In this study, Jana explores why most of the Asia and the Pacific region lags behind the rest of the world in tapping into social enterprise and impact investing models to contribute to the development agenda. She identifies the main barriers that are currently preventing the region from benefiting from impact investment and discusses the ways that various actors, from philanthropists and investors to policymakers, can contribute to enabling the growth of this sector. Jana summarizes her study with several conclusions and recommendations:

Philanthropy will always be a crucial component of impact investment and commercial investment alone cannot support the development agenda.

The potential of private enterprises funded by private investment to create social impact and contribute to inclusive and sustainable development has been demonstrated. However, such investment will not predominantly consist of commercial investment that also generates a market rate financial return. Philanthropy will always play an important role in the development of social enterprises and investments that generate a market rate of return will only be a part of the spectrum of impact investment.

Impact investment is an important tool for development but will complement, not replace, existing forms of development funding.

Impact investment will not replace existing forms of development funding; rather it will be an important addition to the range of available funding tools and will alleviate some of the pressure on grant funding. Impact investment is suitable and can be effective only in addressing social and development challenges that lend themselves to market based solutions.

Policymakers need to support a strong SME sector and entrepreneurial ecosystem.

Any country wishing to benefit from impact investment activity and attract foreign impact investment must first ensure that it is supportive of small enterprise development and has in place a domestic entrepreneurial ecosystem that produces a quality deal flow for investors. This should be the primary focus of initiatives and policy, before the focus can shift to the social aspect of small and medium enterprise.

Policymakers need to decrease barriers to foreign investment and take a multi-stakeholder approach to policy development around impact investing.

In order to attract foreign impact investment, policymakers should ensure that barriers to foreign investment in industries and sectors of interest to impact investors are eliminated. Examples of measures include reductions in foreign investment and ownership restrictions in impact sectors, reductions in paid-up capital required for foreign ownership to enable undercapitalized foreign social entrepreneurs to be active in a country, lower levels of bureaucracy and red tape for setting up and investing in SMEs and ensuring adequate investor protection through a quality legal system which includes proper shareholder protection laws.

Domestic funding and capacity-building of social entrepreneurs is crucial.

Domestic support for seed and early stage social venture activity is essential before foreign investors are able to engage with social enterprises. Governments, the domestic business sector and domestic philanthropists can contribute to initiatives providing capacity-building and funding to young social ventures. Domestically funded and operated incubator and accelerator programmes can make a significant contribution to social venture development in this regard.

Policy must allow for necessary flexibility and innovation in this emerging sector.

The diversity in legal structures and organizational forms, motivations, and activities is an important part of the social enterprise sector as it continues to innovate and evolve. Supportive government policies can play an important role in advancing the development of social enterprises and impact investment. However, Governments should take care that policies actually contribute to the development of the sector and do not become a burden. As a new sector, impact investment needs time and space to innovate. Narrow definitions of what constitutes a social enterprise will limit the development and growth of the sector.

The full publication and chapter are available from the UNESCAP website.

Although I had worked in Myanmar in 2004 and found much of the physical infrastructure challenges still existed, there was a palpable difference in the air. Yes, everyone still used generators many hours a day since the government preferred to sell the electricity to Thailand rather than provide for its own people. And yes, there were still potholes the size of cars and taxis in such decrepit conditions that you could see the ground moving beneath you. But the biggest change couldn’t be seen, only heard and felt in conversations with local people, in terms of both content and delivery.

The airport was so improved it was unrecognizable, had to take a picture!

In 2004, government oversight and censorship were still very much the norm.? All the international NGOs, including the one where I worked, had government spies. (Everyone knew who the spies were. When I suggested firing our resident government mole, everyone was horrified. At least we know who it is! If we fire him, they’ll send a new one or turn someone else into one and we’ll have to start over to figure out who it is.) Taxi drivers knew where all of us foreigners lived, which was both convenient yet disconcerting. Many websites, including seemingly innocuous ones like the Population Council (a reproductive health nonprofit) were deemed inappropriate for [our] viewing. There was little talk, and even less hope, of any changes to the government and the economic situation in the country given the sanctions. My local friends and colleagues tried to make the best of their situations and seldom spoke about politics. Self-censorship reigned supreme. There was so little hope in the air that although I have worked in poorer environments (like some parts of India), Myanmar felt the most desperate and hopeless.

