Thoughts on philanthropy disruption

Two panel discussions at Sankalp Forum 2011, both on impact investing, provided food for thought. One of them focused on missing impact investors in the Indian social entrepreneurship ecosystem. The other panel (with VCs from Acumen Fund, Omidyar Ventures, and Gray Ghost Ventures), focused on the future of impact investing in India.

If one were to map investors on a spectrum, philanthropists and traditional venture capitalists would be found on opposite ends with social impact investors somewhere in the middle. Sasha Mirchandani (Kae Capital) opined that India, until very recently, was in a social investing 1.0 phase and is just about entering the social investing 2.0 phase. During the social investing 1.0 phase (largely dominated by philanthropists), investing has been quite conservative with most of the focus being on education, health, or religious areas. The 2.0 phase, which is expected to be turbo-charged by social entrepreneurship, will require different kinds of investors — ranging from pure-play social impact investors to a different breed of philanthropists.

What would this new breed of Indian philanthropists look like? A few clues emerged from the panel discussions and the interaction with the audience. Acumen Fund’s Meghna Rao felt that perhaps philanthropists need to take more risks by investing in early stage social enterprises. Babajob’s Sean (from the audience) commented that Bill Gates is directing a huge chunk of his foundation’s money towards eradicating malaria because… he wants to be known as the guy who eradicated malaria. Sean followed up with a question to the panelists: how do we increase social value for Indian philanthropists by linking the output of their philanthropy to their status and prestige?

Now let’s return to that investor spectrum real quick — the spectrum with philanthropists on one end, traditional VCs on the other, and impact investors in the middle. It would be really interesting to plot the overall sector sizes of the three investor groups on this spectrum. Worldwide (but definitely for India), the graph would look very dense on both sides of the spectrum and very sparse in the middle. Which brings us to the question…from which end of the spectrum will additional impact investors come from?

The cop-out answer would be “both”. Which would be partially true of course. But the more interesting question is: which investor group is more ready to migrate to impact investing?

As a preamble to my answer, I’m reminded of the following biblical quote: It’s easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of heaven. Traditional VCs are like the proverbial rich man, you see. Their primary imperative is to look for a certain multiple of financial returns. Philanthropists, on the other hand, are already primed to deliver a social impact. It’s just that most of them are doing social investing 1.0. As Acumen Fund’s Meghna Rao observed, if they changed their investment blend to include social enterprises, now that would be something. Here’s to social investing 2.0!