The Grassroot Approach to Impact Investing
Some impact investors, especially in the early 2010s, like to employ the armchair approach to investing. They set up an office in their home country (mostly in developed Western countries), hire someone to “survey”¹ the landscape in the developing countries, and invest out of a global fund. While this approach might work in tech startup investing², the result had often been disappointing for impact investors. I have seen at least three impact investors exited or pivoted their strategy in Indonesia after years of frustration of not being able to make a single investment.
The opposite of the armchair approach is the grassroot approach. The word “grassroot” is more often associated with activism or advocacy of the poor and the disadvantaged in the society. However, in the context of impact investing, grassroot means having a permanent ground presence, staff speaking the local languages, with teams and investment committee members having solid understanding of local contexts. Why would employing the grassroot approach make much more sense for any impact investor, compared to the armchair approach?
1) More frequent engagement with low-income communities
Having discussions with impact entrepreneurs and other investors surely help, but I have had more insights when interacting with the low-income communities, learning about poverty and the best way to get out of it from the poor themselves. Being close to the grassroot would enable longer and more frequent visits that, if done right, can be immensely helpful for the investors to understand about the communities and the impact enterprises that are planning to engage them.
2) Better understanding of sector dynamics
Traditional impact investing sectors like agriculture, education, and healthcare are laden with historical context and political dynamics. Impact enterprises cannot operate completely outside of those contexts, and the best way to understand them is to be present, to live and breathe the same information and, as much as possible, the same emotion that are felt by the entrepreneurs and the communities.
3) Better understanding of regulatory environment
Certain sectors like clean energy and financial technology are so dynamic and potentially disruptive, hence governments are practically updating their new rules on the regular basis. Impact investors based in-country would be able to meet and form alliances with other ecosystem players to understand and help shape the regulations.
4) Ability to engage local entrepreneurs
Expat entrepreneurs usually have easier access to impact investors, the majority of which are based in international financial centers. having international background, and speaking English. While there are many good expat entrepreneurs³ worth investing in, but locally-based investors with local language capabilities will have access to a much wider pipeline of both expat and hiqh-quality local entrepreneurs.
5) Deeper engagement with entrepreneurs
While many tech startups in developing countries are practically copycats of Silicon Valley’s unicorns, impact startups have to develop and nurture their own business models. Therefore, impact investors need to allocate more time with the entrepreneurs, before and during investment, to understand and help develop the custom approaches that work with the local contexts.
6) Deeper engagement with local financial ecosystem
Unlike tech startups who rarely require debt financing, most impact enterprises are asset-heavy and require support from debt providers. Although some lenders operate from a global base, in countries with vibrant financial markets like Indonesia or India, local lenders often provide better options for the enterprises. Impact investors should be around to support their portfolio companies by developing relationships with both international and local lenders.
7) Cultivation of local impact investing ecosystem
Impact investing is still in its early phase. Most impact investors, at least in Southeast Asia, came from overseas with international source of capital. Recently, these have changed, and local family offices are embracing impact investing as well, albeit at a small scale. Global impact investors (with local presence) with their vast experiences in investing in other developing regions need to collaborate and share their learnings with the local homegrown investors. When local capital is fully onboard and the governments start to notice that, the impact enterprises and the communities that they are supporting will thrive.
***
Impact investing involves much more than just financing enterprises. There are local contexts, history of the nation and the people, and political and ethical issues that the players in the sector need to consider. Being fully present and taking the grassroot approach is the best way to incorporate all these important aspects, to make more impactful investments and profitable exits, and to support the evolution of impact investing in the developing countries.
[1] Some impact investors sent permanent representatives, mostly foreign nationalities, to the target countries. But since they are not rooted in the country, they usually take time to adjust and the turnover can be quite high.
[2] Many global tech investors, like Y Combinator or Global Founders Club, operate from a single location.
[3] I have encountered some bad ones with “white saviors” mentality that are insensitive to local contexts as well.
