Praful Shah, Advisor, Principium Consulting: Angel Investing for Impact and Profit
Global, June, 27 2014 -
Many people view impact investing as philanthropy or charity. They claim impact investments have little or no profit! It is a fallacy that there is no return on investment in impact investing.
A divorced young mom with infant twins was struggling to make ends meet. Even though she had a full time job, and two years of a profitable business, she couldn't get a bank loan to expand her company. She was making fresh tea with spices -- chai, in a rented kitchen space once a week and selling it to local cafes and restaurants. When I met her in 2009, she did not have enough money to buy a refrigerated truck to distribute beyond her neighborhood in Boulder, Colorado. With initial help from me and other impact investors, the chai is now available nationwide. The company Bhakti Chai generates over five million dollars in revenue, has 34 employees, and the company valuation has increased over five times in five years. It gets tea leaves and spices from the vendors in developing countries that follow fair-trade practices and donates at least 2 percent of revenue to nonprofit organizations that work to empower women and girls.
A young, first-generation Nigerian woman creates a soccer ball to generate power as kids have fun playing with the ball. With 30 minutes of play, the soccer ball provides three hours of light. A young man goes to Ecuador to study linguistics and culture, but ends up with starting a company, Runa, that processes and exports guayusa tea leaves to help the native tribes. A nurse doing mission work in Honduras found out that the dirty needles were transmitting pathogens. She created an inexpensive, painless delivery system for needle-free injection so that children can be vaccinated all over the world. These and other impact investments have provided me superb financial returns, created local jobs in a tough economic environment, have had measurable social impact and of course, provide a deep personal satisfaction along with incidental learning from the experts in many exciting fields.
Many people view impact investing as philanthropy or charity. They claim impact investments have little or no profit! It is a fallacy that there is no return on investment in impact investing. One of the reasons the impact investments are successful is the passion of the founder and the team for the cause. Their intense desire to succeed regardless of obstacle arises because for them the mission is too important to fail. Of course I look at the management team, the product and the probability of success before investing. I think of impact as "do no harm" and look it from a century view: a hundred years from now, how would one look back and think of this investment?
Capital is a tool. We need to use it for the good of society and not for a select few individuals. Investors and advisors tend to think of entrepreneurial success only in terms of financial return. We need to change that view to true returns which include not only profit but overall benefit to society in the long term. An entrepreneur talks about financial returns because he thinks that is what an investor wants! Given a choice of similar financial returns with non-impact versus impact-oriented enterprise, most investors will choose the impact. I will settle for a lower return if the true return is higher.
Unfortunately, many investors continue to make money in companies that create problems, with short-term focus on profit only, ignoring the long-term impact. This is not a sustainable model we want future generations to inherit. We need to align the incentives. Fear of failure by an entrepreneur to start a company and fear of the investor that the company will fail keeps them both away for trying to solve major societal problems. Government tax policy can play major role to help alleviate capital flow in impact investments; for example tax deduction or tax deferral for the impactful investors who are focused on true total return.
Once you have established yourself as an angel investor, deal flow is not a problem; it is more like deal flood! I live in the Boulder area where we have the University, investor clubs, incubators, venture funds, Impact Hub, Unreasonable Institute and many contacts from friends, bankers, lawyers and other professional colleagues. Through these networks (and similar ones nationwide), I have heard about many impact companies all over the country. Once investors recognize the long term value of true return (where everyone benefits), capital will flow to impact investments. Impact investing is a win-win situation for the community and the world and provides fantastic true returns.