“People grow out of poverty when they create small businesses that employ their neighbors. Nothing else lasts.” -Thomas Friedman
As 2012 approaches its final month and President Obama is elected for another 4 year term, it is only natural that many people are contemplating the future and what it will bring. For those involved in social entrepreneurship and impact investing, the big question is “what does the future hold for the emerging field of social business?” Last week marked the 5th annual Global Entrepreneurship Week, a UK based initiative to promote entrepreneurship. The campaign had a presence in 115 countries and got people thinking about the future of social entrepreneurship. The month of November will end with Bill Drayton, founder of Ashoka and the man responsible for the term “social entrepreneur”, giving his predictions on the future of social entrepreneurship in an interview with David Bornstein.
In anticipation of Drayton’s predictions, many in the field of social business have taken it upon themselves to make their own predictions. In a recent article in Forbes, Eli Malinsky, executive director of the Centre for Social Innovation, got the ball rolling by publishing his own predictions and started a conversation on twitter #FutureSocEnt. In the spirit of making predictions and speculating about the future, here are 4 of mine:
1. Widespread emergence of MicroConsignment Models (MCM): Microfinance and Microcredit have become widely used models of financial development and have inspired similar models such as that of MicroConsignment. Under this model, strategic partner organizations employ and train local entrepreneurs to sell health-care related goods and services (eye-glasses, water filters, cook stoves, solar lamps, etc.) to rural communities using a consignment mechanism (the partner organization covers the overhead costs and the local entrepreneurs “borrow” the products until they are sold). The MCM was developed less than a decade ago in Guatemala by Greg Van Kirk. His company is known throughout the country as Soluciones Comunitarias and has proven to be scalable, replicable, and sustainable. There are a number of social entrepreneurs in the process of replicating the MCM model in a variety of health-care and technology related endeavors.
2. Impact assessment will become more formal and more important. As the competition grows between social entrepreneurs, impact investors will have many more options. These investors will become more critical and will demand transparency. As a result, formal assessments, ratings reports, and certifications will become the norm. The emerging leader in this field of analytics is B Lab, a non-profit that supports GIIRS ratings and B Corp certifications.
3. Hybrid Value Chains will grow in size and complexity. Gregory Dees, founding faculty director of CASE, defines these chains as “partnerships between nonprofit and for-profit organizations that help make markets for products that help the environment or serve the poorest of the poor in a constructive way” . Instead of maintaining the traditional separation between non-profit, for-profit, and governmental organizations, I believe all sectors will collaborate and work together by pooling resources and utilizing a variety of talents to achieve common goals. Hybrid Value Chains are starting to emerge around the world and I predict they will grow and become more integrated and complicated as they work to solve increasingly complex social and environmental issues.
4. Growth and reliance on accelerator programs. Agora Partnerships, Village Capital, and the Unreasonable Institute run some of the largest and most well-known accelerator programs in which early-stage social entrepreneurship gain business development assistance and access to established networks of impact investors. As the field of social entrepreneurship expands and competition grows, impact investors will become more picky about where they place their investments. The accelerator programs mentioned above are very selective and ensure quality from the entrepreneurs who undergo their programs. I predict that as the graduates of these programs build successful business, impact investors will become more likely to enter these networks and focus their investments only on companies who have gone through accelerator programs.
As you come up with your own predictions for the future of social entrepreneurship, ask yourself: “What would the world look like if all entrepreneurs were social entrepreneurs?” 
A new generation is entering the post-graduate workforce laden with an entirely different perspective on the role of business and purpose of charity than their predecessors and an ambition to solve the world’s most daunting social and environmental problems. I consider myself part of this idealistic group of young people, commonly referred to as the “Millennials“, who wholeheartedly believe that it is possible to “do good and make money“.
In a New York Times opinions piece titled Generational Self, William Deresiewicz describes this new generation of Millennials.
“The millennial affect is the affect of the salesman….Nonprofits are still hip, but students don’t dream about joining one, they dream about starting one. In any case, what’s really hip is social entrepreneurship — companies that try to make money responsibly, then give it all away….The small business is the idealized social form of our time. Our culture hero is not the artist or reformer, not the saint or scientist, but the entrepreneur….The characteristic art form of our age may be the business plan.”
