Financial return… or social impact? How about both?
Redwood City, CA., December 7, 2016 /PRNewswire/ — Based on $1B and 12 years of impact investing experience, Omidyar Network has published a new framework to help other impact investors evaluate the financial and social impact of their investments.
The report lays out a continuum that includes commercial investments, subcommercial investments, and philanthropic grants.
“This report is intended to move impact investing beyond the long-standing and unproductive debate that impact investors can have either financial return or social impact, but not both,” said Matt Bannick, managing partner at Omidyar Network. “In our experience, that is a false choice—in fact, impact investing opportunities fall along a spectrum of financial and social returns.”
The report, “Across the Returns Continuum,” appears in the Winter 2017 issue of the Stanford Social Innovation Review. It introduces Omidyar Network’s impact investment framework and details the conditions under which Omidyar Network accepts lower financial returns in exchange for greater social impact. The framework classifies investments into three categories:
- Commercial Investments. Commercial investments are expected to deliver both positive social impact and strong financial returns.
- Subcommercial Investments. In order for Omidyar Network to make an investment that is unlikely to generate commercial returns, the firm requires that its social impact extend beyond its customers to the broader marketplace, such as:
• Pioneering a new business model that has the potential to create an entirely new market with broad social impact.
• Providing industry infrastructure that is necessary for markets to develop effectively.
• Influencing government policy or sparking debate on important issues in a way that helps shape market conditions. - Philanthropic Grants. These grants are not expected to produce a financial return, but they are expected to have high social impact. Grants are awarded to organizations according to their ability to become self-sufficient, through approaches ranging from producing zero revenue to covering up to 100 percent of their costs.
Excerpts from Omidyar Network’s ‘Across The Returns Continuum’
- Pioneering a new model
Sometimes markets—particularly those that serve low-income or rural consumers—take a while to develop. And sometimes serving those consumers requires the creation of business models that differ from the models used to serve higherincome groups. By offering high-risk, patient capital, impact investors can enable a firm to prove the viability of a new model. If the model is successful, it will inspire other firms to follow suit, and the emergence of competition will in turn drive down prices, increase quality, and spark innovation.
In this sense, the market impact of a pioneering firm encompasses all of the customers served by all of the firms that ultimately enter the market that it helps to create. In assessing a pioneering firm, therefore, impact investors should weigh not just that firm’s expected financial return and its expected direct impact on customers, but also the benefits that could arise from launching an entire new model.
The microfinance market provides one of the best-known cases in which patient capital helped create an entire new market. But there are other examples of this process. Consider the market for consumer solar products in developing regions of the world. One Omidyar Network investee, d.light, provides solar lanterns and home solar systems to customers in Africa, China, and South Asia (as well as the United States). Part of its founding mission is to tap solar power in order to eliminate the use of noxious, expensive kerosene in low-income countries.
When we initially invested in d.light, the market for consumer solar products was completely unproven. But over several years, d.light demonstrated the commercial viability of its first offering—low-cost solar lanterns—by designing innovative product models and by building effective distribution channels in its target markets. In so doing, the company paved the way for other solar lantern providers.
A second d.light offering involves low-cost home solar systems. Initially, the company sold those systems mainly through a company called M-Kopa, which acted as its distribution partner in East Africa. But M-Kopa later terminated its exclusive relationship with d.light and eventually began selling home solar systems on its own. Other firms entered this market as well, and many of them developed novel product and service offerings. (Off-Grid Electric, for instance, uses a leasing model.) It’s too early to tell which solar equipment providers will prevail. But it’s clear that early support for d.light by Omidyar Network and other investors accelerated the development of a robust new market that now includes multiple firms.
- Providing industry infrastructure
Some markets, in order to develop effectively, require critical pieces of enabling infrastructure. The creation of this infrastructure, however, sometimes lags because no single market player wishes to assume the cost and the risk of investing in it. That is all the more true when such an investment is likely to benefit potential competitors.
The need for exotic currency hedging in microfinance offers a case in point. Microfinance originally evolved as a nonprofit endeavor. As companies sought to commercialize the field, they found that the lack of affordable currency-hedging capacity inhibited the development of an efficient market.
In particular, they encountered the problem of currency mismatch: Many microfinance institutions (MFIs) draw funding from investors based in the United States or in Europe, and that funding is in hard currency. Yet MFIs, to meet the needs of their borrowers, lend out money in local currencies that have very low liquidity. As the microfinance market grew, the MFIs’ currency risk grew as well. But few financial institutions offered hedging products for the relevant local currencies, and institutions that did offer those products often imposed onerous collateral requirements on customers.
The Across the Returns Continuum report is available on Stanford Social Innovation Review’s website.
About Omidyar Network
Omidyar Network is a philanthropic investment firm dedicated to harnessing the power of markets to create opportunity for people to improve their lives. Established in 2004 by eBay founder Pierre Omidyar and his wife Pam, the organization invests in and helps scale innovative organizations to catalyze economic and social change. Omidyar Network has committed more than $1 billion to for-profit companies and nonprofit organizations that foster economic advancement and encourage individual participation across multiple initiatives, including Education, Emerging Tech, Financial Inclusion, Governance & Citizen Engagement, and Property Rights. To learn more, visit here, and follow on Twitter @OmidyarNetwork #PositiveReturns.
