Since the formation of the modern venture capital industry in the 1960’s and 1970’s, investing has taken on a new mindset. Innovation and creativity have replaced tradition and custom as the buzzwords of the working generation. The newest innovation? Social investing.1 Venture capital has paved the way to allow for new forms of investments, benefitting both the philanthropic and investing worlds.
Impact investing, in its most basic definition, requires an investment to produce a social impact as well as monetary profit. However, that fundamental characteristic creates several issues that affect industry startups’ success. For example, traditional forms of financing are not conducive to social investing. Companies seeking both social and financial returns need a flexible way for investors to contribute that currently does not exist.2 Additionally, measuring impact has proven to be a challenge. Unsurprisingly, it is hotly debated what counts as an impact, if measuring impact is even useful, or if we should simply focus on creating broad transformations.3 Additionality, the concept of impact not occurring but for an investment, is viewed by some as a necessary element of an impact investment.4 In reality, a strict but-for standard is a very high expectation for such a new field.
Lok Capital is a venture fund that has successfully managed over $87 million in impact investments.5 How does Lok sustain ongoing growth with so many obstacles for social investors? Lok’s philosophy includes two priorities: inclusion of and generating employment for those at the base of the pyramid.6 This does not sound revolutionary, but in practice these priorities keep investments on track and, ultimately, profitable in more than one way.
The concept of inclusion for Lok means including those at the base of the pyramid on both sides of the business. When seeking investment opportunities, Lok looks for companies with a dual purpose: they both serve the needs of and provide employment to those at the base of the pyramid.7 Inclusion means that Lok builds close relationships while gaining valuable data about how to improve their investments.
Focusing on the base of the pyramid allows Lok to reach a large number of households with a wide range of basic needs. In India, their target market, 186 million households (over 91% of all households in India), are living at the base of the pyramid.8 These families need stable income, education, healthcare, and necessary consumer goods. With such a huge population, Lok’s potential for growth is enormous. Importantly, Lok distinguishes between lending for consumption and lending for productive purposes. Business models that encourage credit dependency through consumption-based lending will not be funded by Lok.9 By doing this, Lok is making its impact sustainable in the long run.
Another important key to Lok’s success is constantly evaluating their programs and readjusting to improve outcomes. Lok fully integrates its evaluation and feedback program, doing interviews with management and employees and reviewing the current systems in place.10 Lok then uses the information to create a “Social Action Plan,” through which a social mission is infused into every action the company takes, both on a daily basis and larger scale.11 Being in touch with all aspects of its investments helps Lok build relationships, reputation, and ultimately returns, both social and financial. To achieve the type of success Lok has had in impact investing, investors new to the industry should consider structuring companies with dual purposes, regular assessment of investments’ success, and above all, the perspective and needs of those whom they aim to serve.
Sir Ronald Cohen and William A. Sahlman, Social Impact Investing Will Be the New Venture Capital, Harvard Bus. Review (Jan. 27. 2013, 8:00 AM), http://blogs.hbr.org/2013/01/social-impact-investing-will-b. ↩
Audrey Choi, Response to “When Can Impact Investing Create Real Impact?”, Stanford Social Innovation Review, Fall 2013, at 27. ↩
Paul Brest and Kelly Born, When Can Impact Investing Create Real Impact?, Stanford Social Innovation Review, Fall 2013, at 22. ↩
Lok Capital, Defining Inclusion and BoP, http://www.lokcapital.com/defining_inclution.html. ↩
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