Closing the Pioneer Gap

By Sasha Dichter, Robert Katz, Harvey Koh, & Ashish Karamchandani2 | Winter 2013

rice_burner_impact_investingHusk Power Systems, a growing social business, burns rice husks to generate power and provide electricity to low-income Indian villagers. (Photo by Harikrishna Katragadda/Greenpeace)

Bihar is far from the economic growth that has transformed Indian megacities like Mumbai, Delhi, and Chennai. It has the lowest rate of economic activity of any Indian state ($430 a year GDP per resident); between 80 and 90 percent of its villages have no electricity; and many of these villages are so remote that the government has declared them unreachable with the conventional electrical grid, consigning millions of people to darkness and poverty.

Gyanesh Pandey, Ratnesh Yadav, and Manoj Sinha knew there had to be a way to address this issue. In 2005, costs for producing renewable energy had been dropping globally, and they believed this represented an opportunity for Bihar to become part of India’s story of economic transformation. They experimented with different sources of renewable power and ultimately settled on rice husks. Bihar is in India’s rice belt, and the husk left over from milling rice grains is not only plentiful, it is generally considered a waste product as well. By developing their own small, low-cost, rice husk-fired power generators, the team believed they could produce reliable, renewable, and affordable electricity for the 70 million people who were off the grid.

The first plant the three social entrepreneurs built in 2007, using their own personal savings, looked modest. It produced just 30 to 35 kilowatts of power, required three operators to keep it running eight hours a day, and delivered power to about 400 homes in the surrounding village over low-voltage power lines strung up on bamboo poles. The economics of delivering power through this system were attractive, and the team believed that this new, small-scale design and mini-grid could be the key to lighting up rural India.

Although excited about the promise of the business, the team’s personal bank accounts were nearly depleted by the cost of developing and building this plant. With a business plan in hand, in 2007 they entered and won three business plan competitions at the University of Texas, the University of Virginia, and the Massachusetts Institute of Technology, netting them $97,500 in prize money. They used this money to construct and operate a second power plant, pay their growing team, and continue their research and development.

The three entrepreneurs also began talking to potential investors about investing in their company, named Husk Power Systems. Although there was some interest, the feedback they got was that the business was at an early stage and too risky for investment. The team was at an impasse. Between their personal savings and prize money they had invested nearly $170,000 into the company. They had two pilot sites up and running, providing about 800 customers in Bihar with access to clean and affordable power. But they still couldn’t raise the capital they needed to grow their business.

Husk’s story is not unique. Many other companies whose mission is providing the poor with critical products and services face similar challenges. Despite the growing numbers of impact investors and the billions of dollars pouring into social impact funds, entrepreneurs like Pandey, Yadav, and Sinha still have a tough time raising the money they need to grow their businesses. Philanthropy and prize money will only get them through the seed stage of development and is not enough to adequately fund an ongoing business, yet few investors will fund a company like Husk in the early stages.

Although many impact investors care about social impact, their primary goal is to generate a significant return on their investments. And despite its social promise and the huge demand for its service, a social business like Husk faces a daunting set of challenges: poor infrastructure, customers with limited ability to pay, the challenges of attracting talented managers, and nonexistent supply chains. These barriers mean additional costs and additional risks, and early-stage investors will very rarely realize high financial returns on their investments to compensate them for taking on these risks.

As a result, most investors, even those who care about impact, choose either to avoid these companies altogether or to invest at a later stage when the execution risk is lower or when the risks are better understood. This means that early-stage companies like Husk find it difficult to raise capital to grow their business. This hampers the growth of the market, and, ultimately, keeps poor people from accessing high-quality goods and services that can improve their lives.

In many ways, the Husk story reminds us of the early days of microfinance: a social entrepreneur (Muhammad Yunus) willing to look beyond conventional wisdom and experiment with market based approaches (loans, not charity) to serve the poor (Bangladeshi women). It’s easy to forget how revolutionary an idea microfinance was, and how much time and money it took to go from the seed of an idea to a global industry that today serves hundreds of millions of poor people with a critical service to improve their lives.

The question that entrepreneurs, impact investors, and everyone who believes that business can play a role in alleviating poverty must answer is this: What will it take to replicate the successes of microfinance in other critical areas such as drinking water, power, sanitation, agriculture, health care, housing, and education?

Rise of Impact Investing

Interest and activity in impact investing is booming. Since 2010, many of the major development agencies and development finance institutions have either launched their own calls for impact investing proposals or accelerated their direct investments into impact investment funds. In 2011 the Global Impact Investing Network and J.P. Morgan published a report predicting nearly $4 billion of impact investments in 2012, and as much as $1 trillion in the coming decade. At the 2012 Giving Pledge conference, whose billionaire attendees have pledged to donate at least half their wealth to charity, impact investing was the “hottest topic,” according to The Economist. And a 2012 Credit Suisse report affirmed J.P. Morgan’s claim that impact investing is a $1 trillion-plus market opportunity. Although these predictions are at a minimum ambitious, and at a maximum wildly inflated, there is no doubt that impact investing has captured the world’s imagination much as microfinance did before it.

The promise of impact investing is undeniable, but we believe there is a growing disconnect between the difficult realities of building inclusive businesses that serve the poor and the promises being made by many of the newer, more aggressive funds and financial institutions. Part of the reason for this disconnect is definitional. Clearly, when J.P. Morgan and Credit Suisse talk about a $1 trillion impact investment market they are using the broadest of definitions. Much of the capital that now qualifies as “impact investing” is invested in more traditional businesses in developing markets (such as real estate, large-scale infrastructure, shopping malls, and aluminum factories), a trend that has been going on for decades and that has accelerated because of the strong economic growth in many developing countries. In addition, there’s been a huge growth in clean tech investing (which some include in their definition of impact investing): According to a 2012 McKinsey & Co. report, up to $1.2 trillion could be invested in solar alone over the next decade. But only a small subset of these funds is investing in social businesses like Husk that target low-income customers in developing countries.

