In partnership with the Michael & Susan Dell Foundation, the Social Innovation & Investment Initiative at the New York University Wagner Graduate School of Public Service (NYU Wagner) analyzed more than 40 foundation-related investments, and together we developed a MISSION framework to document its impact investing strategy. The framework is comprised of the following elements: Market, Impact, Scale, Sustainability, Incrementality, Organization and Next. This is the second post in a blog series that focuses on each of these elements. This post, on the Market aspect of the framework, is authored by Scott Taitel, Clinical Professor of Public Service and Director of Social Impact, Innovation & Investment at NYU Wagner. You can read the full case study here.
When the Michael & Susan Dell Foundation approached the NYU Wagner Graduate School of Public Service’s Social Innovation & Investment Initiative (SII) to review its decade-long history with impact investing, there was a clear alignment on objectives of documenting best practices in impact investing in order to strengthen this emerging sector. One of SII’s main goals is to encourage collaboration among practitioners, policymakers, and academia, and we saw this as an opportunity to further our goal. The resulting case study may be a helpful tool for other family foundations and philanthropic organizations looking to begin or expand their impact investing activities. The case study also offers exposure to impact investing in the classroom from the philanthropic sector’s perspective.
To develop the case, SII analyzed more than 40 program-related investments made by the foundation to date and developed a MISSION framework, as mentioned in Geeta Goel’s previous blog, to document the filters the foundation uses to evaluate potential investment opportunities. The framework represents Market, Impact, Scale, Sustainability, Incrementality, Organization and Next considerations. This blog post focuses on the Market aspect of the framework.
As the foundation’s experience in impact investing has shown, facilitating or amplifying market-based approaches to social issues can be highly effective. While social enterprises cannot solve all the needs of those who are underserved, they can play a vital role at the intersection of market opportunity, demand, and proper investment tools. To find out if market-based solutions can solve social problems at scale, the foundation works to determine whether the investment:
- Will unlock opportunities to solve social problems at scale, and
- Provide beneficiaries with a solution they find valuable and will pay for.
Using this framework, the foundation can determine if a business model’s long-term financial outlook (viability of their product) and demonstrated demand from customers (unmet market need) fit together. Product/market fit is key to attracting traditional capital and spurring competition within the sector – increasing social impact and the sustainability of the investee’s model.
An example of this process is the foundation’s own success in urban microfinance in India. In 2006, microfinance in India was a rapidly growing industry. However, Microfinance Institutions (MFIs) primarily focused their investments in rural areas. At the time, as little as five percent of all microfinance clients were in cities. The foundation saw significant potential in adapting the group lending model to an urban context, and was one of the first investors to take a risk on new ventures serving disadvantaged families in India’s cities.
The foundation partnered with CARE India and commissioned Intellecap, a research and consulting firm, to conduct a market analysis of the urban microfinance market. The results were clear: Indian cities showed both demand for credit and the ability to pay for low-cost financial services. The foundation subsequently made equity investments in eight urban-focused MFIs. One early foundation investee, Ujjivan, works to extend microcredit and financial inclusion services to the urban poor and underbanked. In 2006, when the foundation invested in Ujjivan, it has had less than 3,000 clients, and as it proved out its model, in terms of replicability and sustainability, it attracted several rounds of investments and support, not just from the foundation but several new, mainstream investors. Ujjivan’s long-term success proves that sustainable, social impact models can attract increased financial support., In 2016, Ujjivan was licenced as a Small Finance Bank, and launched a successful IPO. It serves over 3.6 million customers today.
Despite the success of investees like Ujjivan and others in India, it is important to note that it is difficult to pioneer new markets in any sector, particularly when there is a social impact focus. However, a philanthropic investor can leverage its advantage of having deep sector knowledge and patient capital to work with entrepreneurs to ensure that a financially sustainable way of serving those in need can be tested and scaled, and attract other forms of capital for growth capital. In this way, foundations can add value and scale opportunities in early stages that mainstream investors may not, a concept referred to as Incrementality, which will be the subject of the next blog in this series.
Scott Taitel is Clinical Professor of Public Service and Director of Social Impact, Innovation & Investment at the NYU Wagner Graduate School of Public Service. He received the Professor of the Year Award at Wagner’s 2017 convocation. He teaches numerous courses including Managing Financial and Social Returns of Social Enterprises, Social Impact Investment, Corporate Finance & Public Policy, and Financial Management for Global Nonprofit Organizations and leads an interdisciplinary practicum of NYU Wagner and NYU Stern Business students in the development of a student-operated Impact Investment Fund.