Newspaper cover page the day after President Obama’s visit

But things have changed. People cannot stop talking about the new President and their high hopes progressive reforms by the government and economic development given the lifting of most sanctions. Those in the social sector talked about the government’s sustainable development advisory committee. Apparently there are countless conferences featuring buzz words like green, clean and sustainable. All are signs hinting at positive developments to come.? While most people, both inside and outside the country, are still waiting to see if the rhetoric turns into real action, at least there is hope.

The streets of Yangon

This November we conducted an initial exploratory visit to Myanmar to better understand the current context given the recent major changes in the country, to explore the social entrepreneurship sector and to assess how Synergy could contribute to its development. As with all our exploratory trips, we make a point to meet with a full range of stakeholders including government, multi or bilateral donor agencies, private sector companies, civil society groups, nonprofits, social businesses, philanthropists, investors and intermediaries.

Our visit to Myanmar began the day after President Obama visited the country. The atmosphere was one of excitement and hope, there was not one newspaper that did not have President Obama or Aung San Suu Kyi on the cover. Despite the very recent political and economic changes, Myanmar appears to be determined to catch up to its neighbors. We had hardly left the airport when we saw a billboard advertising a social enterprise business plan competition at a local business school. This was not just a coincidence; the topic of social entrepreneurship is very much at the forefront among people in the social and business sectors. It?s potential to contribute to sustainable development of Myanmar is recognized.

While we are excited that the topic of social enterprise is receiving so much attention in Myanmar already, our job is to look at the barriers to the sector and help overcome them. Although there is strong interest in social enterprise, strong barriers exit for would-be entrepreneurs. Some significant ones include an underdeveloped legal system in while enterprises can be registered and legally protected and virtually no access to start-up venture financing for new social entrepreneurs.

Synergy will begin our work in Myanmar by working with some existing social enterprises we identified and helping them to connect to partners outside of Myanmar, by making available our resources to local organizations that seek to support local entrepreneurs, and by working to raise funds that we can provide to high-potential early stage social ventures in Myanmar to help them overcome the critical financing barrier.

So how does Thriive work? It gives equipment capital loans to small business owners. When it’s time to repay the loan, the loan borrowers repay it forward in the form of goods and services they provide to their community. When applying for the loan, the borrowers must already have a clear repayment plan that details the social needs in the community that its repayment will help address.

What’s brilliant about the model is that the borrowers usually create jobs in their sector, and often train young people to set up their own businesses in the same sector. It may seem like potential competition but in fact they are merely expanding their supply chain. ?One savvy mushroom farmer borrowed money to expand her mushroom farm and train other women to grow mushrooms that she commits to buying because she is unable to meet the current demand for mushrooms on her own.

So far, all Thriive borrowers have continued giving to their communities even after their loans have been repaid. In Vietnam, Thriive borrowers join the Thriive Business Association where the borrowers connect with one another and develop ways to support each others businesses and the community through a service or product barter system. For example, a carpenter helped a small incense shop install a wooden door that it had not been able to afford.

Thriive repayment ceremony in Hue, Vietnam

The Thriive model makes a great deal of economic sense. These businesses need capital to grow their businesses and once they do, they can create economic value by creating more jobs in the community. Thriive offers a non-interest bearing loan that is more attractive than regular commercial loans. But Thriive is also creating an equally important kind of value, social value in the form of creating or strengthening closer and tighter caring community bonds. This is what ultimately leads to supportive and resilient social infrastructure in times of crisis. The Thriive Hue team has already shown its savvy understanding of this concept by linking all the Thriive businesses to the local disaster response organization in Central Vietnam, a part of the country that is prone to destructive flooding. All Thriive borrowers commit to providing certain supplies in case of flooding emergencies.