A broad definition of impact investing is in many ways appropriate because nearly all of this capital has the potential to create positive impacts on society. But a broad definition also masks the fact that most funds—even those that talk about fighting poverty—bypass the more difficult, longer-term, and less financially lucrative investments that directly benefit the poor, and instead gravitate toward the easier, quicker, and more financially lucrative opportunities that target broader segments of society.

Today, only a small subset of impact investing funds are willing to take on the high risks and low- to mid-single digit annual returns that come with investing in these markets. This is particularly surprising given the actual track record of the global venture capital industry. According to a recent study by the Kauffman Foundation analyzing the investment returns of its $250 million invested in 100 venture capital funds, only a third of these funds exceeded the returns available in the public markets and, as an overall conclusion, “the average venture capital fund fails to return investor capital after fees.” If Kauffman’s experience is representative, it suggests that venture capital investing has not adequately compensated limited partners for the high risk and low liquidity of these investments. Nevertheless the rhetoric in impact investing is that “market” rates of net return should be 10 to 15 percent per year or higher.

Realities on the Ground

To better understand the subsector of impact investors and other funders that focus primarily on supporting companies that directly address long-standing social inequities, especially global poverty, we undertook a research project funded by the Bill & Melinda Gates Foundation. Specifically, we wanted to understand the sources of capital available to early-stage entrepreneurs focused on low-income markets, why it is still so difficult for them to raise money, and what it takes to scale up new businesses in these markets.

Our starting point was the research that Monitor Inclusive Markets (a unit of Monitor Group) had already undertaken of more than 700 businesses in India and sub-Saharan Africa. We then conducted a broad overview of the impact investing market—mostly at the fund level to understand investment strategies—and then undertook an in-depth look at Acumen Fund’s $77 million investment portfolio in 71 companies in India, Pakistan, and East and West Africa.

We pored over reams of data, including detailed social, operational, and financial performance information from Acumen’s portfolio as well as detailed reports on capital sources, including grants and subsidies. With early data in hand, we tested our hypotheses and initial findings by conducting extended interviews with more than 60 sector experts—investors, entrepreneurs, policymakers, and donors. Because we had access to the full Acumen database, we conducted deep-dive investigations into more than 20 companies, the first time an impact investor has submitted its portfolio results for this kind of external analysis.

Building an Inclusive Business

One of the first things we learned is that creating and growing a company like Husk is difficult, much more difficult than building a traditional business. These social entrepreneurs are truly pioneers. Not only are they aiming to provide new products and services to customers with both low incomes and an appropriate aversion to changing long-standing practices, these entrepreneurs also need to overcome the additional challenges of poor physical infrastructure, underdeveloped value chains, and thin pools of skilled labor to build their businesses. As a result, costs rise, time horizons lengthen, and roadblocks come up—all of which can be overcome, but it takes time and money to do so.

For Husk, for example, building a mini power plant that could generate energy from burning rice husks was challenging enough. But to make the innovation commercially viable the company had to develop a consistent source of rice husk, string wires on bamboo poles to connect every house in the village, create an electronic metering and payment system for customers with no credit history, and create Husk Power University to recruit and train the mechanics, engineers, and operators needed to run the plants. Although a new power company in a developed market would just build a plant or rebrand and resell power, Husk had to build a fully vertically integrated company that does everything from sourcing feedstock to producing power to deliver to people’s homes to collecting payment. Each of these pieces of the value chain is critical to Husk’s commercial viability, but they layer on additional direct costs and add degrees of difficulty to the successful execution of the company’s business plan. From an investor’s perspective, that means higher costs and more execution risk without larger financial returns, because Husk’s customers, even if there might be millions of them, have a limited ability to pay for power.


To better understand Husk’s evolution, consider the four stages of development that a new, pioneering enterprise undergoes: blueprint, validate, prepare, and scale. (See “Scaling a Business,” above.) Pioneering social entrepreneurs have an idea and develop plans—a rough blueprint—for a business that could disrupt the status quo and make a dent in a big problem. The entrepreneurs then take their ideas and begin market tests that require multiple rounds of trials to prototype, refine, and validate the business model, to learn that the product or service works and that customers are willing to buy it at a price that will provide a sufficient return to support the company in the long term. Next, the company needs to prepare for growth, both internally (for example, strengthening the executive team, board, governance, and operating systems) and externally (for example, stimulating customer demand for its products and establishing effective distribution channels to get its products to the customer). Only then is the company in a position to scale up the business.

The Pioneer Gap

One of the most striking findings of our research is that few impact investors are willing to invest in companies targeting the poor, and even fewer are willing to invest at the early stages of the creation of these businesses, a problem that we call the Pioneer Gap. Monitor found that only six of the 84 funds investing in Africa offer early-stage capital. This finding was confirmed by interviews we conducted with nearly 30 impact investors: The overwhelming majority of these funds and advisors expressed a strong preference for investing in the later stage of a company’s development—scale—after commercial viability had been established and preferably once market conditions were well prepared for growth.

The reason this happens is twofold. The first is ideological, the belief that by definition anything that uses investing tools must hit market rates of return—without a clear definition of which market those returns are based on. The second reason is structural: Most of the money going into impact investing still relies on traditional fund structures with traditional return expectations. Funders look to investors to realize significant financial returns and create social impact, but in practice the financial returns nearly always come first for funds with external sources of capital.

What our research uncovered is that although there certainly are many businesses with positive social impact and promising financial prospects, businesses that directly serve the poor nearly always operate in environments that make outsized financial returns extremely unlikely. At Husk, for example, the costs of building out each piece of the supply chain may never provide financial returns for investors, and yet without Husk or someone else taking on these costs, the business will never grow and millions of Biharis will continue to live without power.

