The following blog post was written by Elliot Rosenberg, a Frontier Market Scout.
Usually when one thinks of impact investing, what comes to mind is equity, debt, and everything in between. But what about grants? Grants are only for nonprofits, right? Wrong. There’s an often overlooked, but crucial, funding instrument in impact investing called venture philanthropy. And it’s making an important impact on social enterprises. Organizations like Shell Foundation are using venture philanthropy to catalyze enterprises in underdeveloped markets lacking suppliers, partners, and finance.(1) When deployed correctly, venture philanthropy funds critical components of an enterprise, which leads to self-sufficiency, without distorting the market. Otherwise, these high-risk enterprises would struggle to attract risk capital and survive, let alone reach scale.
If the concept of giving money to for-profit enterprises still seems radical, consider other industries. For example, microfinance has received nearly $20 billion in grants to become the commercially viable industry that it is today.(2) Would Mexico’s Banco Compartamos and India’s SKS Microfinance ever have had IPOs if it weren’t for generous subsidies from their predecessors? Even outside of the social enterprise sector, many arguably less socially impactful sectors benefit from massive subsidies in the US—energy, agriculture, transportation, and the list goes on. Could multinational corporate giants such as Boeing and ExxonMobil be as competitive as they are if it weren’t for the billions in subsidies they’ve received? Probably not. So why should enterprises with double or triple bottom lines be limited to risk capital when their non-social counterparts benefit from large subsidies?
The case of Shell Foundation’s “smart subsidy” of Husk Power Systems exemplifies venture philanthropy’s role in building social enterprises and entire markets. Husk Power generates electricity through rice husk gasification for sale to underserved, rural Indians.(3) Like most businesses proposing to sell to the bottom of the pyramid (BoP), thin margins require large scale to make these enterprises commercially viable. In the early stages, Shell Foundation’s $0.5 million in grants for some of the company’s first power plants coupled with business development assistance helped Husk Power to achieve proof of concept. Subsequently, the company attracted $1.2 million in pre-Series A fundraising. Again the Foundation added another $1.7 million for HSSE (Health Safety Security Environment), R&D, human resources and training, marketing and financial management.(4) Since then, Husk Power has grown to near 100 power plants serving 150,000 people and is on pace to have built 2014 plants by the year 2014. Shell Foundation’s support proves that venture philanthropy can be the unsung hero in developing, young, social enterprises. Nonetheless, venture philanthropy is scarce, so more organizations must re-work their traditional investment plans to provide such investments with potentially transformative social returns.
1) Harvey Koh, Ashish Karamchandani, Robert Katz, From Blueprint to Scale, Acumen Fund/Monitor Group, April 2012
3) SOCAP11: Impact Investing Special Edition, Innovations, September 2011, pages 113-120).
4) Alliance Magazine, June 2011, pages 26-59