by Annette Jung, Capital – Head of DACH, BNL & Africa, Impact Finance
Philips Foundation – Impact Finance
At various recent sessions and conferences relating to impact investment, I was struck by how many speakers and panelists referred to “scale”: we only invest in scalable projects; scale is a key requirement for us; business models need to be scalable; we focus on scalable solutions and so on. I started to wonder: a) how should we define scale, and b) who would invest if a project was not scalable?
How to define “scale”?
At the Philips Foundation, we focus on primary healthcare solutions for underserved communities in low resource settings. For us, a key element for defining scalability is measuring the number of people who will receive an improved access to care due to the solution or service provided by the social entrepreneur we are engaging with. Thus, we assess business models and engage with social entrepreneurs to understand the underlying assumptions, key challenges, and main risk factors. This allows us to see what non-financial support we can provide, for example, bringing in required expertise via skilled volunteers to ensure the business plan’s successful delivery.
The impact investment space, which is defined here as any financial contribution beyond a grant or donation, should – stating the obvious – relate to impact creation rather than scaling an organization as such or driving higher profits. Increasing beneficiaries’ access to whatever product, solution, services a social entrepreneur is providing. But is it limited to access? What about better quality, lower price points, ease or simplicity of access?
How to measure and how to relate to impact?
Healthy Entrepreneurs, a social business active in Uganda and other developing countries, uses the transport costs saved by beneficiaries, who can now access care close to their home, to measure impact.¹ For many families, distance, cost, and the quality of care are strong deterrents for seeking the care that they need.
Two years ago, they created a “Doctors at Distance” approach to providing a toll-free line from which health workers can call doctors from anywhere, at any time. By calling doctors directly, community health workers can receive advise they need so they can offer more thorough consultations to their communities and better track the treatment plan. The model proved itself immediately effective, resulting in a scale-up from 50 community health workers in the pilot phase to Healthy Entrepreneurs becoming one of the biggest employers in Uganda with 3.000 staff.
However, does scaling necessarily translate to a sustainable and economically feasible business model? If impact investors refer to scaling, this often refers to an increase in revenue in order to repay the loan or pay dividends. We have to be vigilant that, in the end, this remains the overarching goal. So, we need to determine what is driving investment decision – impact or the investor’s appetite for risk.
This raises the question: should impact investors take more risk if the opportunity for impact is higher? And leads me to my other question, whether the expectation of scalability is simply a must. Who would engage and invest if there was not at least an opportunity for scale? I am not only referring to impact but also to the business reaching the size which makes the value proposition feasible and workable. Who would put energy and resources into an initiative that has no chance of becoming big? Perhaps “how big?” is a more pertinent question.
We have to be careful not to refer to the timing aspect when we are referring to scaling. The impact of the investments at a later stage, i.e. the scaling-up phase, is reflected. That investors want the concept to be proven and, possibly even, a previously successful rollout at a smaller scale would make more sense to me. In other words, in referring to timing instead of scale as their absolute requirement to invest and help social entrepreneurs and social purpose organisations overcome the so-called “valley of death.”
Role of corporate foundations
This is where corporate foundations need to come in – to invest before and during the valley of death without emphasizing the scaling aspect and provide funding to tip the needle and scale. Yes, this is riskier, but the impact scaling opportunity is right here: this is investing for impact. Compared to investing late(r) in the curve where, in my view, you move towards investing with impact. Here is where we can make a difference.
There’s one last question that I would like to share with you. If you invest early stage and consequently with high risk – which is typically done in the form of a donation or grant – should you also be allowed to ask for some repayment or success fee for the social entrepreneur’s scaled business? Thus, recycling parts of your funds to re-invest and drive more impact? Or is this “not the done thing” for a corporate foundation?
This is perhaps worth diving into deeper during the C-Summit, and I am looking forward to meeting and discussing with you.
¹ Based on Healthy Entrepreneur’s studies, such transport costs are 65% of the total spent related to a required health intervention.