A man sporting his new pajamas received from a Thriive borrower

It was great to see the links between the entrepreneur-philanthropists and the community. Prior to my visit, I had thought Thriive helped to ‘seed’ philanthropy in low-income communities. But after meeting the Thriive borrowers and learning about their many philanthropic activities prior to Thriive, I realized that in most cases, Thriive helped to formalize, nurture and grow existing small-scale community-building initiatives. Some of the Thriive borrowers may have already been low-key community do-gooders but the Thriive model shines light on their good deeds and provides additional resources to ramp up their community building activities

During my visit, I was fortunate to be able to participate in a Thriive repayment ceremony. Two Thriive borrowers, both tailors, gave custom-made pajamas and school clothes for abandoned elderly and children with special needs respectively. There were smiles, tears and hugs all around.

If the Thriive model is able to help one rural community reach out to its most disadvantaged members in such a positive and caring way, one can only imagine what Thriive can achieve on a global scale.

Recently, however, I’ve had some conversations that don’t follow this pattern. Instead of the usual excitement, I sense hesitation and reluctance. I ask these aspiring entrepreneurs why they want to start a business. “My funders suggested I start a business and use the profits to help my nonprofit organization be more financially sustainable”? is the answer. Somehow, it seems, social entrepreneurship has gained the reputation of an easy solution to a nonprofit organization’s shortage of donor funds. Instead of funding the nonprofit’s work, some funders now see it a better use of their funds to help the organization start a side business and use the profits to fund the nonprofit organization’s work. In theory it sounds simple, if the donations aren’t coming in start a business and supplement your revenue with the profits. Unfortunately, it’s not simple at all.

Entrepreneurship is not for everyone. It takes a certain personality, someone who is knowledgeable and passionate about a particular industry, is stubbornly persistent, and has an appetite for risk and an ability to deal with many ups and downs and constant uncertainty. Early-stage investors say that it’s all about the people and the idea is secondary. You can have a great business idea, but the wrong people will not be able to implement it. Or you can have an average business idea, and the right people can make it a great business. As with everything else, some people are suited for entrepreneurship, some are not. Because the right entrepreneur is such a key factor, we can not assume that every nonprofit organization will have the right person on the team to launch an enterprise. Most in fact will not.

Starting a business, social or not, is very risky, and the failure rate of start-ups is incredibly high. Many successful entrepreneurs succeed not on their first try, but on their second, third, sometimes fifty-sixth. Even if a nonprofit organization has someone on the team who has an entrepreneurial drive and the right skills and experience, launching an enterprise will take time and resources. For most businesses that do become profitable, it is a matter of years and a lot of resources invested. Funders encouraging a nonprofit to become enterprising need to consider how much of their time staff will need to devote to the effort (or how much it will cost to hire a good management team) as well as the financial resources needed. In addition to the risk of failure, another potential negative consequence is the effect on the nonprofit’s core activities if staff are devoting time to starting a business.

There have certainly been examples of nonprofit organizations that have established business ventures that have become profitable and contributed back to the revenues of the parent nonprofit. Important factors for success, however, are the right people to lead the venture, and a business opportunity that can leverage a core competency of the parent nonprofit organization. A social enterprise is a powerful tool when used in the right circumstances. But expecting it to be a sure way for a nonprofit to add to its revenue streams is almost sure to result in a stressed out entrepreneur and funder, lost funds, and a loss of focus on the primary work of the nonprofit.

Rithy at Small World

I met Rithy, a young but serious-looking guy the day after he had completed a run across Cambodia to raise money and awareness for Small World, a co-working space he founded where Cambodian youth can explore entrepreneurship and creativity. Despite the fact that he must have been exhausted after 10 days of running, Rithy was energetic as he spent over two hours answering our countless questions.

I was so impressed by his thought processes of why he wants to foster entrepreneurship in Cambodian youth and about the different activities through which he inspires other young people to explore creativity and innovation. From the poster paper on the wall listing questions Small World’s members wanted to explore, to interesting product samples and prototypes, to a mini ping pong table (to encourage thinking differently), evidence of budding ideas were everywhere.

