P R Ganapathy | December 18, 2015

5 questions for budding impact investors

Perhaps you’ve heard about this great new movement called ‘Impact Investing’ where investors fund social enterprises – companies with products or services that help the poor or save the environment. Perhaps you’ve read about a social business that’s doing innovative and impactful work on an issue that you care about and have asked yourself “how can I help?” Perhaps your portfolio has done well, and you now feel like you would like to “give back”.

We recently launched the Menterra Social Impact Fund and if you too are considering becoming an Impact Investor in India, then here are some questions to ask yourself before you take the plunge.

Why do you want to do this?
It’s important that you clearly understand and articulate your objectives, because that will help you make the right choices as you develop your investing strategy. Your objectives will determine how much money you want to put in, what mix of financial and social returns you are looking for, and how much time you can spend. Some people have no time to give, but want their money to make a difference. Others would like to fund and also mentor entrepreneurs. Some other people make impact investments to engage their children with social causes. Think through why you’re doing this, and you’ll find it easier to develop a sound strategy to align with your objectives. It is also important that you articulate these objectives to your wealth advisors, family, friends and other partner organisations, including the entrepreneurs you meet, so that there’s no misunderstanding later.

What causes or regions are you passionate about?
Are you sector and region agnostic, or do you want your money to go into a specific problem area – like education or healthcare, for example? Several people in India consider it their duty to make investments for the betterment of their home state or region – so ask yourself if that’s important too. You should also then think through whether you have a particular point-of-view on the problem area. For example, if you believe that digital technologies can improve the effectiveness of teaching in under-resourced schools, or that skill training without job placement is a waste of money, then please articulate those views too. It will make it easier to find an enterprise that fits your world view.

What returns do you want and how much risk can you take?
A by-product of the question about why you want to become an impact investor is how much you’re willing to risk, and what returns you’re willing to take (both financial and social). You should pick your investment instruments accordingly. For example, you should only look at super early-stage equity investments in high-risk/ high-impact enterprises (like med-tech device companies) if you are willing to lose your entire investment. If you want moderate returns and your principal protected, you could make peer-to-peer impact investments through a platform like Micrograam (www.micrograam.com) or Kiva (www.kiva.org). Your risk appetite will also determine the stage of enterprise you should look at (although later stage investments generally require a higher investment ticket size). You must also factor in your investment time horizon. There is a reason why impact investors are also called ‘patient capital’. Social enterprises take time to scale and have impact, and therefore need investors who can patiently wait and support them for much longer than conventional investors. If you want to be an impact investor, make sure you’re not in a hurry for returns or exits.

How much do you want to be involved?
The activities involved in becoming an impact investor take a lot of time (finding good social enterprises that are looking for funding, performing due diligence, negotiating terms and managing your investment.) Ask yourself how much time you have to do these activities. If you have limited bandwidth, partnering with someone else who can help with some aspects, such as an incubator or an impact investment fund, will help. They will surface pipeline and perform diligence, and you can co-invest with them.

How will you measure results?
In addition to measuring the IRR of your financial returns, you should think about how you would like to measure social returns. This is linked to the intervention areas that you would like to focus on. Number of children from BOP families educated? Change in learning outcomes? Number of life-saving tests conducted? Improvement in incomes for small and marginal farmers? Determine what metrics you are going to use to measure the non-financial social impact and what targets you would like to achieve along those metrics. This will help you track your progress from time to time and give you quantitative results that go beyond the feel-good that comes from supporting social enterprises.

Impact Investing can be a lot of fun, especially if the investor takes the time to provide more than just money – advice, mentoring and contacts – to the entrepreneur. Social entrepreneurs are passionate, motivated, hard-working people, and their energy and desire for social impact can be infectious.

However, impact investing is very different from commercial angel investing, so please take the plunge with your eyes open. If you go in with the right expectations, I’m certain you won’t regret it.