Viewed through a purely financial lens, the decision not to invest in Husk at a very early stage makes sense. The early stages of a social business are beset with complexities—all the challenges of a traditional startup, multiplied by the very difficult operating environment—and a potential investor will be unlikely to realize outsized financial returns within an acceptable time frame (typically five to seven years). Viewed through an impact lens, however, this approach makes no sense. Impact investing was meant to fill the gap faced by companies like Husk. And although there is certainly much more capital available than there was just five years ago, most of it is for later-stage investing.

Understanding these limitations, early-stage social businesses tend to look to other sources of funding, particularly grants. Our analysis shows that most social businesses—whether in Acumen’s portfolio or in the broader landscape surveyed by Monitor—had received meaningful grant support early in their development. Of the 71 companies in Acumen Fund’s portfolio, 67 received grants at the blueprint, validate, or prepare stages. These grants paid for the market development costs that companies serving the poor must meet in order to function.

Husk provides an excellent example of the role strategic grants play in building an early-stage social business. Pandey, Yadav, and Sinha had established a blueprint for providing off-grid power in Bihar, but were having limited success raising early-stage capital to complete the validate stage of their growth. In 2008, with two power systems up and running, the Husk team met Simon Desjardins, program manager of the Shell Foundation’s Access to Energy program. Desjardins’s goal was to bring modern energy to low-income communities by backing promising ventures in emerging economies, and Husk seemed to fit the bill.

Fortunately for Husk, Desjardins was not a traditional program officer, and Shell was not a traditional grantmaker. Rather than simply make a grant to Husk to help it provide power to more villages, Desjardins asked an atypical question: How could grants help Husk get to a point where it would be more attractive to investors? Desjardins and the Husk team set out to determine what investors would need to see in order to fund Husk. They agreed that investors expected the team to have more plants in place, to lower the cost of each plant, and to demonstrate the ability to build plants and sign up customers more quickly and efficiently.

So Shell’s grants were tied to Husk hitting a series of operational milestones. The first grant called for Husk to build three additional plants in six months—faster than they had built them before—and maintain consistent uptime at each plant. Later grants pushed the company to reduce the cost of building a plant, develop a proprietary payment system, build local mini-grids, create and implement health, safety, and environmental safeguards, and establish Husk Power University. In total, Shell gave Husk Power $2.3 million in grants between 2008 and 2011 to hit these milestones.

In addition to the Shell grants, Husk benefited from a new policy by the Indian Ministry of New and Renewable Energy to give a capital subsidy to companies providing power to off-grid villages. This significantly reduced Husk’s out-of-pocket costs to build a plant and helped individual plants reach profitability within an acceptable time horizon.

Meanwhile, from 2007 to 2009 Husk stayed in active conversation with Acumen and other potential investors. By late 2008, with 10 plants in place and having hit nearly all of the milestones called for in the early Shell grants, Husk was finally ready to attract impact investors. The company was still small—with fewer than 10 plants serving a few thousand households—and years away from profitability, so the risks were still high. Yet Husk had enough of a track record to attract a $1.65 million pre-Series A round of investment led by Acumen Fund, with participation by LGT Venture PhilanthropyBamboo Finance, and Draper Fisher Jurvetson.

Since 2009, Husk has grown from 10 to 75 plants and is on track to open hundreds more in the coming years. Strategic grants, a well-executed public subsidy program, and investor capital came together to help Husk’s team reach these impressive milestones.

Enterprise Philanthropy

Husk’s early growth required a combination of founder money, targeted grants aimed at achieving specific operational milestones, public subsidy, and impact-focused investors willing to take an early bet on a promising young company. Across the Acumen portfolio we see the most successful companies walk a similar path, balancing the needs of multiple stakeholders and finding creative ways to attract different types of capital at different stages of their growth. (See “Successful Enterprise Grantmaking,” below.)


One of the most critical sources of funding at the early stages of a company’s growth was from what we call “enterprise philanthropy.” This kind of philanthropy—exemplified by the grants given by the Shell Foundation—provide grants along with ongoing, hands-on support to help companies move from the blueprint through the validate stage of their development. Enterprise philanthropists are not only willing to make grants, they are also willing to invest time and money in social businesses at the early stage of their growth. By doing so they are helping firms bridge the Pioneer Gap.

Not every grant to a company qualifies as enterprise philanthropy. A successful enterprise grant will accelerate the development of a social business and position the business to take on investor capital. Enterprise philanthropy, as distinct from traditional grantmaking, has four distinct characteristics: an aligned purpose; a focus on a profitable proposition; clear progression through operating milestones; andpersistence through the many cycles of iteration of a new business model. (See “The Four P’s of Enterprise Philanthropy,” below.)


In our research we saw examples of successful enterprise grants as well as other grants to companies that clearly failed. When the grants failed, it often was because there wasn’t an alignment of purpose between grantmaker, investors, and the company, or the grant did not help the company get to a profitable proposition. Enterprise grantmaking is difficult in practice. It requires a high degree of engagement and successful management of previously strange bedfellows (donors, entrepreneurs, and investors).

It is therefore not surprising that giving grants to a business is not something that most philanthropists are used to doing. If anything, enterprise grantmaking runs counter to traditional philanthropic practice. In Shell’s case, grant money was used to build a local talent pool, develop metering systems, and create safety standards and practice—costly investments in the value chain that a traditional power company in the developed world would not have to make. Although Shell understood the potentially catalytic effect of these targeted grants, most grantmakers would not feel comfortable giving grants that don’t have a direct impact on villagers’ lives.

Bridging the Pioneer Gap

The reason the Pioneer Gap exists is the persistent misalignment between the demands of investor capital and the economic realities of building businesses that serve low-income customers. The risks of investing in these types of businesses are simply too high and the financial payoffs too low to consistently realize funds’ expected returns.

Philanthropy and other grant capital, including public funding, have an important role to play in closing this gap. As the Husk example illustrates, direct grants to the company and a government subsidy program both played significant roles in accelerating the growth of the business without distorting the end market for affordable power in rural Bihar.

