Signals | November 17, 2014

Bill Gates Makes an Impact Investment to Seed Base-of-the-Pyramid Startups in India

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Bill Gates arguably ushered in the current golden age of philanthropy. Now the world’s richest man has endorsed another way to put money to work for good: impact investing.

It’s safe to say Gates doesn’t need the market-rate returns expected from his new venture-capital investment in Unitus Seed Fund. His modest commitment closes a $20 million US-Indian fund through which Unitus has taken early stakes in more than a dozen for-profit startups providing health, education and livelihoods, for Indian families living on less than $10 a day. (Impact investments are intended to generate—and measure and report—social and environmental impact alongside a financial return.)

The investment puts Gates on one side of a debate that has divided his fellow tech titans and billionaires, and now apparently separates the Microsoft co-founder from his friend Warren Buffett. Should private investors back businesses with explicit social and environmental missions and metrics?

Impact investing is a powerful model with the potential to build markets and drive change for the people who need it most.Bill Gates

Buffett and Gates are co-founders of the Giving Pledge, which has signed up more than 125 billionaires to give away at least half of their fortunes. But Buffett has favored the traditional separation of business and charity. “I think it’s tough to serve two masters,” he told a conference last year. “I would rather have the investment produce the capital and then have an organization totally focused on the philanthropic aspects.”

Marc Andreessen, the Silicon Valley venture capitalist who challenged Gates in the Netscape-Microsoft Web browser wars of the 1990s, has also been critical of the idea. Two years ago, Andreessen said “I would run screaming from a B Corp,” or for-benefit company that adopts explicit social goals, which he said are distractions for startups.

“The split model makes me nervous and I don’t think we would ever touch that,” Andreessen said on a panel. “It’s like a houseboat. It’s not a great house and not a great boat.”

Will Poole, co-founder and managing director of Unitus, recently spent several days on a houseboat in Kerala, in India’s southwest. “It was an excellent boat and a fine house,” Poole said, “and we provided local economic development at the same time.”

Unitus, with headquarters in Seattle and Bangalore, in its first year has made 14 investments of generally between $100,000 and $250,000 in companies such as Smile Merchants, which operates low-income dental clinics near Mumbai, and Hippocampus Learning Centers, a network of private kindergartens serving more than 6,000 rural and low-income students.

Poole, who spent 13 years at Microsoft, got Gates on board after gaining commitments from other high- and ultra-high net worth investors. Unitus has attracted 15 Indian nationals and more than a dozen non-resident Indians, including venture capitalist Vinod Khosla, Romesh Wadhwani, founder of Aspect Development and Steve Singh, CEO of Concur Technologies, which SAP recently agreed to buy for more than $8 billion.

Gates’ investment in Unitus comes out of a personal fund, not from the Gates Foundation, which has set aside $1 billion for to provide equity, loans and loan guarantees to for-profit companies. Gates personally has made a number of food and energy investments, including Hampton Creek Foods and EcoMotors, a low-emission engine maker. But Unitus is apparently his first investment in a fund or company targeting so-called base-of-the-pyramid customers, the poor in the developing world.

“Impact investing is a powerful model with the potential to build markets and drive change for the people who need it most,” Gates said in a statement confirming the investment in Unitus.

Some of the naysayers may be softening their positions. Andreessen’s wife, Laura Arrillaga-Andreessen, is the founder of a social venture-capital firm and earlier this year, Andreessen’s firm, Andreessen Horowitz, invested in AltSchool, a network of micro-schools offering personalized education for children…that is in the process of becoming a certified B Corp.