Frontier Market Scouts: “Impact Investing 101: What Is It and How Does It Work?”

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The following blog post was written by Dana Warren, a Frontier Market Scout.

Development is a term that is frequently thrown around to describe everything from the creation of new medicine, the mental capacity of a child, the construction of roads in rural areas, and the conception of new technologies. To me, development means empowering people who would otherwise be trapped in the poverty cycle. It means giving people, particularly in disadvantaged countries, the opportunity to not only become consumers in the very same economic market that drives the “developed world,” but also to play a meaningful role in that market. Muhammad Yunus proved to the world that poor people, especially women, could be very successful in business if they are just given the opportunity. The Grameen Bank and Microfinance changed the lives of millions of impoverished people around the world.

So what does all of this have to do with impact investing? Microfinance specifically targets the poorest of the poor and provides them with small loans to lift them out of poverty. Once out of the life-threatening poverty cycle, these people are able to imagine a future beyond living one day to the next. Many of them become entrepreneurs and start small, sustainable, community-focused businesses. If these businesses are successful, they even look to expand. However, they need more money than can be provided through microfinance, but either lack the collateral necessary to take out a loan from a traditional bank or cannot take on the debt because their business is in such an early stage of development. This is the point at which impact investing steps in. Impact investing, “involves making investments that generate social and environmental value as well as financial return” (Monitor 2009). Impact investors target these small, growing businesses, specifically “social enterprises,” that are making a sustainable impact through their product or service. Impact investing fills the gaping “missing middle” by providing the necessary support (both financial and non-financial) so that these entrepreneurs can develop, refine, and test their business models, stimulate demand, develop supply chains, build organizational capacity, and ultimately reach scale (Monitor report).

So, how does impact investing work? The field of impact investing is a nascent industry but is rapidly growing and always innovating. The two impact investing organizations I am most familiar with, Village Capital, and Agora Partnerships, go about it in two different ways. Village Capital uses a “peer review” model in which 15 carefully selected social enterprises pay a small fee and enter into a 10-week peer review process. Each week all 15 entrepreneurs meet and work together to help each other develop their businesses. At the end of the 10 weeks, two entrepreneurs are selected by their peers to receive a $50,000 investment to start their businesses. Although the remaining 13 do not receive any money, they all leave with investment-ready business models. Agora takes a different approach to impact investing. They are an incubator, which means they find the social enterprises, work with the entrepreneurs to develop their businesses and then they match them with investors. Both Village Capital and Agora have been very successful with their methods and have become influential in the impact investing world. Thus far, this is the extent of my exposure to hands-on impact investing, but I look forward to discovering new methods and innovative organizations throughout the duration of my Frontier Market Scout placement.

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