Some would argue that this new surge of start-ups and small businesses is a response to the recession and the downtrodden job market. If you can’t find a job when you graduate, why not create your own? Others, such as myself, believe that these social enterprises are emerging in response to the global struggles the millennials have witnessed and endured in the past 2 decades. We grew up in a very different world than our parents and grandparents. Social media, affordable travel, and other technologies have bridged the knowledge gap between the privileged classes and the realities of those living in poverty in the developing world. In addition, the effects of global warming that so many have both feared and denied have finally begun visibly affecting developed countries. It is more than just an increased social consciousnesses that is driving the millennials to find their own solutions; it is a frustrating lack of answers and support from the generation that currently leads our society. The millennials are looking for a way to alter the current economic and political systems that have created rampant inequality and allowed for the unbridled exploitation of our world’s natural resources, systematically causing increasingly destructive natural disasters.
Not everyone shares the same optimism as the millennials. David Brooks wrote a very popular op-ed in the New York Times earlier this year.
“It’s hard not to feel inspired by all these idealists, but their service religion does have some shortcomings. In the first place, many of these social entrepreneurs think they can evade politics. They have little faith in the political process and believe that real change happens on the ground beneath it. That’s a delusion. You can cram all the nongovernmental organizations you want into a country, but if there is no rule of law and if the ruling class is predatory then your achievements won’t add up to much.” 
I have never met a social entrepreneur who thinks they can evade politics. They often complain about how corrupt local politics are and how the widespread culture of bribery in many developing countries interferes with their social missions. These frustrating legal barriers inspire many entrepreneurs to get involved in political activism. As a recent college graduate, I have countless socially-minded friends attending law school and pursuing masters in public policy so that they can make a difference on the political side of inequality. The social enterprises that grace the covers of progressive magazines and news-stations are generally those who are on-the-ground in the developing world, selling water filters and solar lamps to rural villagers. The political activists play more of a behind-the-scenes role in the world of social entrepreneurship. They are the ones tirelessly studying the legal systems that have caused this inequality and drafting new bills and policies with enormous potential but may take years to adopt.
I agree with David Brooks that “There’s little social progress without political progress“. However, I believe the opposite is true as well. In Guatemala, there are countless villages where the average daily earning is less than $1 or $2. The corrupt political system in Guatemala has pushed these people so low down on the economic ladder that they are forced to use every last ounce of energy they can muster to feed and house their families. The thought of organizing some kind of political activist group is the furthest thing from their minds. Even if a group wanted to form, the majority of the people in these communities lack the basic education and resources necessary to make their voices heard. NGO’s and for-profit social enterprises are not trying to evade politics, they are merely attempting to afford these people the basic necessities of life that their governments have failed to provide. Once their basic needs are met, then the billions of people living in poverty will have the opportunity to create the necessary political change.
The millennials are infiltrating the current economic structure with a combination of NGOs and for-profit social enterprises where the focus is not profit-maximization and giving charity to the poor. Instead, the mission is first to help those living at the BOP (bottom of the pyramid) escape extreme poverty and then to offer affordable and sustainable products, services, and employment opportunities to empower these people and guide them slowly but surely forward along the inverted u-shape of the Kuznets curve, as taught in every development economics course. As they near the center of the curve, more time, energy, and resources will be afforded to creating political change, bringing us one step closer to a world in which every persons needs are met and their rights are respected.
Impact investing seems to combine the best of both the philanthropic and the traditional financial worlds. However, there has been a great deal of skepticism and precautionary warnings about this new and growing field. The most common criticisms include:
1. Youth. Everything about the industry is young. The first impact investment fund, Acumen Fund, is just reaching the decade mark. The majority of social enterprises invested in are in early-stages, translating to high-risk investments. In addition, according to the Skoll World Forum on Social Entrepreneurship “a typical investment associate is in her late 20s, still learning the ropes on the investor’s dime.”
2. Transparency. Due to its youth, the impact investing sector lacks a widely agreed upon and transparent definition and set of metrics. “An internet search for ‘social enterprise’ is as likely to lead to a non-profit urban garden in London as it is to an African mobile payments scheme, and little consensus exists on how investors and companies should balance social impact and financial return.”
3. Returns. Again, due to the youthful nature of the industry, few impact investors have have achieved full ROI (return on investment). As a result of this limited track record of success, it is difficult to convince the world that it is possible to “do good” and make money. In addition, profit margins are often very small (or even negative) in the early stages of most social businesses.
4. Opportunity. Impact investors struggle to find the “right” companies in which to invest. Investors look for a social enterprise’s ability to reach its target population, capacity to scale, financial sustainability, impact metrics, ect. It is rare to find an early-stage enterprise with all, or even some, of these aspects. In addition, most investors are based in the developed world while the majority of social enterprises emerge in the developing world. This makes it very difficult and expensive to find early-stage companies (preferably with the traits mentioned above) and even more costly to preform the necessary due diligence on a company located half-way across the world.
