As enterprising individuals look for new wellsprings of funding for tackling the world’s problems — whether, for example, bringing electricity to a hospital in Ghana, setting up low-income housing in a disaster-plagued region of South America or combating obesity among inner-city children in the U.S. — the lines between public and private, nonprofit and for-profit, are becoming increasingly blurred. Venture capitalist and former Wall Street attorney Garrett Melby is among those who have made the leap from the traditional business world to what is now known as impact investing.
Speaking on a panel at the recent Wharton Social Innovators Conference, Melby described how in 2008, pronouncements by the likes of Bill Gates, Bill Clinton and venture capitalist John Doerr about public-private partnerships began to grab his attention. “I thought, ‘Well gosh, if the world’s greatest entrepreneur, politician and venture capitalist are all talking about a new model of social progress, and engaging the private sector, and using the tools of capitalism, this might be something that has legs.'”
Today, Melby is the co-founder and executive director of GoodCompany Ventures, a nonprofit that provides educational, consulting and research services to early-stage social entrepreneurs through its accelerator and business seminars. Melby explained that GoodCompany offers a 12-week curriculum in which entrepreneurs learn to capitalize and finance the scalability of their innovations. “We [try to] challenge these social change agents, who may not think about big money and big goals. What would they do if someone gave them $10 million as opposed to … a $50,000 idea prize?” He characterizes the company’s efforts as “fairly successful,” reporting that the first four graduating cohorts of 10 companies have gone out to raise $50 million in private capital. “Compared to the amount of money that was spent on the program, that’s a 700x return.”
Investing at the Gates Foundation
Melby’s colleague on the panel, Richard Henriques, is the former CFO of the Bill & Melinda Gates Foundation. He, too, entered impact investing via the for-profit realm: Before joining Gates five years ago, he was the senior vice president of finance and corporate controller at Merck. “I realized it was a different world I’d entered,” he commented of his Gates Foundation experience, noting that in a 30-year corporate career he had never once heard the term “impact investing” or “double bottom line.” (“Double bottom line” means that positive social impact is measured in addition to conventional fiscal performance.)
“I thought, ‘Well gosh, if the world’s greatest entrepreneur, politician and venture capitalist are all talking about a new model of social progress … this might be something that has legs.'”–Garrett Melby
One of the first missions Henriques was charged with was to grow the Gates Foundation’s program-related investments, or PRIs. A PRI, he explained, is a financial investment with a charitable purpose, which the Foundation was becoming involved with in addition to its main operations in the grant space. Henriques and his team achieved significant success, growing the program’s portfolio from $50 million to $700 million. He noted that the team was — and needed to be — “incredibly passionate and persistent” because appropriate opportunities could be hard to come by, and were required to be a good fit with the specific goals and categories of the Gates Foundation.
Henriques’ projects included direct equity investments with biotech companies and direct loans to organizations such as charter schools. A major area he worked in, and said he found particularly rewarding, was purchase/volume guarantees for vaccines and contraceptive implants. “We would go to a Merck, a Bayer, a Novartis, an Indian vaccine manufacturer and say, ‘If you provide these volumes over this time, we’ll guarantee that the Gates Foundation will buy them, if the world doesn’t.'” Part of the deal was that the vaccine maker would have to drop the price by a significant amount. The smallest allowable drop was around 20%, noted Henriques.
Public and Private Collaborations
One of Melby’s notable initiatives to date is the FastFWD program, a 2014 public safety initiative aimed at decreasing recidivism through education. The research behind the initiative includes a 2013 RAND study, which found that inmates who received education while in prison were 43% less likely to become repeat offenders.
Good Company put together FastFWD in partnership with the Wharton Social Impact Initiative and the city of Philadelphia, with the help of a $1 million national idea prize from Bloomberg Philanthropies. According to Melby, the project required “re-framing public safety as a $140-billion-dollar market opportunity, and attracting entrepreneurs from around the globe to Philadelphia for the program.” About the initiative’s progress, Melby said, “We’re only six months out from the graduation of the first cohort [of entrepreneurs] with the $100,000 that the city put in at the pilot sponsorship, and it’s already unlocked $3 million in private capital.”
