Monday, February 27, 2012

Heart of a Development Investor, Discipline of a Lender

Takeaway: Grassroots Business Fund’s investment in social enterprises throughout developing countries enforces discipline investing using patient capital from impact investors.

Investing in social causes has for a long time remained an oxymoron. But with companies like Grassroots Business Fund (GBF), such investments are becoming real, abound, and very much desirable.

GBF was founded in 2008 by the International Finance Corporation of the World Bank initially as a Grassroots Business Initiative. As way of background, the IFC was created in 1956 as an institution through which private investors can invest in developing countries. Similarly, GBF intends to mobilize private capital from developed to developing countries. Unlike IFC, however, GBF’s investments are in a much smaller scale involving small start-up social enterprises.

In the talk about GBF I attended on February 24, 2012 at John Hopkins University, Harold Rosen, GBF’s CEO, very eloquently shared the company’s business structure and investment strategy. GBF is essentially an investment manager that invests in high impact businesses, which are for-profit businesses that create economic opportunities for people at the base of the economic pyramid. Unlike traditional venture capital firms, GBF incorporates both financial and social metrics to assess its investments, which Rosen stresses to be one of the main challenges in investing in social enterprises. The funds managed by GBF come from various institutions, including Overseas Private Investment Corporation (OPIC), DEG (German Development Bank), FMO (the Netherlands Development Finance Company), and Deutsche Bank. GBF charges a 3% management fee, and its average investment size ranges between $500,000 and 2 million with an average investment span of 6 to 9 years. GBF has investments in Kenya, Ghana, Tanzania, Indonesia, India, Bolivia, and Peru.

Rosen stressed the importance of obtaining patient capital for investment with an eye on development. GBF strives to identify nontraditional investors who are willing to wait for returns to finally kick in. This requires investors who believe in the underlying cause of creating positive impact in the enterprises’ surrounding communities. Such investors are now popularly known as impact investors. Factors that signify “impact” include the numbers of people employed and family members supported.

However, GBF’s typical investment structure in these social enterprises combines equity with debt, which Rosen refers to as quasi-equity or hybrid securities. These investments are debt-type instruments with equity features, such as convertible loans or redeemable structures, that incorporate a current income component. Unlike equity, quasi-equity holders have a known cash flow. GBF distinguishes itself from other sources of funding that Rosen refers to as “soft money”―grants and equity, investors of which do not care much about returns―by characterizing its investment as discipline investing. Through the current income component, these social entrepreneurs are obligated to bring steady investment returns to the investors. The reason for such a structure is to discipline the investees to allocate income on a steady basis, which would thereby affect their business planning, enhance investment accountability, and consequently strengthen their financial viability.

In addition to, or part of, its investment, GBF also provides technical assistance in areas of corporate governance, financial management, operations and supply chain management, environmental and social impact, and human capacity. GBF builds the portfolio companies’ capacity to create, maintain, and use simple management dashboards. By having the skills to build such dashboards, these entrepreneurs can leverage their data to obtain future financing for their high impact businesses.

One final but very enlightening point raised by Rosen: there is more capital out there than social enterprises. It took me several minutes to really understand and agree with him. My guess is that Rosen was not referring to simply any business ventures that call themselves social enterprises; rather, he was probably referring to social enterprises that directly benefit the communities while creating profit, or what our business friends would call reaching scale. The smooth and successful marriage between profits and philanthropy remains a mystery to most.

For the talk’s power point slides and taped talk, visit


  1. Throughout history, the primary movers of of development/civilization have changed from time to time.

    In our time, we see the omnipresence of profit motives as major propeller for development. Profit motives/business approach has been seen as the prerequisite to construct sustainable changes. Individual motivation, often translated as utility maximization, is the lowest common denominator from the enormous diversity that is human civilization.

    Various creative efforts from the business sector to align themselves better with desirable social change is laudable and deserve total support from various stakeholders. Creative investment performance indicators, including those which add social factors is a great start.

    However, let us keep our eyes and mind open to new ways of thinking. One that does not put profit motive as the glue to sustainable changes. One that understand how to foster more social provisioning. One that does not surrender to the diversity of individuals by taking the ‘lowest common denominator’ approach.

    Let us not forget that while profit motive and business approach have been very successful in maintaining the sustainability of large scale effort, it has done really poor job in representing the best side of human civilization. Just switch on our telly, list the box office movies, or google up what products are provided by the Fortune 500 companies.

    Are those really the best things in life?

    In the other hand, underlying many grand inventions of our time, from the internet security technologies to microfinancing scheme that saved bangladesh, are often efforts that is not at all moved, initially, by profit motives.

    Will the world be a better place if we, perhaps temporarily, eliminate growth; national interest; sustainable economies of scale; and, profit; from our development paradigm?

    Poverty occurs not because there is not enough resource/money for everyone, it exists because most part of the community put too much emphasis on resource/money as the metric to measure their life.

    I bet that most 'impact investor' will scratch their head should they visit places where most part of the community ignores money, or at least they do not put money/profit in the centre of their lifes.

    In such community, as in most part of Yogyakarta's rural areas, Baduy village (both are in Indonesia), or Findhorn village in Scotland, they manage to put respect, trust, social debt and social provisioning as the engine that support their dignity and life. In such area, everyone is joyous and generally happier than most other people on earth. They put the proper effort to really value what matters in life.

    And is it not happ(Y)ness that we're all after?

    They, in turn, will scratch their head if you tell them that they need poverty alleviation intervention, since according to the World Bank, they live below the poverty line.

    1. I don't necessarily agree or disagree with you. As for the existing economy, however, financial considerations are almost inevitable.

      Those who would definitely agree with you are Chip Conley ( and Bhutan's Prime Minister, as evident in the country's adopting the unusual metrics of Gross National Happiness.