Impact Investment and the changing landscape of Venture Capital

Babak Hafezi, CEO of Hafezi Capital International Consulting, recently presented for C5’s impact investment incubator in Washington D.C. This incubator is the first in Washington, D.C., to promote impact investing. In the past five years the notion of impact investing and venture philanthropy have gained momentum in the investment market. Investment arms of family offices, pension plans, and wealthy individuals are actively searching to invest in projects that both have a strong return on equity (ROE) and also a measurable positive result within the industry and environment of the investment.

“In the past decade we have seen that investments are moving towards social impact causes that create local jobs, develop infrastructure and alleviate poverty via positive economic contributions to the local economy. Being part of C5 and the cohort of new and developing organizations from around the world, allows the impact to be broader. I am honored to help this amazing incubator and its cohort to develop local economies and increase the social impact footprint,” stated Babak Hafezi.

Impact Investments at a glance

Impact investments often have a different rate of return and timeframe than regular Venture Capital investments. Within the impact investment world, we have a type of investment called “Patient Capital”. Patient Capital generally requires a lower rate of return than normal investments, and the return timeframe is longer than most Venture Capital investments of 5 to 8 years. Patient Capital is investing in organizations with the aim of improving the quality of life and return on equity. To be successful both of those elements must be measured. Generally speaking Patient Capital has an investment horizon of 15 to 20 years.

Impact Investment

Babak Hafezi, MA MBA presenting how to define your Value Proposition in Impact Investment projects to C5 cohort in Washington DC

However, HafeziCapital’s in the field findings show that in the case of Impact Investments, Patient Capital does not require it to be any more patient than conventional Venture Capital. HafeziCapital’s research shows that the mean and median return for Impact Investment projects to be about five (5) years, no different than the average exit for a Venture Capital backed investment. These findings show that a good business models with a positive impact within a community can yield an investments as a good Venture Capital backed investment. Communities tend to support businesses that have a positive and lasting impact on their customers, and viable impact investment projects are at the epicenter of customer loyalty. HafeziCapital’s forecast shows that Impact Investments will be the investment choice of the millennial generation. We should see above the current trend line increases in Impact Investment vehicles given mass adoption and demand in the coming decade. HafeziCapital’s forecasts that the overall investment pool of Impact Investment will increase to $980 billion US Dollars by 2025.

Impact Investment by the numbers

Impact investing’s goal is to find solutions to key problems within a specific industry and underserved market. It is critical to understand that impact investing is generally undertaken by private enterprises but may have backing by NGO organizations. The laboratory of Impact Investing has been India, with over $5.2 Billion US Dollars worth of impact investment projects since 2010. The investments have been led by 54 private investors and have yielded an annual growth rate north of 14%. A deeper dive in the investments show that out of the 48 investor exists between 2010 and 2015, the median internal rate of return (IRR) was over 9.4%. The top quartile of investments yielded a median IRR of 37.8%, demonstrating that social enterprises can be as profitable and viable as Venture Capital backed investment.

Examples of Impact Investment project in India

A great example of impact investment is that of Ziqitza Health Care Limited in India. Founded in 2002 with a single ambulance, ZHL was created as a response to the lack of consistent and high quality adulatory vehicles in India. Created as a result of one of the founder’s mother suffered a heart attack and no ambulance could be found at 1AM, thus the team developed a private market charging for ambulatory services. Today, Ziqitza Health Care Limited is the largest ambulatory service in India, ZHL has served over 13 million people since 2002. They have saved countless number of lives and have become a critical lifeline for the people of India.

Impact Investment as seed capital

The changing demographics and the deflationary cost of technological infrastructure are allowing social enterprises to actively compete in the underserved communities. Although such investments have compressed margins, the volume of the underserved community is very high, and thus allow projects to become financially viable. In the primary stages of business development, we have the merging of technical knowledge and the business knowledge. Impact Investment Clubs can facility knowledge transfer and functional business models that are applicable to the impact investment community. Impact Investment organizations require a specific business model and strategy that may be different from those of general venture capital.

HafeziCapital’s research shows that Impact Investment Clubs can be a great vehicle in obtaining seed capital. Proof of concepts, minimum viable product (MVP) testing and social viability testing in smaller and less served markets are critical for product success. General institutional investors are not willing to take the risk, whereas Impact Investment Clubs are more prone to take those risks, especially if they are coupled with grant money from Non Governmental Organizations (NGO). In the coming years, we will see Impact Investment Clubs become the epicenter for new project launches. This is especially true in the areas of agriculture, clean energy, micro-finance, banking, and healthcare. It is imperative to note that Impact Investment projects have a dual mandate, namely be financially sound and provide a positive social impact. To be successful they must meet both mandates.

Impact Investment and negative Social Impact

Social Enterprises may find that while they are selling the Impact Investment story, that their actions destroy specific markets they have attempted to help. The case of Tom’s Shoes is a great example of how a company with a pure social cause can have negative effects with their respective action. Tom’s promoted a buy one we will give one away to a needy person around the world model. The social enterprise project became a poster child of ethical capitalism, and its $70 shoes sold everywhere from Neiman Marcus to Nordstroms.

However, Tom’s shoes in its efforts to help needy communities drove viable shoe shops out of businesses in Africa. Why pay for a shoe, when you can get it for free? Countless viable businesses that were helping the African economy where driven out of business, given that free was better. These models show that dependency for a “free” model, undermine the sector as a whole, and decrease choices in underserved communities. Impact Investments should not depend on give aways a model, but rather to solve a key problem that the community deems viable and a necessity. The under-served allocate money if it has a key impact on their respective quality of life, thus impact investment projects should really understand their respective value proposition and how their actions bring about a positive social impact.

For more information on Impact Investment, contact HafeziCapital today!

 

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