No matter what your sector, geography or investment approach, the world is more uncertain than it was nine months ago.
In this world of heightened uncertainty, resilience is the new ROI. There’s been a lot of talk around Joe Biden’s “Build Back Better’ plan for recovery which includes building new infrastructure, upgrading homes to be more energy efficient and supporting small businesses, all initiatives that support long-term resilience – but how, as investors, do we build back better?
For the past eight years Open Road Alliance has provided ‘emergency’ funding via bridge loans and grants to social organizations facing unforeseen challenges, so we are well versed in risk and resilience.
In the past, the crises in our portfolio have been acute and time-bound. But 2020 was different. Now, social entrepreneurs we work with are looking to shift their business models, delivery channels, product offerings, and cost structures for the long haul. Now, no one is asking for ‘just three months’ of lost revenue to ‘get through.’ They know there is no going back to the way things were. The concept of survival or ‘waiting it out,’ does not and cannot apply. The goal is no longer to survive, but to adapt.
These entrepreneurs get it, but what about funders? What does pivoting or adaptation look like for impact investors? Increased uncertainty in 2020 has had a profound effect on the evaluation of risk and returns. For example, an enterprise that might have been a ‘2’ on the risk scale in January is now a ‘3,’ through no fault of the entrepreneur and no change in their business model. Risk is the default of our post-Covid world.
In order to build back better, we have to embed resilience and adaptation into our process now.
Having deployed more than $8 million since April 1, 2020 to support companies adapting through COVID, here are three shifts social enterprises took to successfully adapt in the post-COVID world that investors should also adopt.
Keep It Moving
When faced with so much uncertainty it is a natural reaction to freeze up and stop. Stop due diligence, stop lending, stop investing. When presented with a crisis, it is tempting to wait it out. But this is not a crisis with a finish line that we can wait for. Those who freeze will die. In contrast, those who keep moving, those who bob and weave will be rewarded.
Redavia, for example, is a for-profit social enterprise providing solar farms to businesses and communities in West and East Africa. When COVID-19 hit, Redavia understood that it was critical for their clients to continue receiving reliable and clean solar energy. Without it, the ripple effects of COVID-19 would be exacerbated in the Ghanaian and Kenyan markets they served. So, rather than pulling back, Redavia made the decision to keep moving and created a new concessionary solar power program to continue attracting new customers. The COVID-19 Resilience Lease provided solar power plants to business customers for six months, completely for free. This response not only enabled Redavia’s customers to survive, it also became a promising “try before you buy” approach for prospective customers that expanded their business faster than planned. As Redavia’s CEO, Erwin Spolders stated, “don’t let a crisis go to waste; things that weren’t possible before can become possible.”
Entrepreneurs who aren’t pivoting to no-contact distribution channels, adjusting to localized supply chains, or finding opportunities like Redavia won’t survive the next 12 months. Likewise, impact investors who are putting holds on investments are in a ‘survival’ mentality, and will find themselves behind the curve and the competition when the dust settles.
Trust the Entrepreneurs
As the effects of the pandemic continue to ripple across the globe, we risk losing decades of progress on healthcare, education, and more. The tension between investment v. impact is more fraught than ever before. The bottom line is that there is more risk and someone will have to bear it.
In a world where up to 500 million people risk falling back into poverty due to the pandemic, it is the intermediaries and investors, not entrepreneurs and the companies serving these communities, who are best positioned to absorb this excess risk. Simply put, it is worth it – even necessary – to stay active in this uncertain market in order to reduce the risk of losing decades worth of progress. We have to pivot towards investing for impact and that means trusting entrepreneurs to focus on the core of their business, which is impact. In impact investing, preserving impact is good for business because impact is the business.
Jibu, for example, trains and finances emerging market entrepreneurs to build profitable social franchises designed to serve the most basic needs of their community. Their anchor product is radically affordable drinking water. As of early 2020, Jibu had launched over 2,000 retail points and created more than 1,400 new jobs. With COVID-19 came mandatory quarantines in all markets where Jibu operates. In the midst of a capital raise, Jibu was at risk of not being able to close on time with international travel banned in all of their core markets. A short term loan from Open Road gave Jibu time to make the necessary restructuring to become cash flow positive and close financing. The bridge loan provided them with the liquidity needed to continue with core training programs and strengthen their quality control processes. It was an investment to double down on impact, knowing that growth would follow. By doubling down, Jibu solidified customer loyalty and became a trusted brand in its core market of Uganda while growing into new markets such as Kenya.
Entrepreneurs know firsthand what’s happening on the ground in their markets. They can keep their impact on track if we trust them by enabling them to make their own bets and iterate in this moment of uncertainty on what will produce the most impact.
Impact focused investing has always been plagued by the philanthropic formula of measuring success in a linear fashion. $X invested equals Y people educated, vaccinated, fed, etc. Traditionally, the bigger the growth plan, the better the investment.
However, in this world of heightened risk, linear progression can no longer be the standard for measuring success. Instead, evaluating an organization’s resilience, how quickly it can adapt to changing circumstances and how adept it is at seizing new market opportunities – perhaps multiple times – will be the sign of a winning company.
Both Redavia, Jibu, and dozens of others in our portfolio have had to redefine success for 2020 and beyond. As investors, we have also had to adjust our expectations and our parameters for investment.
As we continue to make investments across the globe we’re not looking for the company with great numbers in 2019 that’s planning a ‘V’ shaped comeback in 2021. Instead, we’re looking for the one that has steady numbers – with two pivots along the way.
The world has always been unpredictable and the future offers no changes to this reality. If impact investors can adapt to this future in the same way our entrepreneurs are doing, we will advance beyond “just surviving” this global transition. Instead we can seize the opportunity to come out smarter and stronger on the other side. After all, that’s what resilience does, it builds the muscles that allow you to keep both impact – and revenues – on track in any storm.
Maya Winkelstein is Chief Executive Officer of Open Road Alliance.