Venture capital is undergoing a transformation. A term once only heard around the boardrooms of Silicon Valley, venture capital is now on the lips of development experts and social entrepreneurs in low-income markets around the world.
Corporate Impact Venturing (CIV), a subset of traditional venture capital, is proving to be an innovative financing tool for low-income markets. CIV is the practice of a corporate providing capital to a inclusive business with the expectation of financial, strategic and social and/or environmental returns. Rather than creating their own inclusive business models from scratch, corporates invest in field-tested models, providing much-needed finance and expertise to social entrepreneurs. The previous separate spheres of social impact and corporate strategic gains are united under this emerging financing practice. In Endeva’s forthcoming report explores the models currently used in corporate impact venture capital.
How are corporates venturing into inclusive business?
Depending on the investment objectives and venture capital expertise of corporations, corporations may choose to directly invest in a particular inclusive business while other corporations take a more hands-off approach. Corporations may also employ intermediaries such as venture philanthropy organizations and impact investment firms to assist in the process. To make sense of these diverse variety of CIV practices, Endeva’s report categorizes three main models of corporate impact venture capital: direct investments, self-managed funds, and third-party funds.
Direct investments provide funds to inclusive businesses from the corporation’s primary accounts with the investment listed on its annual balance sheet. In implementing a direct investment, corporations may utilize internal expertise in venture capital or employ intermediaries for transaction advice to successfully manage direct corporate impact ventures. The Body Shop International provided a direct equity investment to Divine Chocolate Limited, a Fairtrade chocolate company owned by Ghanaian cocoa farmers via the co-op Kuapa Kokoo. The Body Shop also supported the Kuapa Kokoo co-op by buying its raw cocoa products.
In a self-managed fund, the corporate sets up an investment company or creates a captive fund. The Pearson Affordable Learning Fund (PALF) is an example of a self-managed fund. Established in 2012 by the British multinational education company with US$15 million of Pearson capital, PALF’s current portfolio includes 10 for-profit educational enterprises investments in Africa and Asia.
Corporations can also invest corporate impact venture capital through third-party funds such as venture philanthropy funds, syndicates or funds with corporates as limited partners. Schneider Electric is a limited partner of the Energy Access Venture Fund with Aster Capital as the general partner. In 2013, Schneider Electric invested in One Degree Solar, an inclusive business offering solar-powered battery kits that powers light bulbs, phones, radios, and other USB devices. The One Degree Solar investment offers Schneider Electric experience in BoP cleantech innovations and a foothold in African markets as BoP consumers search for alternatives to kerosene lamps.
CIV case studies such as Schneider Electric and OneDegree Solar demonstrate corporate impact venture capital’s potential to achieve positive impact in low-income communities.
To read more on corporates venturing into inclusive businesses, read Endeva’s report.