The big question is whether enterprise philanthropy can grow large enough to meet the need. Enterprise grantmaking is hard to do, it often requires hands-on support and high engagement, and it is different enough from traditional grantmaking that it will feel very foreign to most grantmakers. It is hard to imagine a world in which billions or tens of billions of dollars of enterprise philanthropy flow into the sector as direct grants. The challenge is not just the availability of philanthropic capital and the mindset shift that would have to occur on the part of grantmakers, it is also that an entire infrastructure of enterprise grantmakers, on the ground and able to work directly with companies, would have to be built globally. This is certainly possible, but it is daunting.

A complementary solution to addressing the Pioneer Gap is to increase the supply of impact investment capital whose risk/return profile is aligned with the realities of early-stage companies in remote, underserved markets. Despite the rhetoric of the impact investing sector, our interviews affirm that most impact investors won’t invest in the early stage. And why would they? Most impact investment funds are backed by limited partners who expect returns of 10 to 15 percent per year or higher. Although there’s no doubt that some risky early-stage ventures with huge potential social impact will offer these levels of financial return, our research shows that most of these early-stage companies do not offer a sufficiently attractive investment proposition to hit this financial benchmark across a portfolio.

The clear solution is to create more investment funds that have more moderate financial return targets—for example, 5 percent per year or lower. These funds, whether investment capital or philanthropy, would be designed to look for the highest social return; those structured as investment funds would hit a minimum threshold of financial return. This orientation would be the exact opposite of what is predominantly happening in today’s impact investing market, where financial returns are paramount and firms must hit minimum social impact targets.

What might such funds look like? The simplest and most attractive approach is for limited partners to make their social impact thesis more rigorous and explicit and then offer capital to investment funds that will commit to hitting these social targets while offering a more modest rate of financial return. To make this work, the investment committees of the major institutional funders—many of them government bodies funded by public monies—would have to be comfortable having a subset of their investment capital explicitly structured to tolerate lower financial returns in order to achieve more aggressive social impact targets.

Another approach would be to build more blended investment funds that combine investment capital with philanthropic or technical support funding. For example, a new $50 million investment fund could also raise a $10 million philanthropic fund—this approach is similar to the recent fund raised by Grassroots Business Fund. The advantage of this structure is that it gives the investors freedom to deploy targeted grant capital to their investees, much like the Shell Foundation did for Husk Power Systems. In addition, by having the investor provide both the grant and investment capital, getting alignment of purpose toward creating a profitable business proposition is a more straightforward undertaking. The challenge of course is that most investors are not adept at raising philanthropy, and many philanthropic funders do not want to feel they are subsidizing investors’ returns. So, although conceptually attractive, this approach has some limitations in practice unless individual investors prove more willing to provide both investment and grant capital.

Finally, at the most aggressive end of the impact spectrum, more funds could be created that are backed by philanthropic capital. Acumen Fund is one such model, as is any fund created from private capital that doesn’t have an explicit return expectation to external investors. Such philanthropically backed funds have the most flexibility to take early-stage risk and to test the limits of where markets will work to solve some of the toughest social issues.

Although it is easy to describe each of the three solutions above, it is difficult to make more of this funding materialize in practice. Investment committees are slow to change their investment theses and their risk tolerance, and it is challenging for a limited partner thousands of miles away from an investment to be able to distinguish between the kinds of impact different funds will actually have on the ground—meaning higher-return funds can look like they represent limited trade-offs in terms of impact. Harder still is to increase the supply of philanthropy, both because philanthropy is always difficult to raise and, more challenging still, because the growing orthodoxy is that impact investing can and should be funded by traditional investor capital.

One way to attack this problem is to have more fund managers and more funders experimenting with fund structures that more directly and appropriately align fund partners with the fund’s impact objectives: rather than use traditional fund structures that provide incentives to maximize fund returns (through carry), create funds that explicitly aim to maximize social impact while requiring a lower minimum return on invested capital. For example, a fund could have a bonus structure whose sole payout mechanism is a function of hitting social impact targets, instead of specific financial targets.

More broadly, the sector needs a mindset shift. For the impact investing sector to reach its potential, it needs to return to first principles and articulate what kind of impact we aim to create for which populations. Our research has shown us that unless we create a structural shift in the supply of capital, the Pioneer Gap will persist; businesses that most aggressively target the most difficult-to-reach people and the toughest social problems will continue to struggle for funding; and “impact” will be loosely defined rather than a core purpose of nearly all impact investing funds.

The Future of Impact Investing

The growing interest in impact investing is a sign of an emerging consensus: the time has come to use the tools of business and investing to achieve social good. In the froth of excitement surrounding impact investing, however, we worry that a limited notion of the tools of impact investing may be hamstringing its goal: to build and scale organizations that help to solve big social problems.

A close look at impact investing reveals myriad investing goals, theories of change, and financial return expectations. It is early enough in the life of the sector that no one philosophy or approach can confidently claim to achieve the greatest impact per dollar invested. But for any of these approaches to flourish, we need much more clarity about our definitions of success. Impact investing was created as a reaction to the limitations of single bottom line investing, yet ironically many of the newest impact investing funds have traditional private equity fund structures that expect high financial returns and that compensate fund partners on these financial returns without any explicit aim or incentive for achieving social impact targets.

At Acumen, the investing in impact investing has always been a means, not an end in itself. For most other funds that cannot be the case because of investor demands for high financial returns. One of the risks we face is that more and more of the capital coming into impact investing has impact as a secondary goal. Our research indicates that it is difficult if not impossible to have impact as a primary goal while generating consistent capital growth for limited partners. Driven by the traditional fund structures and return expectations, many fund managers will have no choice but to screen out all investments that promise anything less than significant capital growth. With that as a first screen they will quickly discover that they cannot invest in many of the most innovative, early-stage, high-potential businesses.

The result will be that the Pioneer Gap will persist, and many of the most promising social businesses will have to improvise to raise money. Philanthropic grants can play an important role in funding early-stage companies, but we worry that they do not have sufficient funds to meet the needs of the sector. Targeted government subsidies and funding can also play a role, but they have to date also proven to be insufficient. Without a structural change in the capital market for social businesses that attracts more impact investors, many will fail to bridge this gap.