“We would go to a Merck, a Bayer, a Novartis, an Indian vaccine manufacturer and say, ‘If you provide these volumes over this time, we’ll guarantee that the Gates Foundation will buy them, if the world doesn’t.'” –Richard Henriques
Melby called FastFWD a comprehensive model for impact investing that reflected fruitful collaboration among the public, private and academic sectors. GoodCompany is now working to apply the same framework to an initiative called Climate Ventures 2.0. Part of the White House’s Climate Data Initiative, it will aim to focus data and technology resources on addressing climate threats to food and water systems.
In Pursuit of Hard Numbers
The word “messy” came up with some frequency as Melby and Henriques described their travels in the world of impact investing. While acknowledging that this condition was unsurprising for a fledgling industry, both discussed the importance of financial rigor. Melby recalled going to impact investing conferences a few years ago, watching the entrepreneurs pitch, and thinking, “These guys just really aren’t going to cut it.” He commented that someone from a social services background may be “full of passion and charisma” but may not understand things like how to put together a scalable business model or how to talk to investors.
For entrepreneurs designing business models, advised Melby, it is important to do research about their particular sector and then be ready to present some numbers. “You’ve got to give me something to work with. It doesn’t matter if they’re right in absolute terms or relative to another sector,” he noted. He commented that in the financial for-profit realm, it is relatively easy to do a price-volume analysis to determine if your model is workable, and come up with ways to make more money or reach more people. But one should be able to formulate something similar on the impact side, Melby said. “Let’s not worry too much about [for example] whether avoiding an incident of sexual harassment should be called a $10 item or a $100 item or a million-dollar item…. Let’s put a number on it so we can look at everything going on around it.”
“We [try to] challenge these social change agents, who may not think about big money and big goals. What would they do if someone gave them $10 million as opposed to … a $50,000 idea prize?” –Garrett Melby
“The biggest single learning curve … when I went into the Gates Foundation was understanding the complexity of measurement [of social impact initiatives],” noted Henriques. “I would subscribe to Garrett’s motto to ‘just pick something’ and put it down, because it’s going to be better than guessing after the fact.” He said that while the Gates Foundation does perform impact evaluations, they can be “hugely expensive” and “sometimes not add a lot of value because they take so long and are not actionable as the marker of progress as the program is underway.” He also noted that there is a spectrum of approaches to measurement that are sector-specific, and this creates additional challenges. “An educational outcome in the United States versus sanitation in Ethiopia? I’m not sure I can draw a comparison sometimes.”
‘It’s Very Early Days’
Where is impact investing headed? Henriques noted that the Gates Foundation is “not the norm,” if in fact there is a norm in this emerging field. It is unusual from a market perspective, since its risk tolerance is “kind of off the charts,” as he put it. “One of the tag lines we had for the PRI initiative at the Gates Foundation was ‘Markets don’t work well for the poor.'” The Foundation, he said, functioned as “someone who’s willing to come in with a higher risk tolerance — taking the charitable purpose first — and actually clear the way for [investors] to come in, because we’ll take that first hit of risk.”
“It’s very early days,” said Melby. What Melby finds “exciting” is the “accelerating convergence” of various players in the impact investing space, leading to more innovative and effective ways of tackling the world’s problems. He calls the long-established definitions of non-profit and for-profit simply “a historical accident of tax policy.” Now, he said, we see philanthropic actors making their capital deployment more accountable and return-oriented, and at the same time, return-seeking investors trying to find more socially impactful places to deploy their investment practices. “What we have essentially is a spectrum evolving. Trying to find out who’s the best capital source for which type of risk is really an important evolutionary step.”