5. Balance. It is very difficult to balance profit and impact. The visions and goals of social entrepreneurs don’t always match up with those of impact investors, creating a challenging environment in which to make deals. The investor should not ask an entrepreneur to compromise his/her social mission but the investor must be conscious of the enterprise’s ability to return the investment.
6. Uncertainty and Risk. The portfolio director at the Mulago Foundation writes about impact investing, “Cash flow projections are wildly unrealistic, management teams untested, and market failures unacknowledged. There’s 10 times the risk profile of a standard US venture deal without the same potential upside.” There is a lot of trust involved in impact investing since the social entrepreneur usually knows much more about his/her target population and market and often can’t afford extensive market testing.
Despite the warnings and skepticism, I am a firm believer in the potential of impact investing to help solve some of the worlds greatest social and environmental issues. The critiques mentioned above stem from the youthful nature of the industry. We must be patient and give the industry time to develop. However, the critics play an important role in the development of the industry because they bring to focus issues at a very early stage, allowing them to be addressed in an effort to create a stronger industry.
There are a number of organizations and networks that have already emerged to address many of these issues. GIIN (global impact investing network) was created to increase the efficiency, effectiveness, and scale of impact investing. Its website provides impact investor resources including up-to-date research, news, events, publications, profiles, investor spotlights, useful links, and a career center. GIIN also created an investors council, ImpactBase (an online global directory of impact investment vehicles), and the Impact Reporting and Investment Standards (IRIS) (set of metrics used to measure and describe an organization’s social, environmental and financial performance). Another useful tool is the Global Impact Investing Rating System (GIIRS), ” a comprehensive and transparent system for assessing the social and environmental impact of companies and funds.” Companies such as Mission Measurement have also emerged with similar goals to help companies measure the impact of social projects.
Impact accelerators and major conferences are also playing a role in overcoming the challenges and criticism associated with impact investing. Agora Partnerships dramatically reduces the cost to investors as well as the risk involved by doing the scouting themselves, hosting an extensive business development program, and matching their entrepreneurs with an Agora employee to preform due diligence and create an investor-ready business plan. Major conferences focused on social entrepreneurship and impact investing have sprung up all over the world to bring people together, share ideas, and address common problems in the emerging sector. SOCAP (social capital markets) is one of the biggest and most popular of these conferences. It was held earlier this month in San Francisco and attracted more than 2,000 people from 50 countries. The conference highlighted accomplishments, addressed mistakes, and discussed the future of impact investing and social entrepreneurship.
The bottom line is patience. It is important to address the challenges and weaknesses of impact investing but it is just as crucial to stay positive and be patient. As the industry develops, the kinks will work themselves out. Impact investing is about deploying capital in creative manners to solve social and environmental problems. I am confident that this very same creativity will be utilized to overcome the barriers that currently face the young, emerging industry. We are all still learning and it is way too soon to cast a shadow of skepticism over impact investing and its tremendous potential.
Articles about impact investing have been flooding the internet and everyone seems to have a different definition. The Global Impact Investing Network (GIIN), defines impact investments as ” investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a financial return.” They emphasize that these investments can be made in both emerging and developed markets and can expect a wide range of returns (as long as they don’t exceed market rate). The Mulago Foundation provides a slightly different definition: “impact investing is the practice of putting money—loans or equity—into impact-focused organizations, while expecting less than a market rate of return.” JP Morgan views impact investing as “creating positive impact beyond financial returns” and “distinguishes impact investments from the more mature field of socially responsible investments (“SRI”), which generally seek to minimize negative impact rather than proactively create positive social or environmental benefit.”
Although these definitions are varied and somewhat vague,
“The glue that binds those who operate in the impact investing industry is the shared conviction that creative investments can play a crucial part in addressing social and environmental challenges. This investment interest is sparking the emergence of a new industry that operates in the largely uncharted area between philanthropy and a singular focus on profit-maximization.” 
As inequality across the globe increases, impact investing is becoming a very important tool to bridge the gap between donor-reliant philanthropy and the estimated $100 trillion in opportunity currently in for-profit capital markets. However, impact investing fills more than just the funding gap. Jacqueline Novogratz – founder of the pioneer impact investment fund, the Acumen Fund – writes “Philanthropy alone lacks the feedback mechanisms of markets, which are the best listening devices we have; and yet markets alone too easily leave the most vulnerable behind”.
