At Appropriate IT, we’ve been calling ourselves a start up. While that’s true, it sometimes feels as though we’re not. For years now, AI has been a known entity through its project-based work, and concepts for our latest iteration have been piloted for the past couple of years. As we hit 2014 though, we’re shifting gears a bit – launching the hybrid model of Innovation Lab and Development Academy that we will scale. That also means, we’re beginning to bring in the first round of outside funding (seed stage investments) that will enable our growth.
Given where we are now, I’ve been making sense of early stage funding opportunities for our organization over the past few months. This means that I’ve been deep in research and mapping mode. I could reflect on this process for days. For now, I’ll share a bit about a type of capital we are cultivating.
To clarify up front, AI is currently raising investment (not philanthropic or grant) capital to fund our general operating costs, expansion of our execution team and refinement of our revenue generation strategy. This is money invested in AI for the purpose of earning a financial return on investment – of making money. Put as simplistically as could be, if a funder were to invest a dollar in AI today, we would give them more than a dollar back in the future. (Terms and size of deals will vary, and risk rates will be factored into valuations – but you get the gist.) Our investors are making a bet on our success, and, in return, they get a share of the profit that comes along with that.
I’m emphasizing this point because it can be a bit confusing. As you’ll see throughout our website, we are very committed to having a positive social impact in the world. In fact, it is core to our design and measurement of our own success.
Basically, our “social enterprise” structure means that we have chosen to accomplish our organization’s social impact through a for-profit business model. We believe our reach is broadest, our intervention most unparalleled and our model most sustainable if we earn revenue to enable the social impact we hope to have in the world. We see a market opportunity for the role AI will play in the tech space. We’ll capitalize on that, and along the way, be sure to mainstream social impact priorities in the myriad ways we can. In fact, we think that this mainstreaming will make our business itself stronger – more competitive, informed, insightful.
To be clear though, this all means that our first priority is being a financially successful and sustainable business – so that we can then fulfill our social impact agenda.
As a result of this “double bottom line” approach, much of the capital that we bring in will be “blended value” capital. This sort of thing – money invested to earn a financial return with a conciousness of social impact – is not a super-new frontier. Movements around things like Socially Responsible Investing (SRI) as a means of diverting capital from bad practices, microfinance as an asset class that can reach and empower underserved populations and many, many other interventions have all sought to make sense of strategies for capital markets to work as a tool for social change.
In recent years (let’s say the last ten), activity, expertise, an enabling environment and buzz have grown around the emerging industry of “Impact Investing”. The “Global Impact Investing Network (GIIN)” explains:
Impact investments are investments made into companies, organizations and funds with the intention to generate social and /or environmental impact alongside financial return. Impact investments can be made in both emerging and developed markets, and they target a range of returns from below market to market rate, depending upon the circumstances.
Let’s think of impact investing as yet another manifestation of investment capital as a tool for social impact. Decidedly distinct, but at the end of the day, yet another intervention (though many would argue a very “game changing one”) to use dollars invested via for-profit vehicles as a tool for social change.
So now, every flag or critique this might raise for you is probably valid. For one: slippery slopes as far as the eye can see. Then there’s the very appropriate point that philanthropists, NGOs, nonprofits, etc. have worked tirelessly and devoted massive resources to social change agendas for years with no money-making agenda married in.
That’s all fair, but let’s stop and consider orders of magnitude for a minute:
The above chart is based on a Monitor Institute’s Investing for Social & Environmental Impact report (pdf). You have the link to this full report, so dig in to the data all you want. In a nutshell, this snapshot of our global economy says that of all the money exchanging hands through market transactions (I bought a bond in my newborn granddaughter’s name, my company’s matching the money pulled out of my paycheck into my 401K, philanthropist X made a donation, etc, etc, etc) totals about $50 Trillion. The projected market opportunity for Impact Investing as an industry over the next 5-10 years is about 1% of that. Sounds kind of small until you see that it eclipses the projected scale of philanthropic giving.
To be sure, this is a much longer conversation, but I really wanted to throw that last point out there. When thinking about the importance of social enterprises, there’s a tendency to think mainly about their activities – and by extension a focus on the outputs and subsequent (sometimes presumed) outcomes. For example, Social Enterprise X sells 100 bed nets at a discounted rate to a previously under-served population and 100+ more people have greater protection from malaria (yes, another simplistic statement, but stick with me – it’s just to set context). This grounds the potential of a social enterprise in the context of who it will help in the world.
As I think about raising capital for AI, I’m drawn to a different dimension of social enterprise potential: the potential of social enterprises to unlock the billions of dollars that could be earning both social and financial return. Social enterprises as part of the absorptive capacity for these blended value dollars. From this perspective, the impact of our company lies not only in the social impact indicators (outputs, outcomes, & impact) that we will measure, but in the dollars that we shift from seeking traditional value to blended.