The impact investing gold rush. Just yet?

By Pranay Gupta, 91 Springboard

It is amazing to note how often we hear about ‘social enterprises’ and ‘impact investments’ nowadays. There is, or at least there seems to be, a lot of buzz around money chasing impact startups. In fact, an article in a VCCircle article talks about how the money has gone from $4bn to $12bn in just recent times.

Is this like the technology gold rush of 2000 where regular companies just created their websites and became ‘tech companies’?

We are excited about this and believe it will have a multiplier impact on the entire startup ecosystem.

Some specific points we thought are exciting

  • The availability of funds will help potential social entrepreneurs sitting on the fence decide easily. We have met great entrepreneurs — well educated, good experience, big vision who will jump into the fray to solve real problems of the world.
  • There is a scare of the a-la-‘Tech Gold Rush of 2000’, where regular companies just created websites and became ‘tech companies’. Likewise, we will see a lot of companies trying to sneak into the ‘Impact’ definition to benefit from the gold rush. Frankly, we aren’t complaining a lot about that. As long as investors carry out their due diligence and invest on the merit of business and are not losing money – at least it will be another good business supported. Impact ho jayega!
  • Definitions of ‘Impact’ will get wider. Everyone who is in this space has probably sat through at least 5 debates on ‘What is Impact’? The jury is still out on this. Rather, no one knows who the jury is. And thus, everyone has their own definition. There have been attempts by bodies like GIIN and the upcoming the Impact Investor Council; but there is no consensus yet. Again, we aren’t complaining. We are glad that people get to have their own definition and work as they please. That said, with more money chasing startups – the better startups that conform to the stricter definitions will get costlier. And then, the definition will start getting looser at the peripheries. For example:

Providing Jobs to Below Poverty Line –> Providing Jobs to those educated till 10th –> Providing better jobs to under-employed –> Simply Providing Jobs

  • A lot of ecosystem parts will fall into place too. More people like Intellecap and Ennovent supporting fund raising and consulting social enterprises. More people helping with the market reach. More debt. More government support.
  • Challenge for most investors is the balance between impact and fair market returns. The problem is that most investors use impact as the screening criteria and do not usually give due weightage like they would give to the financials of the business in their evaluation. If the company is profit focused – IPOs, etc. can be potential exits. But, if they do give weightage to impact criteria – and even if company grows on impact – who will drive the eventual exit? It is not like there are companies acquiring for Impact anyway.  We do have more thoughts on this subject & have captured them in our blog here.

On NGOs…

  • NGO decline will be there, or rather NGOs will end up focusing only on non-revenue based activities. Any NGO which is into generating revenues will start moving towards being a social enterprise. Or, they will separate the social enterprise part from the pure social support part and park them in two separate entities. The pure social part will run based on donor funding.
  • Similarly, the social enterprises, as they run now… will spin off their non-profitable ecosystem development activities into a separate NGO and try to dip into donor money for those components. The donors can judge it in two ways – (A) a loss centre to do the dirty work for a profitable business that others are benefiting from. (B) an efficient run NGO working hand in hand with a sustainable business.

Let’s see how this evolves.

Meanwhile, this report by GIZ is a good reference for impact based startups too. Gives a nice list of current landscape, sources of funding, etc.

Excerpted and republished with permission from the 91Springboard blog.


Author Bio: Pranay Gupta is co-founder of Delhi based 91Springboard, a co-working hub for technology startups. He has led 40+ investments in startups across several domains. Follow @PranayG.