Impact investing combines the socially conscious values and desire to “help the poor” traditionally held by non-profit organizations with the competitive nature and demand-drive of the market. It eliminates the need for entire departments dedicated to grant-writing and outlandish efforts to keep donors happy. With impact investments in place of grants and donations, socially-focused organizations can focus all of their talents and resources on improving and expanding their mission. The social consciousness of impact investors also allows for-profit ventures to use slightly more expensive inputs that are significantly better for the environment and/or the people they are serving. For example, Tegu, a social business that produces high-quality wooden blocks, uses wood that has been sustainably forested in Tegucigalpa, Honduras. Cheaper wood of equal quality could be used, but the founders of Tegu are willing to accept a slightly lower profit margin in return for the knowledge that they are supporting and promoting sustainable forestry. Likewise, impact investors would choose to invest in Tegu over a more profitable wooden-block company that harms the environment.
As the industry continues to develop, expect to see more definitions of impact investing emerge, not less. One of the shortcomings of current development projects is the strict definitions and metrics required by donors. The versatility of impact investing is one of its strongest attributes because it allows for investments over a wide range of projects with flexible terms. The problems impact investors are looking to solve are not clear cut or easy to define. Therefore, the definition and terms of impact investing should be versatile and creative in order to finance the best solutions and create maximum impact.
 The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World, location 3621 of 2849.
“Social Entrepreneur” is #1 on the list of Philanthropy’s 10 Favorite Buzzwords of the Decade, and “Impact Investing” is not far behind at #4. The article states, “In 2000 few people had ever heard of social entrepreneurs. Many would have defined a social entrepreneur as a very friendly business leader. A decade later, Kiva’s founders are on Oprah, PBS, and NPR, universities offer degrees in social entrepreneurship, and U.S. presidents both present and past laud social entrepreneurs.” The article continues on to estimate that the impact investing marketplace, created in 2008, will grow to “$1-trillion in opportunities by 2020.”
How did this new sector of social business become so popular in such a short amount of time?
- Tireless work of socially-minded leaders such as Jacqueline Novogratz and Muhammad Yunus. These two have dedicated their lives to their social businesses and have not only created social change on a very large scale, but have brought the lessons they learned and stories of impact to the public in a number of popular novels. Banker to the Poor and Creating a World Without Poverty: Social Business and the Future of Capitalism are two of the many books Yunus has written to share the story of the creation of the Grameen Bank and the lessons he has learned from a lifetime of social entrepreneurship. Novogratz, founder of Acumen Fund, one of the pioneers in impact investing, published The Blue Sweater: Bridging the Gap Between Rich and Poor in an Interconnected World to share her stories of creating social impact.
- A new class of socially minded, ethically driven university students. Programs are popping up in universities all over the U.S. that focus on social entreprenuership and impact investing. Tulane, Duke, and Yale are three of the many university with these types of programs. In addition, fellowship programs such as Ashoka Fellows, Frontier Market Scouts, Acumen Fund Global Fellows, Echoing Green Fellowship, and many more are growing and becoming increasingly popular for young professionals.
- Technology has created a much greater awareness of social problems. The entire world is connected via the internet and people are not afraid to voice their opinions. Social businesses are utilizing social media to spread their messages as far and wide as possible. In addition,socially focused online publications such as the Stanford Social Innovation Review have been created, well-known business reviews such as the Harvard Business Review has been publishing an increasing amount of articles about social entrepreneurship, and other popular online newspapers such as the Huffington Post have created entire sections devoted to social business.
- Impact Accelerators are helping social enterprises develop and grow. Agora Partnerships and Village Capital are two of the many accelerators that run programs to help early-stage social enterprises develop their business model, grow, and find investment. Both company’s have dedicated teams of scouts who have uncovered thousands of social enterprises around the world and are providing them with the support necessary to make a large-scale impact.
- Big name companies are becoming players in the impact investing world. Some of the biggest names in the corporate world, Shell, Ebay, and Rockefeller have channeled a portion of their profits into socially focused projects and investment funds, the Shell Foundation, the Omidyar Network, and the Rockefeller Foundation. These organizations have supported social projects both financially and logistically and have provided capital that has allowed countless social entrepreneurs to pursue and expand their impact-focused businesses.
Maria Pacheco has a Dream:
“That all communities have houses…that all houses have a window…that from all windows a garden may be seen…that in all gardens there is a ball…that all balls belong to girls and boys that go to school…that all the schools have PTA’s with parents that work…that all who work, may reach the markets…that markets multiply houses with windows…that in the new windows birds and trees are multiplied…so the sky may be blue and the sun bright for everyone!”
