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re: What type of investment to spread “Market-based strategies that benefit low-income communities”? Posted by: John Berger, The Emancipation Network, CEO

September 26, 2005

Stephanie - You pose some questions I have also been pondering over the past year. As a matter of background, I am a businessperson with only limited non-profit experience. If you wanted to know how to evaluate or finance a for profit business I could answer those questions easily as I have dealt with such questions for the past 15 years. But over the past year I have asked the same questions from the framework of an emerging non-profit business, The Emancipation Network. Ill give you some of my current thoughts but I would love to hear opinions from others.

How should investors evaluate a social-investment? That’s a very difficult question. Most of the projects in this competition involve markets and customers that are well outside the scope of understanding for most investors. You mention the example of micro-credit. I was recently at a speech by Muhammad Yunus where he went into detail on how he created micro-credit. His early critics were obviously wrong, but to me it is the underlying reason why they were wrong that was my most important lesson-leared from his speech. His critics were wrong because Yunus understood his market and customers and their capabilities much better than the critics. My advice for social-investors would be to place a high value on local knowledge. But let’s take the micro-credit model further. Let’s say its 1976 and you as investor have 100% confidence in Yunus and Grameen. What investment return should you expect – and should Grameen even seek for- profit investments? Grameen is currently 94% owned by its customers and has lent over $200 billion. Would Grameen have done even more if in 1976 a venture investor funded it in return for say, 20% ownership? I think it is likely that if in the early years Grameen was run more like a business that needed to keep their investors happy they would not have accomplished as much as they have. Another lesson-learned from Grameen is that not all great sustainable social ventures need or even should be financed by investors seeking economic returns.

There are clearly trade offs involved in any social-venture that is seeking funding. Is it best to grow slowly and use very little capital – thus keeping the “profits” dedicated to the underlying cause? Or can you better maximize the social benefit in the long term though additional, but expensive, capital? Just like for profit investing, investing in social venture will be as much art form as science. I would not be surprised at some point to see for-profit business created to help investors analyze and select social ventures.