The problem is not one of will. Many new and existing impact investors are doing this work because they care profoundly about social impact. But there are two major barriers to creating a well-functioning impact investing marketplace. The first is ideology—the simple notion that any investment involving trade-offs or submarket rates of return inherently is bad investing and is unsustainable. The second is a lack of imagination on the part of funders to create products that match the real needs in the marketplace.

Over the course of our study we heard a lot of frustration. Impact investors are frustrated that there are not enough investment-ready companies, which makes it hard for them to meet their stated financial and social goals. Social entrepreneurs are frustrated because in the early stages of the company’s development, when they need money most, impact investors won’t invest. The market has incredible potential, but this potential will be realized only if investing capital can align itself with the realities on the ground. And until the enabling environment for pioneering social businesses changes radically until we have better infrastructure, deeper talent pools, and more proven business models—investors will not be financially compensated for the risks they take.

Impact investing has come far as a sector. Just a decade ago, the notion that philanthropy could be used for investment was unheard of. The idea that direct grants to a for-profit company could be a mainstream strategy to fight poverty would have seemed absurd. The idea that pursuing social impact could be incorporated in an investing strategy—whether in public or private markets—was seen as a fringe notion. So much has become mainstream, so much more is possible, but only if we realize that we are just at the beginning.


Morgan Stanley Smith Barney Announces Launch of Investing with Impact Platform

Investing with Impact Platform offers an investment approach targeting risk-adjusted financial returns as well as positive environmental and social impact


NEW YORK, Apr. 26 /CSRwire/ – Morgan Stanley Smith Barney today announced the launch of a new investment platform designed to help clients align their financial goals and their personal values. The Investing with Impact Platform offers clients and Financial Advisors a broad range of investment options.

The concept of integrating social and environmental impact into investment decisions is not new, but its growing importance has led to a greater opportunity set for investors. Nearly one in eight dollars under professional management in the U.S. or about $3.07 trillion follows investment strategies that consider corporate responsibility and societal concerns.1

“This is an important initiative for Morgan Stanley Smith Barney,” said Andy Saperstein, Head of Wealth Management, U.S., at Morgan Stanley Smith Barney. “We hear frequently from clients and Financial Advisors about the importance of integrating sustainability themes into their investment portfolios. Now through the Investing with Impact Platform, MSSB is able to offer our clients an action-oriented approach to combine financial returns and their personal values.”

At launch, the Investing with Impact Platform will offer clients access to many opportunities spanning public and private market products through their Financial Advisors. This is the first phase in Morgan Stanley Smith Barney’s focused effort to meet investors’ desire for investment opportunities that center on positive social and environmental impact, without sacrificing financial performance potential. The launch of the Investing with Impact Platform will provide a substantial base on which to expand our offerings over time.

“Our goal is to build this into a robust offering to meet our clients’ needs, regardless of their impact priorities or what their portfolio fit might require,” said Paul Hatch, Head of Investment Strategy & Client Solutions at Morgan Stanley Smith Barney. “With over four million clients who have more than $1.7 trillion of investable assets, we are in a unique position to extend the reach of an ‘investing with impact’ program to one of the largest sets of investors in the world. Even a fraction of this total represents a substantial amount that could be invested in support of the common good.”

“At Morgan Stanley and MSSB, sustainability is at the core of our business and now, with the launch of the Investing with Impact Platform, we are able to help our wealth management clients align their investments with their desire to positively impact their communities,” commented Audrey Choi, Head of Global Sustainable Finance at Morgan Stanley. “We believe investments targeting positive environmental and social impact should be available to all investors from individuals to large scale institutions, and we look forward to continuing to broaden the reach.”

To find out more about the Investing with Impact Platform at Morgan Stanley Smith Barney, please contact your Financial Advisor or email

Morgan Stanley Smith Barney, a global leader in wealth management, provides access to a wide range of products and services to individuals, businesses and institutions, including brokerage and investment advisory services, financial and wealth planning, credit and lending, cash management, annuities and insurance, retirement and trust services.

For further information about Morgan Stanley Smith Barney, please

Morgan Stanley (NYSE: MS) is a leading global financial services firm providing a wide range of investment banking, securities, investment management and wealth management services. The Firm’s employees serve clients worldwide including corporations, governments, institutions and individuals from more than 1,300 offices in 43 countries. For further information about Morgan Stanley, please visit

©2012 Morgan Stanley Smith Barney LLC. Member SIPC. CRC 493016/04/12

1 U.S. SIF: The Forum for Sustainable and Responsible Investment, Report on Socially Responsible Investing Trends in the United States, 2010

Are Philanthropists Key?

Written by Maura O’Neill, Chief Innovation Officer

How donor grants may unlock billions of investment dollars for impact enterprise.

In 2010, JP Morgan released a figure that shocked the investment industry: the group estimated that the potential capital market for impact investing—putting dollars into enterprises that would deliver positive social impact—was between $400 billion and $1 trillion. Buoyed by the success of the microfinance revolution, philanthropists, governments, entrepreneurs and investors began in earnest to see how else they could do well by doing good.

Impact investors have surged forward with capital, ready to support the pioneering entrepreneurs creating fortunes and development gains at the base of the pyramid (BoP). There are now 200 impact investment entities poised to pour billions of dollars into impact enterprises in the next year. They have cast wide nets, but it is becoming increasingly clear that there is a dearth of enterprises that can deliver both the social and the financial returns the investors seek.

This week, more than 250 high-level investors, business executives, entrepreneurs, philanthropists, and academics are convening in Washington to ask the important question: how can public and private actors work together to unleash the potential of the impact economy? 

