Impact investment insights: blending mission with financial discipline

At the Michael & Susan Dell Foundation, ensuring our efforts have lasting, positive outcomes for the families and communities we serve is core to our mission. As I mentioned in an earlier post, one of our guiding principles is “staying the course,” which means that we invest not only financial resources in companies that are making a difference, we also invest the necessary time to help them scale and achieve sustainability. This guiding principle led to the creation of our MISSION framework used to guide our impact investing decisions.

Below, I’ve outlined three key factors in the foundation’s impact investing strategy that have helped us in keeping our focus on social impact while helping organisations scale up to achieve financial viability and investor interest.

1.Being an impact-first investor

For the foundation, this means analysing potential investments by asking: Is this an opportunity that aligns with our programmatic goals? By using a mission-first approach, we only consider potential companies that have social impact embedded in their DNA and that are working in the spaces where we strive to see the most improvement and transformation.

An example is our work to address housing finance services for low-income urban families led us to the Micro Housing Finance Corporation (MHFC) — an affordable housing finance company that provides micro-mortgages to those families without access to formal banking in India. The concept of their model was driven by extensive research that showed the need and viability of low-income housing at affordable prices. We were drawn to their thoughtful approach to serving low-income, first-time homeowners in a risk-mitigated manner by working in close partnership with approved builders and housing projects. With a strong leadership team, along with investments in their technology and product design, we felt confident that MHFC would be able to successfully bring to market housing finance services designed to help those who are underserved and financially excluded.

In 2009, we invested, jointly with Caspian in MHFC as one of their first institutional investors with clear alignment on the families they would be servicing.

Over the course of the next few years, MHFC stayed true to their customer base and continued to finance homes below a threshold price of Rs 5-10 lacs. By 2017-18, MHFC was disbursing 250-400 new loans each month. They continued to strengthen their credit assessment and scoring models with appropriate levels of home visits and physical checks built into their credit process to offset the lack of documented income and cash flow data. Despite the perceived risk of the target segment they served, MHFC maintained its portfolio quality and best-in-class industry standing with less than two percent non-performing assets, and was able to develop several strong banking partnerships as a result.

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2.Ensuring financial discipline

For social impact to stick and make a difference in the communities we serve, it’s essential that companies are financially healthy and sustainable. This takes financial discipline and planning. We find that working closely with our investment partners helps to build and strengthen positive connections between social and financial returns. Once we have invested in a social enterprise, we work alongside them as thought partners on their financial models.

In many ways, social impact investing straddles the line between traditional financing and philanthropic funding and carries with it the best of both worlds. Often, there is a misinterpretation around impact capital, especially from philanthropic foundations, as requiring little to no financial discipline. However, our experience has led us to believe that strong financial discipline from the beginning is critical to long-term social impact at scale. This financial discipline enables the companies to become financially viable and capable of attracting more capital, thus scaling up their outreach and impact.

As we identify companies to invest in, it is extremely important that the culture of the organisation at all levels—from management to those working in the field—is centred on the impact to the customers, as well as their path towards financial viability and growth. We have typically encouraged this through investments in management information systems (MIS) to enable transparency and accuracy in data (financial and social), which can then enable stronger decision making.

For example, in several of our skill training and education companies, we have worked closely with our investment partners to introduce efficiencies around staff allocation and utilisation through automation of their processes and regular review of data. Our work with Avanti Learning Centres, a blended learning company focused on math and science education in senior grades, involved review of centre-level data to help them move to a hub-and-spoke model better leveraging synergies around staffing and management. Similarly, Labournet, a skill training company, employed real-time, detailed MIS to establish minimum pricing norms for contracts as well as identify cashflow efficiencies through streamlined collection processes. These collaborations helped to build stronger financial controls and discipline within the organisations to foster viability and higher growth options.

3.Structuring responsible exits

As part of our relationship with our partner companies, we work together and strategise on responsible exits once they have reached the desired scale, maturity, and stability. One of our key learnings has been that meaningful scale can be achieved in different ways, but it takes time. In most cases, we are investing in companies or business models that are considered high-risk — where other investors might not consider investing. Often, such enterprises take time to mature their business models and prove the scalability of a double bottom line of both profit and social impact.

Given that our investments are not structured as a fund with a limited life, we are not restricted to a typical five-year estimate of a traditional investor, thereby giving companies access to patient (but disciplined) capital for their early-stage ideas and models.

The option to exit becomes feasible after a company has scaled up, is able to attract other capital, and the business model is on a strong growth trajectory. This can take anywhere from four to seven years or possibly even longer, but patience is key as business models need time for iteration, product research and validation from their customers. As an example, in 2008, we incubated Svasti, a microfinance institution focused on the slums of Mumbai. After supporting and nurturing the company for more than 10 years, we exited the business in 2019.

We first met the founder of Svasti, Arun Padmanabhan, when he was still working at ICICI bank and looking to explore the idea of micro-credit and financial inclusion. We helped him in working with a consulting team to further research his idea. They spent 15 months in the field to better understand the market dynamics and challenges and to design a product that would meet customers’ needs —which aligned with our key principle of deeply understanding the people we look to serve.

Svasti worked to develop and refine their processes and technology, and improved operational efficiencies and data analytics to scale up. During the course of this 11-year journey, Svasti saw induction of capital from Bamboo Finance, Poonawalla Group, and Norwegian Microfinance Fund. Their reach grew to more than 185,000 customers across 52 branches spread over four states. Our confidence to exit came after Svasti had demonstrated a large-scale presence in Mumbai markets in a viable, risk-controlled manner.

We have also experienced exits where companies have reached scale and viability sooner, such as Intellegrow, a non-banking finance company set up to offer loans to social enterprises, where we partially exited within four years of our investment. Similarly, we made a partial exit from Janalakshmi Financial Services four years after our first investment in early 2007.

In both these instances, our role as a foundation is to stay close to the operations to support the strongest and most responsible impact focused outcome.

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Leading with impact

Our mission drives everything we do, so leading with impact is core to the way we do business. To create lasting change for the people we serve, we invest in companies that share our mission of transforming the lives of children and families living in urban poverty. This also means investing in companies with a path to a viable, healthy financial model so as to ensure accessible services remain available to those who need them most. That’s why it’s so important to work alongside our partners to think through how to achieve sustainability over time.

The work can be incredibly challenging, and staying the course often comes with unexpected challenges. But when the real-world impact becomes evident in a family or community, it becomes clear that mission focus, financial discipline, and thoughtful growth—and exits—are essential to creating long-term impact.

(Edited by Evelyn Ratnakumar)