Impact Investing Isn’t a Hype: It’s an Evolving Toolbox of Opportunities
Women entrepreneurs are often an under-tapped force that can rekindle economic expansion while driving positive social change. Solar Sister, for instance, an organization started by Ashoka Fellow Katherine Lucey, is empowering women to become an active part of the grassroots clean energy economy, both as sellers and users of affordable and high-quality solutions. By training women who live in remote areas in Sub-Saharan Africa to be micro-entrepreneurs and sell clean energy access to their peers, Solar Sister has put the key to inclusive development in the hands of the ones who suffer most from the exclusion. The network encompasses more than 2,500 Solar Sisters across Uganda, Tanzania, and Nigeria, who have reduced the in-house pollution of over half a million people.
With over sixty percent of Solar Sisters’ operations already covered by earned income, the organization projects that it will break even by 2020 and have the ability to pay back investors from operating cash flows.
Solar Sister is ripe for growth capital to scale their proven intervention even further.
However, the reality is that Solar Sister — like many social enterprises — sits somewhere on a spectrum between nonprofit and business, which makes finding the right scaling and financing solution tough. Their work includes quite a lot of capacity building and advocacy costs that eat into the margins, and thus, increase the price of products/services.
If Solar Sister had the ability to be financially sustainable, it would open up much more opportunity for them to use unrestricted income to focus on talent, R&D/innovation and long-term strategizing. Unfortunately, the traditional philanthropic funding that they normally rely on — like grants — is often short-term, restricted in its purpose and limited in size.
So, is investment the magic bullet?
Impact investment has been leading the way in deploying capital for both financial return as well as positive social impact. But many social enterprises like Sister Solar are in the early stages of developing their revenue models and require more flexible instruments.
Fitting social enterprises into the existing financial solutions doesn’t work. We need to think creatively to find the right financing solutions that fit the enterprise.
‘Blended finance’ has been used in development finance for a while and over the last decade, we have seen it applied to social enterprises by essentially combining investment and philanthropic capital into one deal. These two funding streams have traditionally been kept separate — as one expects capital to be returned with a financial gain, while the other expects social impact to be created without the need to return capital — but have proven to be extremely powerful when combined.
Blended finance is also a powerful de-risking tool to engage a group of capital providers that otherwise wouldn’t be able to participate by having philanthropic capital come in as a first-loss guarantee.
Solar Sister has a hybrid business model that is able to separate out its philanthropic activities like training and market development from its revenue-activities, namely the distribution network of micro-entrepreneurs selling solar products. The training can be provided to any and all micro-entrepreneurs who can benefit from this capacity building support, which also solves for the much-needed sharing of back office services within the social enterprise field.
By separating the revenue-generation activities, Solar Sister can start to explore investment for this piece of their model. Repayable finance taps into a much larger pool of capital and is also available in larger amounts than non-repayable financing options. However, traditional financing solutions don’t perfectly fit many of these high-impact social enterprise models, as exit options are non-existing or limited, returns are in the low single digits, and there isn’t often security available. Beyond blending different types of finance, most of the innovation in the social finance field today looks at new financial solutions, such as mezzanine instruments with strong impact incentives tied to the financial return.
Solar Sister is the perfect example of blended finance: Both the investor and the philanthropist are able to leverage each other’s type of capital in pursuit of social mission. It is the kind of model that would benefit from more creative thinking around the instruments we use to leverage the strategic growth (in business and impact) required to create systemic change.
The evolution of the impact investment space is buzzing around this piece of instrument innovation, as the majority of social enterprises still don’t fit the siloes of the financial sector as it exists today.
Josephine Korijn co-founded the Hybrid Finance Initiative at Ashoka, the global network of the world’s leading changemakers. A collaboration between the Philips Foundation and Ashoka has allowed a cohort of leading social entrepreneurs to explore alternative financing solutions that solve for their unique financing needs. We will be bringing together the ecosystem of funders to collectively find the financing solution for social enterprises of all stages and sizes on the 18th of October inEindhoven, Netherlands.
Originally published at www.forbes.com on October 14, 2016.