It is a timely conversation. Monitor & Acumen Fund released a Gates Foundation-funded report this month, “From Blueprint to Scale: The Case for Philanthropy in Impact Investing” (pdf) that warned of an imminent lack of impact investing opportunities. The report breaks down the pipeline problem into three constraints investors of impact ventures face: especially modest margins, long times to scale, and high risk.

Meanwhile, enterprises face their own challenges: difficulty accessing financing, attracting and retaining human capital, achieving economies of scale, creating trust brands, selling to hard-to-reach customer bases with limited resources, high volatility in production, and building high levels of awareness and education—to name a few.

The report then made the recommendation that we at USAID know well: there is a real need for grant dollars and other philanthropic support to reach “pioneer” social enterprises, so that they can develop and test the new business models and forge new markets that will open the field wide for entry.

Put simply, these pioneers are providing public goods when they painstakingly develop new business models to reach the BoP, train a skilled labor force, and cobble together the necessary infrastructure, regulation, and customer awareness that other firms can use.  Without initial support from government to test and scale their work, the report argues that “much impact capital will continue to sit on the sidelines or be deployed in sub-optimal opportunities for impact, and fail to achieve its potential in driving powerful new market-based solutions for the problems of poverty.”

We have an opportunity too great to be missed. So, to help impact investors identify winners, USAID, in partnership with the Rockefeller Foundation, Prudential Financial and Deloitte, launched a Global Impact Investing Rating System (GIIRS). The rating system measures the social and environmental impacts of companies and funds, to provide a credible, independent evaluation of impact, as S&P does for credit risk. In just six months, 53 funds with $1.9 billion in assets under management have joined to invest in GIIRS-rated enterprises.

Development Innovation Ventures does precisely what Monitor prescribed for pipeline support. DIV is a special USAID mechanism that directly supports and scales a growing portfolio of cutting edge “impact enterprises” – market-based social enterprises that have the potential to provide financial returns and yield positive social and economic return. DIV’s niche of providing direct grant (and early stage) support to impact enterprises to help them prove their business model and scale fills an important gap for the impact economy sector, and helps build the pipeline of viable enterprises that can attract investment capital.

There’s more good news. Today, at the opening of the Global Impact Economy summit, Secretary Clinton announced a new $44 million Global Development Alliance (GDA) between USAID and the Skoll Foundation and the Skoll Fund.

The alliance marries DIV’s pioneering approach at USAID with Skoll’s decade-long experience cultivating the world’s most successful social entrepreneurs. Through the new alliance, Skoll and USAID will identify high-impact entrepreneurs who have demonstrated innovations and sustainable business models that are ripe for scale. We will expect from every grant an evaluation of their impact using cutting-edge methods that will help deliver lessons learned about what works, to attract even more scaling support for the solutions with proven results.

Bill Drayton, the founder of Ashoka, once said, “social entrepreneurs are not content just to give a fish or even teach how to fish. They will not rest until they have revolutionized the fishing industry.”  Inspired by their spirit, USAID is working hard to revolutionize the way we support the pioneers, giving them the chance to innovate, test, and grow.  It is the key to unlocking billions of dollars that lie in wait.

Finance Can Fund a Revolution in Giving

By Alexander Friedman and Patty Stonesifer

Finance has been pilloried in recent years for putting profits ahead of people. At its best, it still performs a noble role: connecting investors to investments and fuelling industrial innovation. But finance could also do far more to help tackle social problems instead of leaving the challenge to governments drowning in debt and philanthropists with limited resources.

Look at the numbers. US foundations alone have around $700bn in assets. They give away about 5 per cent of assets annually, about $35bn. This is a lot of money, but not when compared with the investment management industry, which oversees more than $100tn.

Our experience suggests investors want to devote more money to making the world better. They ask their advisers how to do that, but usually do not get a helpful answer. They are also put off by the complexity of establishing their own foundation or remain unconvinced they can give away their money as effectively as they earned it. Yet if investment advisers helped clients to direct just 0.1 per cent of their assets to philanthropy, total funds would increase by around $100bn a year. $1tn could be unlocked this decade.


Here is what the industry should do so clients can meet this goal.

First, banks should create an independent vehicle so clients can support the world’s most effective social programmes. Foundations have proven programmes that lack full funding. In return, foundations will have an incentive to improve transparency and make public their priorities. They will also be rewarded for due diligence in grant-making. It will create a marketplace of philanthropic ideas, open to public review, with the best programmes most in demand. The financial intermediary would make philanthropy as easy for clients as buying a share of stock or investing in a mutual fund.

In this way, individuals could tap into the insights of the top foundations, just as they do with top professionals in venture capital. It is the same strategic reasoning used by Warren Buffett when he chose to invest his philanthropic capital alongside Bill and Melinda Gates.

Second, investment management firms should scale-up their offers of so-called “impact investments”. Impact investing is a nascent asset class that can offer investors both financial and social returns by supplying badly needed capital to businesses producing public goods, such as microfinance and clean technology. In today’s low-yield investment climate, impact investing is becoming more attractive because it is relatively uncorrelated to the broader market. And investment firms should show their seriousness by co-investing alongside clients.

Third, investment banks should use their own employees to create social finance teams. Foundations and non-governmental organisations are experimenting with applying finance to some of the most challenging problems of our time. For example, the International Finance Facility, supported by investment banks, the World Bank and other players in the financial industry, uses long-term pledges from donor governments to sell “vaccine bonds”, making funds immediately available for the purchase and delivery of millions of lifesaving vaccines while providing returns for bondholders.

But we need dozens of these offerings and this requires access to the talent present in the financial industry. Banks should allocate a defined portion of staff time to social finance, similar to the way the legal profession institutionalised pro bono work. The most important work should be awarded to the brightest and best-paid people. When the tech industry got serious about using its assets for good, we saw efforts such as Google tracking dengue fever outbreaks. Finance could produce an even greater impact.

Over the past 50 years, the financial industry has built a huge infrastructure to manage investments and along the way has been roundly criticised for seemingly subjugating the welfare of society to short-term profits. It now has an opportunity to change the debate by opening the capital markets to the social sector in a manner that is good for investors and great for the world.

