Editor's Note: As we wrap up 2012, NextBillion is republishing some of the most-read and most commented-articles of the year. These posts illuminated new modes of thinking and new practices for improving low-income peoples' lives through market-based solutions. This post was originally published on Oct. 23.
This year's SOCAP gathering was an absolute treasure chest of insights, dot connecting, networking and intellectual feasting upon solving the world's greatest challenges. It was my first SOCAP conference and I was blown away by the humility of our fledging sector's leaders, the collaborative nature of almost everyone I met and their interest in the work we do at the tip of the continent.
However, there also was an itch that began during the conference as I found myself consistently listening to U.S. and/or developed country-driven solutions to global problems. There seemed to be shared problems amongst the network, but what was lacking was diverse collection of voices or local solutions. So, I returned to South Africa, consolidated my thoughts, the jet lag and the engagements I made throughout the conference, and felt the urge to share some observations as a relative outsider.
Cultural Gentrification in Impact Investing
Coming from a racially segregated society, I am acutely aware that white privileged South Africans have an education and network advantage that consistently keeps our society segregated from those who don't have such fortunate backgrounds. It's very easy for white South Africans to hire from their existing networks of friends or those they feel culturally connected to, and would invite for a post-work beer. However, that approach does not lead to any economic transformation in South Africa. It only enforces an exclusive culture.
While meeting many people at this year's SOCAP, I believe a similar trend exists in the impact investment ecosystem. By default, accelerators, foundations, impact businesses and consultancies hire Ivy League, culturally gentrified employees in foreign countries. This often comes in the form of a foreign deployment, or a U.S.-educated local who has been away from home for half their life. This results in seeking entrepreneurs within existing networks and therefore only exposing a very limited opportunity base. Investment deal flow will therefore be consistently limited, as we continually attract self-recognizable social entrepreneurs and individuals who fit a certain cultural box. Or, we will white wash it with a sub-standard entrepreneur to ensure the enterprise is racially or gender diverse. Meanwhile, no one has actively pulled up their sleeves and deeply penetrated new networks, associations, and cultures to truly source local winners.
'Stage Ready' or 'Investment Ready' Deals?
Another big feature at this year's SOCAP meeting were the entrepreneur scholarships, pre-conference entrepreneur acceleration and pitch sessions throughout the conference. I see lights, cameras, action and a young well spoken U.S. graduate (living in Uganda/Kenya for under three years of course), passionately giving their elevator pitch on how their model is going to change the world. The sell is perfect, tears roll from the eyes listening to the problem statement, the model is plausible and the entrepreneur is a true believer in their cause.
Then it comes time to actually meet the entrepreneur. They come with all the credentials on their CV; three different accelerator programs or fellowships; every answer easily rolling off their tongues. It’s all very impressive. However, spend ten more minutes with the youngster, ask some hard questions and peel back the layers and there is nothing there. Once you delve a little more deeply, you realize that they have received over $75,000 in prize money over the last two years and spent a good chunk of their time flying from conference, to incubation program, to fellowship.
At a macro level, one notices that these entrepreneurs get recycled into the whole global network and come out the other side no further than where they started. Some raise capital, but this often is burnt on living costs and air flights very quickly. The outcome is often the same; very little time spent by the founder on the ground building their business; a living eked out by permanently raising small grants; the impact negligible; and non-profit business plan competitions/fellowships selling the story.
Now, I'm not saying that this exclusively happens, but there is a clear trend. We need to start finding real businesses, which might not be found through a business plan competition or pitch session, they might not culturally fit our educated, yet sophisticated backgrounds. But their potential for investment readiness, scale and impact are large.
It’s Time for Investors to Go Deep
To affect significant change, and achieve scale, early stage impact investors must consider focusing on deep issues within regions and local cultures. At SOCAP, I listened to Matt Bannick, from Omidyar Network. Bannick promoted the notion of taking a sector approach to impact investing. And while I fully support approaching sectors with depth, I believe it doesn't only start there. Impact investors who are deploying capital globally with very small, centralized teams really need to consider forming close local partners in the regions where they operate. Flying a young analyst out from the US to perform due diligence in Sub Saharan Africa is almost futile, and provides very little information and insights into the local fabric of social issues and really appreciating the marketplace. It’s very important for Impact Investors to develop deep, in country local capacity or work with trusted local partners. The phrase ‘Think Global, Act Local’ comes to mind.
Unfortunately soft money can also make investors lazy, when they are not driven by the financial performance of the underlying portfolio. I question the wisdom and impact of throwing $5,000-$10,000 in grants to startups, especially those with unproven skills to deploy that money wisely. This type of social investing does not go deep, it goes broad and is measured by the stories the entrepreneurs tell and the numbers of investments they make.
Accelerators Need to Start Proving Their Value … NOW
The conversations around accelerators are heating up. At a SOCAP pre-conference accelerator meet-up sponsored by Halloran Philanthropies, many of accelerator managers discussed how to improve their effectiveness and drive access to capital into early stage businesses. The Aspen Network of Development Entrepreneurs (ANDE) has also commissioned a research paper, making the business case for incubators / accelerators. Unlike tech accelerators in Silicon Valley, impact accelerators are mostly non-profits. Most of them raise third party grants from donors, they are not necessarily incentivized to the success of the business, they are under capitalized and forced to rely on interns and under-qualified human capital to drive these businesses. It also seems that many impact investors are unwilling to have serious conversations with them and form long-term partnerships.
Impact investors also raise grants for technical assistance, which often goes to expensive consultant resources incentivized to their day rate or short-term business development projects.
Given the success of accelerators in Silicon Valley, there are some principles that could apply in the impact investing universe. Impact accelerators need to be incentivized to the success of the business and align their services to the needs of the entrepreneur. There is a potentially important role for impact accelerators to combine local in country deal sourcing services, intense investment readiness incubation, small amounts of catalytic capital and provide "qualified" deal flow downstream to impact investors. There might even be a space for accelerators to take on early stage deals and exit into impact investors.
The Truth Is …
Obviously, I feel these topics need to be explored openly and discussed deeply if we want to scale this sector.
There is no silver bullet here, just a kaleidoscope of grey areas, that if explored can result in incremental improvements which will enhance the work we do collectively as practitioners and custodians of social capital markets. But first, we need to start getting serious about the cultural and economic forces that are holding back impact investors, if our collective intent is focused on scale and impact. We need to start finding winners, and we need to start looking in places we wouldn’t expect them to hide.