplified in the case of our investment in Sub-K, an Indian company providing saving products to low-income customers. At the time of investment, such products were virtually non-existent in India. From a vendor standpoint, Sub-K could not have built a better product – it was a secure, technology-based solution that leveraged an existing distribution network of corner stores and brought the power of a commercial bank to the fingertips of otherwise ‘unbanked’ clients.

However, Sub-K quickly learned that customers did not see as much value in the product as was expected – the majority of customer transactions were cash-based and customers preferred to hold cash in their own houses rather than entrust it to an unknown system. By interacting with beneficiaries as customers, Sub-K learned that customers had a preference for products that facilitated access to credit, remittances and government transactions. The company accordingly adapted their product offering to incorporate these functions – this not only enhanced the impact of its product offering to customers but also put them back on the path to financial sustainability.

Markets as a mechanism to recalibrate feedback loops

We consciously decided to invest equity, instead of a grant, to support Sub-K. The primary reason for this was not to maximize financial return; it was actually to maximize impact. Sub-K was ultimately at the mercy of the market; in order to ‘survive’, it had to adapt, pivot or iterate in order to address consumer needs. In other words, the market mechanism forced Sub-K to become primarily accountable to the beneficiaries that they sought to serve.

Impact investing can deliver many benefits to both the investor and the company.

In a traditional philanthropic scenario, there is an inclination for service providers to become more accountable to the funder than to target beneficiaries. However, what the funder thinks is impactful may not actually be so in the eyes of the beneficiary, but because the beneficiary is implicitly excluded from the feedback loop, it is difficult to gather that feedback. The market mechanism puts the beneficiary in the front and center of the feedback loop – if a customer does not perceive the product or service to be impactful or of sufficient value to justify their purchase, they will not do so. It therefore puts the onus on the vendor to enhance the quality or iterate on their offering.

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Implications for our investing

Much of our giving takes place in program areas where a market does not even exist yet – that is, the beneficiaries lack the capacity or ability to pay and therefore there is no economic incentive for service providers to supply their products or services to that market.  In such an instance, it is more appropriate to use grant dollars to ensure that important good or services are delivered to beneficiaries who are otherwise excluded from the market .

We will be inclined to consider impact investments where we see early indications of a market forming – either a willingness and ability for customers to pay for products or a willingness for vendors to provide to that market. This could be formative assessments in the case of Mastery Connect, micro-credentialing for teacher professional development in the case of BloomBoard, company-funded skills training models in the case of LabourNet or school rating assessment products in the case of Gray Matters India.

Impact investing can deliver many benefits to both the investor and the company: it provides an opportunity for an investor to ‘do good and do well’, it helps a company scale and become more financially sustainable and it ensures greater capital efficiency. What is paramount to these benefits however is the needs of beneficiaries. Impact investing provides a mechanism by which beneficiaries are placed at the front and center of the feedback loop. It incentivizes service providers to deliver the highest impact, highest quality product that serves a genuine need of beneficiaries. This is the philanthropic value of impact investing.