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For Omidyar, Investing in High Social Impact is Worth The Lower Financial Returns

Anne Field | December 6, 2016

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Some social enterprises promise fast growth and lofty financial returns for investors. Others, not so much. But according to a recent analysis from Omidyar Network, accepting lower returns in exchange for greater social impact is well worth the effort.

That, of course, is good news for high-impact social entrepreneurs on the lower end of the return spectrum looking for funding.

Omidyar, the impact investing fund set up by eBay founder Pierre Omidyar, has invested $1 billion in both for-profits and nonprofits over the past 12 years. Researchers at the firm spent about two years analyzing the results. The result was “a framework for investors across the returns continuum,” says Matthew Bannick, Omidyar general partner. In other words, a model for impact investment that takes into account everything from investing in high-growth venture-capital friendly enterprises to awarding grants to nonprofits.

Specifically, the framework includes three investment categories, called A, B and C, each of which has sub-categories. (No matter the category, says Bannick, any enterprise must have the potential to impact at least 100,000 people).

Category A is made up of “commercial companies that promise risk and high returns—your basic hot startup that both impact investors and venture capitalists agree has the potential to scale fast and make a lot of money. A related sub-category covers ventures which Omidyar figures will provide regular commercial returns, but traditional investors like VCs would likely pass up. Ventures in C are nonprofit grant candidates, some of which have the potential to become self-sustaining.

Matt Bannick of Omidyar Network (Photo credit: Eric Millett)
Matt Bannick of Omidyar Network (Photo credit: Eric Millet)

But it’s the ventures in the B “subcommercial” category that are particularly noteworthy, according to Bannick. They’re companies that deliver modest or minimal returns, but high impact—the kind of ventures many investors would avoid. “They’d argue these companies won’t generate strong returns and they won’t have the capital to scale,” says Bannick. “And they’d ask why would you spend your money on something like that?”

The answer, he says, is that these social enterprises might achieve a few important results, beyond simple financial return. For one, while not highly profitable, these ventures in some cases have the potential to pioneer a new market, paving the way for other players to follow. One example is MicroEnsure, which offers life insurance for low-income families in Africa and Asia. It started in 2002 as a nonprofit before adopting a for-profit model in 2012. Omidyar invested in the enterprise at both stages, accepting a lower returns profile because it believed MicroEnsure would serve millions of people and help build a nascent market. Today, the company has more than 40 million registered customers in 20 countries, according to Bannick.

In addition, these modest “B” ventures can play a critical role in creating infrastructure for a new industry or stimulating policy discussions. A case in point is Suyo, a Colombian company that helps low-income, urban families formalize property ownership, with the potential both to influence policy and pioneer a new market for property rights services, says Bannick.

“For investments in this category, we accept the prospect of lower financial returns in exchange for the promise of significant market impact,” Bannick and several coauthors wrote in the Stanford Social Innovation Review discussing the new framework.

“At the end of the day, we’re about having as much impact as possible,” says Bannick. “This is a bit of a call to action for people to think beyond just the impact of an individual firm.

You can almost hear the sound of thousands of social entrepreneurs exclaiming “Amen!”

Anne Field is a New York-based journalist who writes about social enterprise and impact investing. A version of this article originally appeared on her Not Only For Profit blog on Forbes.com.

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