The writers are chief investment officer at UBS, and the former CEO of the Bill & Melinda Gates Foundation

Copyright The Financial Times Limited 2012. You may share using our article tools. 
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How to Pitch to an Impact Investor

April 21, 2012

Written by Jessica Young, Marketing Manager, Social Venture Network

In the words of Beth Sirull, ED of Pacific Community Ventures, “the basis of freedom is economic self-sufficiency.” As an impact investor leading capital and business advising programs, she’s inspired to build the impact investing movement knowing that it creates freedom for people.

On Friday, April 20th, at the SVN Annual Member Gathering, Beth led a panel on “Investing That’s Changing the World” with domestic impact investor Rob Davenport (Founder and Managing Partner, Brightpath Capital) and international impact investor Harold Rosen (Founder and ED of Grassroots Business Fund). With a growing number of investors interested in social and environmental impact, and a plethora of social entrepreneurs developing solid business plans, the three believe the impact investing movement is coming into its own.

For entrepreneurs looking to find social capital and investors aligned with their missions, panelists shared valuable insights including criteria they seek in their investments and how entrepreneurs can best position themselves as desirable investees.

Impact Investors Seek

Rob, who focuses on new stage ventures in the Western US, requires that social benefits be part of a business’s output. Impact he looks for includes increases in job creation, levels of education, health and wellness, and clean tech and environmental impact (see portfolio client Sungevity).

Harold, who invests in entrepreneurs at the base of the pyramid (from Delhi to Jakarta and Nairobi to Lima), couples financing with capacity building. Grassroots Business Fund selects high impact businesses that provide low-cost goods and services for the poor, agricultural systems, and sustainable offerings with proven delivery models.

Making the Pitch

Entrepreneurs can best position themselves and their businesses for capital by following these tips:

1. Don’t over-invest in your PowerPoint.

PowerPoints and models are nice to have, but invest more time proving you can run an enterprise soundly. Showing you’re aware of your competition (both current and future) is key.

2. Build the investor’s confidence in you and your management team

Impact investors are in the people business; they want to understand who the entrepreneur is and see emotional intelligence, passion and integrity.

3. Don’t overestimate your growth

Be prepared to hit 40% growth instead of 80%, and sensitize your projections accordingly. Panelists resoundingly agree projections never come close to reality.  Hearing “Everything’s great- look at how fast I’m going to grow,” is an automatic put-off says Harold.

4. Demonstrate you can deal with problem cases

Inevitable pitfalls will arise; show you have the flexibility to adjust and will react wisely to stress and business threats. (Consider how you’ll react if your original concept doesn’t play out or if it’s uncertain you’ll make payroll.)

5. Show you are coachable

Loans are risky and investors seek people who are coachable and listen to counsel. Successful entrepreneurs admit when they don’t know what to do and seek expertise and advice.

6. If you only produce one return, make it social

“Even if your venture isn’t as profitable as expected, make sure you can break even with a strong social impact,” advises Rob.

7. Have a sustainable exit strategy

As this is rare, having one will distinguish you from your peers.

Building a Resilient Economy: The Patient Capital Collaborative

Capital_instituteBy Susan Arterian Chang

Over the past two weeks CSRwire’s Talkback has introduced Capital Institute’s Field Guide to Investing in a Resilient Economy series. The Field Guide utilizes the power of narrative to recast the story of our financial system, chronicling the progress of transformative, scalable, real-world investment models that support the creation of a more just and resilient economy. In week one, we featured the first Field Guide study on Grasslands’ LLC, and in week two, we spotlighted Cleveland’s Evergreen Cooperatives.

The final article in the series explores The Patient Capital Collaborative, an impact-investing fund that focuses the collective expertise of a group of angel investors on the nurturing of early-stage companies purpose-built to create positive social and environmental outcomes.

Inspiration at The Investor’s Circle Conference

Sensing something missing in his otherwise successful 20-year career as a private equity fund manager, Sky Lance attended an Investors’ Circle Conference where he observed first hand the nature of the paradigm shift that was taking place in the social investing world.

Twenty years earlier, he noted, “The people who were attracted to starting up companies doing good were people with their hearts in the right place but the quality of companies they established were marginal.” At the IC Conference, the presenting entrepreneurs were clearly people with both strong social values and real management experience.

Although he admired the energy and expertise around the IC, Lance also saw a clear need for a fund to provide structure and follow through for dealmakers who attended the organization’s biannual conferences and the entrepreneurs who presented at it. “The task facing entrepreneurs looking for capital from individuals was daunting,” he reports, “trying to ‘herd the cats’ towards coordinated investor due diligence and, hopefully, the ultimate individual decisions to invest.”

Lance saw this inefficiency of process as eminently fixable.

SustainVC: Bringing Efficiency to Social Impact Investing

SustainVCAnd so in 2007, he created SustainVC to become the general partner of the Patient Capital Collaborative (PCC), a series of impact investment partnerships that would house a portfolio of IC companies. In 2010, Tom Balderston, another seasoned advisor and manager of venture capital funds, joined him as Partner.

PCC provides a unique, formal structure that keeps the momentum going for deals to be consummated after IC Conferences when the initial excitement of hearing an entrepreneur’s presentation dissipates.

It also provides a distinct advantage for investors who have an appetite to invest into deals outside their area of expertise. And because the fund has full-time professional management, yet offers a unique “collaborative” approach, investors can step in and out of active engagement as their time and expertise allows.

Ocean Renewable Power Company

Ocean Renewable Power CompanyFor example, when undertaking its due diligence around an investment in Maine-based Ocean Renewable Power Company, a tidal power technology company, PCC was able to call on the expertise of a PCC limited partner who was a trained mechanical engineer and on another who was previously a partner in the power practice of a major consulting firm.

Another PCC LP set up a call with the CEO of a west coast tidal power company that was also looking for funding. Yet another, a retired Fortune 500 CEO, was interested in helping with the due diligence.

