Here’s one way to tell the difference between an impact business model and the still-dominant version. Do they target low-income consumers, as indicated by pricing and cost assumptions?
The impact businesses will be built to maximize affordability. High-quality, affordable products and services that meet the real needs of emerging middle-class consumers around the world means that what’s lost in margin can be more than made up for in volume.
And that means that greater scale delivers profits and impact together. More consumers with access to quality health care, effective education, healthy food and inclusive financial services means growing revenues.
“That’s the ‘Beyond Trade-off’ dimension,” says Sandeep Farias, co-founder and managing director of Elevar Equity, which has raised more than $285 million in four funds and made investments in more than 35 companies in India and Latin America in financial services, agriculture, education, healthcare, and housing.
“The moment you say something is possible from the affordability standpoint, and is a real need of the end customer, then scale, which is the third dimension, is a commercial imperative and our impact imperative.”
Such “collinearity” of impact and profits, the brass ring for many impact investors, often glimpsed but hard to grasp. In Episode Six of ImpactAlpha’s Beyond Trade-offs series of podcasts, produced in collaboration with Omidyar Network, Farias offers a tour of the “Elevar Method,” the investment firm’s methodical approach to achieving impact and financial returns by backing companies catering to low-income customers.
“We want the DNA of the company to be focused on the end customer in the low-income community,” Farias told ImpactAlpha’s David Bank. “If you do the right thing by the customer, then the entrepreneur will do well. If you do the right thing by the entrepreneur, then the fund will do well. If you do the right thing by the fund, then the LPs will do well. I think that virtuous cycle is important.”
(Farias and The Rise Fund’s Maya Chorengel, an Elevar alum, wrote “Distinct Commercial Approaches for Scalable Impact,” in the Beyond Trade-offs series on the Economist’s digital hub.)
After an early career in corporate law, Farias founded and ran the Indian operations of Unitus, a microfinance accelerator. He had a front-row seat to the ups and downs of that sector through Unitus’ investment in SKS Microfinance, now Bharat Financial Inclusion, which was at the centre of the 2010 microfinance crisis in the state of Andhra Pradesh. In 2008, Elevar was founded and continued to manage the Unitus Equity Fund, which had been set up in 2006.
In its later funds (2008, 2014, 2018), Elevar has looked for a broader range of companies serving low-income customers. Such customers are the foundation of Elevar’s method. Then follows backing the right entrepreneur, with a business model premised on distribution economics and affordability that can scale to reach large numbers of underserved customers in low-income communities.
Farias and his team try to identify essential products and services used by low-income customers and to identify where they are sourced by individuals and small-scale entrepreneurs. Typically, those would come from informal actors, whose solutions were often very expensive or poor quality. Elevar then asks, “OK, if that is the need, is a business model capable of doing it and delivering that service affordably?” says Farias.
Finding the right entrepreneur executing on that business model is the next element of the Elevar Method. Elevar looks for entrepreneurs who have their finger on the pulse of what customers need and will pay for, and at least decade’s experience commercializing products and services.
Elevar is usually the founding investor or the first institutional capital in its portfolio companies, which have gone on to raise roughly $1 billion in follow-on financing from co-investors.
Farias says Elevar invests early because it believes it is easier and less risky to work with entrepreneurs to prove and scale their business models than to course-correct for impact at a later stage. It’s also the surest path to commercial returns for itself and its investors, Farias says.
Elevar invests its first slug of capital—typically $2 to $3 million—and spends 12 to 18 months helping a business prove its distribution economics. “For $2 million, you can get a business model that’s capable of dramatic scale from an impact standpoint and from a return standpoint,” Farias says. “What I think is amazing is that’s all it takes to prove a business model in the impact ecosystem.”
For the growth stage, Elevar often invests $5 to $10 million more to build up the organization itself—senior management, risk management, governance, technology—and to begin replicating its distribution approach.
That growth stage is the hardest to execute, and Elevar hasn’t always succeeded. In its second fund, Elevar invested in one company’s Series C round, when the company was already in growth mode. When Elevar went back to look at the business model, Elevar realized that a majority of the company’s revenue was coming from only a small subset of its business units.
“If you have multiple customers with different kinds of distribution strategies, [you’ll] naturally gravitate towards a [higher-income] customer,” Farias explains, “because the margins are better. So eventually that’s the natural instinct [when] you’re building a business.”
The mistake forced Elevar to double down on its commitment to helping entrepreneurs establish their distribution economics early, and ensure companies are optimized from the beginning to serve low-income customers.
Elevar has struck a co-investment partnership with TPG Growth’s Rise Fund, that gives the much bigger private-equity fund exposure to Elevar’s portfolio, and the possibility of writing much larger checks over time. Having such large pools of capital available for growth is itself an impact imperative.
“We do believe that that’s an important factor for success if we really want to solve problems at scale,” Farias says. “There’s no point in saying, ‘We want to solve a problem for 10,000 people.’ We have to address millions.”