Maria has been working for the better part of her life to turn this dream into a reality. Her aim is to provide these communities with a source of income, enabling them to invest in their own futures. Maria spent years working with various communities, trying out a variety of ways to help them produce income. In 2003, she combined the lessons she learned from her many projects, partnered with the talented Queta Rodriguez and Ligia Chinchilla, and founded Kiej de los Bosques, a social enterprise with the goal of connecting rural artisans to the global market, thereby creating a sustainable source of income.In order to create lasting impact within the communities, Kiej partners with the NGO, Communities of the Earth. The NGO serves as a business incubator, providing the training necessary to turn a group of rural women into a legalized business. The incubation process takes 2 years and costs a total of $25,000. Communities are selected based on a vision and desire to make money and change their own lives.The training begins with dream workshop where the women share their dreams and visit successful business women. Kiej then sends in a fashion design team to teach the women how to make Wakami branded products which Kiej sells in national and international markets. Over the course of the 2-year incubation period the companies are aided by local technicians and provided with periodic business training courses.
As soon as a community begins to make and save money, they begin the Wakami Village Methodology, a 3 part combination of goods and services to transform their lives.
- Wakami Family: 5 important indicators are monitored: income generated, taxes paid, weight and height of children, school attendance, banking and savings accounts.
- Wakami Home: sustainable products that can significantly improve health, the economy, and the environment are presented to the communities at affordable prices. These products include: Ecofiltro water filters, Onil stoves, rain water collecting systems, Quetsol solar lighting systems, and organic garden kits.
- Wakami Community: programs are created to encourage community participation. These include: solid waste management programs, recreational parks programs, participation in local decision making spaces, girls clubs, school improvements, and medical and dental missions.
Kiej currently works with 17 rural companies (16 in Guatemala and 1 in Panama), 12 of which are comprised of mothers and 5 of young people working to pay for their education. The Wakami products are exported to more than 14 countries around the world.
This rural development project seems great on paper but it wasn’t until visiting one of the villages and hearing the leaders of the rural companies speak about how their lives have been changed that I was able to truly appreciate the incredible level of sustainable development that Maria and her team have instigated. What stood out most, as the business leaders spoke, was the new-found sense of empowerment and pride they had in themselves, their skills, and the life-changing products they were able to provide for their families.
Francisca, the leader of the San Rafael based company, dreams to own her own land someday. Although she cannot read or write, she has a very keen business sense and was elected to lead the Wakami company in her village. She had never worked before because she had to stay home to care for her family. At first, she told us, she thought the idea of starting a business was much to difficult. She was also wary of the idea because she had seen so many development projects come and go. However, she took the risk, and as soon as she earned her first paycheck she began to believe in the project. She is able to work from her home and is currently learning to read and write. She also takes a bus into Guatemala City once a week to deliver the finished products, pick up new supplies, and learn how to make new designs which she then teaches to the rest of the women in her company. She told us, with tears in her eyes, that her company’s paycheck last month (for 4 women) was 7,700Q, almost $1,000.
Maria, the leader of the Ixil based company, admitted that in the beginning she didn’t believe in the business. The women in her community were accustomed to staying at home all day and no one wanted to do extra work. However, she said that as soon as they began to make a little bit of money they became encouraged. Now they all want to work so much that they stay up all night when a big order comes in. Before they started their company, none of the women had ever been to the bank and had no idea how to deposit checks. Now, Maria proudly proclaimed, dealing with money is easy for them and most have their own savings accounts, separate from their husbands. Last months paycheck for the Ixil company (for 16 women) was 49,000Q, almost $6,300.
Alejandra, the leader of the Candelaria based company, said that in the beginning her husband was not happy about her work. During the first four months of training, he was angry that she spent so much time working but had nothing to show from it. The husbands in her village expected their meals at a certain time and the chores to be done a certain way. They were not used to their wives being busy and it took a while for them to become more flexible. As soon as Alejandra began to make money, her husband started to appreciate his wives job. In the community of Candelaria, the income earned from the company was especially important because the husbands worked on a coffee plantation and had little or no source of income for the majority of the year. Alejandra said she felt empowered that she was able to play such an important role in providing the main source of income for her family during the non-coffee season. With the money, she has been able to purchase a water filter, a solar energy system, and a stove. She no longer has to burn wood to purify water or to cook, purging the 1-room, dirt floor home that her 6 person family shares of harmful smoke. Now she also has a source of light so her children can study in the evenings and she can work to produce jewelry.
The visit with these incredible women ended with a circle of light in which everyone linked arms, lit candles, and listened to the inspirational words of Maria Pacheco,
“An individual dream is very powerful but you can’t stop a collective dream from coming to life.”