Lesson one: Sector knowledge is crucial in impact investing

It’s been 10 years for the Michael & Susan Dell Foundation in India.

During this time, the foundation has combined grants and impact investments to develop scalable solutions to eradicate urban poverty—focusing on education and family economic stability. This blog series will look at our 10 key learnings from impact investing in India over the last decade.

Our earliest lesson was that sector knowledge is critical for social entrepreneurship.

In 2006, the foundation made its first impact investment in Ujjivan Financial Services, a microfinance company for the urban poor. At that time, urban microfinance in India was considered a risky venture. However, the foundation combined our knowledge of the sector with on-the-ground surveys and pilots in urban slums, and was convinced that urban microfinance was as scalable as rural microfinance.

Inspired by our work with Ujjivan, we made seven other investments focused on urban microfinance. Today, our portfolio of companies (including the exited investments) contribute to 32 percent of the total microfinance outreach in India and more than half of the urban microfinance client base. An impressive feat in a short span of time.

Our work with a portfolio of urban focused microfinance institutions has taught us several important lessons:

  • Breaking new ground is complex: With early stage investing, there are many unknowns. In social ventures, complexities increase as we often deal with low margins, untested products, and high aspirations.
  • Consolidating your learnings is crucial: To improve chances of success, it is important that we learn from mistakes, and avoid repeating the same mistakes or re-inventing the wheel. For instance, in our urban microfinance portfolio, collections in summer posed a challenge as clients were engaged elsewhere. We responded with two different approaches—we either asked the clients to make early payment to maintain portfolio quality or intensified collection efforts once clients returned.
  • Flexibility improves outcomes: Weekly meetings were another challenge for our working clients in urban areas. We countered this by encouraging our microfinance institutions to shift to fortnightly or monthly collections. This increased the overall efficiency of the process and improved attendance at group meetings and collections.
  • Retaining talent influences success: Recruiting the right candidates and retaining loan officers is difficult as microfinance organizations in urban areas compete with less strenuous alternative job options such as those in retail or offices. This is a challenge that organizations must overcome to succeed, and we worked with our companies in designing incentive and loyalty bonuses to reduce attrition at the front line of the business.

Today, our portfolio of companies (including the exited investments) contribute to 32 percent of the total microfinance outreach in India and more than half of the urban microfinance client base. An impressive feat in a short span of time.

Today, we are also seeing the benefits of sector knowledge play out in our education portfolio. Having observed educators use different tools over the years, the foundation can now guide our portfolio companies on how they can pitch their product to educational institutions and integrate it into school curriculum.

In this way, sector knowledge provides investors with first-hand knowledge of the problems and opportunities within an industry, especially if it is a new venture. As a result, the strategies developed leverage the strengths of a sector, while providing for its weaknesses. Knowing is half the battle, the rest lies in execution.

Watch this space for the next in our blog series to learn why we believe that “execution comes first.”

Other blogs in this series:

Pioneering a new path forward: 10 lessons learned in impact investing