“I realized that this is the kind of team that Kleiner Perkins would love to have,” says Lance. “No one of us could be an expert in all these fields, but together we put together a team that was.”

Birthing New Funds: ESG & Risk-adjusted Returns

Unlike a traditional venture capital fund that raises money at one moment in time and then is closed to new investors for 5 years, the PCC raises a new fund about every 18 months.  “We invest in the companies that have grown too big for ‘friends and family’ but are too small for the venture world,” says Lance.  “This is the most underserved market segment…and hence the area Tom and I feel we can make the greatest impact.”

Structuring the fund to deliver social and environmental impact as well as positive financial return is an art.

For the Earth“There are all sorts of interpretations of how much to bring the social/ environmental weighting into the equation. We have lively discussions among the limited partners as to how much to incorporate the social mission into the rates of return,” says Lance.

“In general we are managing the portfolio similar to an early stage venture capital portfolio in that you have to have those companies that make three to ten times your money to offset those you write off in order to leave the limited partners with an appropriate risk- adjusted rate of return.”

While PCC’s mission is to help fund and support companies that will contribute to the transition to a more sustainable economy, Lance hopes PCC can itself attract more funds under management in order to be self-sustaining over the longer term.

“What is needed,” he maintains, “is one or two ‘thought leader’ institutions to step up to the plate and put real risk capital out there and say ‘we want to foster this category of investment.’”

Download the full Patient Capital Collaborative Field Guide.

The Field Guide to Investing in a Resilient Economy: Recasting the Story of our Financial System

Capital Institute inaugurates a new Talkback series with a story of investing in ranchland for the environment and profit.

Capital_instituteBy Susan Arterian Chang

Our global economy now operates in a precarious state of social and ecological fragility, reflected in a rising wealth gap and growing ecological “overshoot” as we use up the earth’s finite resources and stress the ecosystem beyond its power to regenerate itself.  

At Capital Institute we believe it is critical that we begin channeling financial flows into projects that go beyond doing less harm to people and the planet—instead, we need to identify, and invest in, projects that restore the earth’s and society’s resiliency.  To that end we look to identify investment models that share the remarkable adaptive and healing qualities of natural systems.

In her classic paper, “Leverage Points, Places to Intervene in a System, Donella Meadows explained that if you want to change a system one of the most important places to intervene is through the narrative within which the system operates.

Capital Institute’s goal with the Field Guide to Investing in a Resilient Economy series is to utilize the power of narrative to recast the story of our financial system, as we chronicle the progress of transformative, scalable, real-world investment models that support the creation of a more just and resilient economy.

Grasslands, LLC: A Story About Holistic Management

fieldYou could say that Grasslands LLC, the subject of our first Field Guide story, is about harnessing the power of the photosynthetic process and converting it into financial, human, and ecological capital.

Grasslands, currently with ranch properties in South Dakota and Montana, operates under the holistic management principals crafted by Allan Savory, a Zimbabwean biologist and rancher.

Through close observation of nature, Savory discovered that where wild grazing animals roamed free, the soil was remarkably porous and nutrient rich, and the plant life unusually diverse. He has dedicated his life to replicating these earth-healing habits of wild animals with domestic livestock.

A handful of ranches like Grasslands— based in North and South America, Australia, New Zealand, and Africa—are essentially pilot projects for some variant of the holistic management practices that Savory promotes through the Albuquerque-based Savory Institute and its sister organization, the Africa Centre for Holistic Management in Victoria Falls, Zimbabwe.

These projects have game-changing land reclamation and carbon sequestration potential, since nearly half of the earth’s land mass is grasslands and conventional livestock management and human population expansion has degraded much of it.

Grazing For Ecology and Profit

Grasslands purchases underperforming ranches whose owners have failed to manage the properties to their full potential using conventional grazing practices.  “The more ecologically healthy we can make these ranches using holistic practices the more livestock we can run on them,” says Grasslands CEO Jim Howell.

“We can typically double the stocking rate and as our revenue increases, the value of our property appreciates.”

The investors in Grasslands, who are in for the long haul, believe that in time they will be able to achieve highly competitive financial returns based on this model.

John Fullerton, President and Founder of the Capital Institute, and Larry Lunt, owner of the family office Armonia are currently Grasslands’ principal investors, along with the Savory Institute.  A native of Belgium where investors typically operate with a long-term perspective, Lunt was attracted to the project because he could actively manage it and because he viewed it as holding the promise of significant positive and environmental outcomes.

True Wealth Creation

Fullerton calls his investment in Grasslands a  “quintessential biomimicry play.”

cowsIt’s all about true wealth creation, he maintains, building biodiversity, soil fertility, sequestering carbon, and generating financial returns.  What’s more, he believes that if the market begins to put a value on ecosystem services as he predicts, it will further enhance Grasslands’ expected financial returns.

Lunt, Fullerton, the Savory Institute, and the Grasslands team of managers and ranchers are confident that they will soon have a compelling story to tell a larger group of investors.  Grasslands will soon close on one more ranch property that will bring the total number of acreages under management to 110,000.

The team anticipates a day when their competitive advantage erodes as more ranchers adopt holistic grazing practices.

“In a sense you might say we have an ‘unfair’ advantage because we look at the land through different financial eyes,” says Howell. “But we look forward to that day when we no longer have that advantage because it means our model will be having an impact.”

Ultimately, Grasslands—like all the projects we chronicle in The Field Guide to Investing in a Resilient Economy—is about linking human economic activity more closely with stewardship of the earth.

Enhanced human well-being tends to be the result. Says Grasslands rancher Ron Goddard:

“The Grasslands Project seems to me an excellent way to show our neighbors (and their kids) what we do and that ranching by holistic management actually can produce not only ‘a pleasant life in the country,’ as Allan Nation puts it, but can also produce the wherewithal to enjoy other things that life has to offer beside hard work outdoors.”

Download the Grasslands’ Field Guide study.