Kim visiting a customer

Later that week I met Kim, a Cambodian woman who is the local project manager for Brooklyn Bridge to Cambodia. BB2C imports tredle pumps that enable small-scale farmers to water their fields efficiently and grow high cash crops during the dry season. On the way to visit farmers using these pumps, Kim chatted to us in great English and gave us insights into life in Cambodia. She also told us about her work with BB2C, laughing as she explained that often when she first comes to a village they call her “the cheating NGO”. This is because she goes to villages to explain the value of buying a product that will enable farmers to increase their income, not to bring free snacks and give things away.

Kim explained how her family’s farming background helped her to understand the value of the pumps, and why she felt selling them rather then giving them away would ensure the pumps got to the farmers that would value and use them most. When we arrived at the farm, I watched her chatting easily with the farmers, checking on the pumps, jumping in to remove a mouse stuck in a pump and wading knee deep into a swamp to clean a hose. The naturally charismatic salesperson that she is, she already had other farmers waiting for her to find out how they could get a pump.

On the two hour drive back to Phnom Penh, which is bumpy and uncomfortable enough in a car, I though about Kim doing this drive on a motorcycle with coils of hose in front and behind her pulling the pump behind the motorcycle. Undeterred by lack of resources such as a truck, she just gets things done.

It is this kind of enthusiasm, resourcefulness, critical thinking, passion and ability to overcome countless obstacles that we look for in entrepreneurs. More than good ideas, good entrepreneurs are hard to find. When investing resources into early stage ventures, we are really betting on the entrepreneur. I’d say these two young people are pretty good bets.

Dr. Ed Rubesch & GSVC participants during a mentoring session

This March I was excited to be invited back as a judge to the South East Asian round of the Global Social Venture Competition. The competition is held annually in Bangkok and organized by Thammasat University, whose MBA program is a leader in the region in incorporating sustainability and social entrepreneurship into its curriculum. Two incredibly energetic people, Dr. Ed Rubesch and Pattraporn (Dao) Yamla-or from Thammasat’s Center for Sustainable Enterprise, are instrumental in this program as well as organizing the GSVC-SEA. This year’s winners, Micro Oasis from Indonesia and Marine Gifts from Vietnam will participate in the global finals at UC Berkeley this month.

Micro Oasis provides a clay pot irrigation system for dry land farming, enabling farmers in Indonesia to grow crops during the dry season. What impressed me about this team is that they had spent a significant amount of time on the farms with farmers and understood well the context they were dealing with. Their marketing involves a lot of community engagement, including through puppet shows, to demonstrate the benefits of the irrigation system to farmers. Marine Gifts is an ecotourism company that brings tourism with minimum impact on the environment to communities in Marine Protected Areas along the coast of Vietnam. These communities have almost no industry and while men do some fishing, women have no sources of income. Through ecotourism, Marine Gifts brings income generating opportunities to women who provide services for tourists and make souvenir products from locally available materials. The ladies behind Marine Gifts were the only non-MBA team in this competition and the first Vietnamese team to advance to the global finals. Although they do not have formal business education, these entrepreneurs understand their industry and the communities they work with extremely well, a key to running a successful venture.

Ryan Dick of GIGA speaking at the Social Enterprise Symposium

A highlight of this year’s event was the Social Entrepreneurship Symposium, which brought together veteran entrepreneurs from through the region to share their stories and lessons learned. One of the speakers was Ryan Dick, director of GIGA, an online platform for sourcing green building and design materials in China. I’ve had the honor of working with Ryan since the early days of GIGA and watching him develop as an entrepreneur. He is true role model for social entrepreneurs, someone who embodies the integrity, intelligence and perseverance that we always look for in entrepreneurs. In his presentation, Ryan spoke about sustainability. It’s a word that we throw around a lot, but don’t always stop to think about what it means. Ryan makes an important point about sustainability, what is it that we are actually trying to sustain? We encourage and fight for sustainability, but is the current status quo actually something worth sustaining? From the environmental perspective, is our environment in the best state that it can be, and such that we should work to sustain? Ryan and his team at GIGA aren’t satisfied, and through their design projects they innovate ways to clean the water, the air and our environment in general. Only once it is improved will it be worth sustaining. I think this way of thinking is relevant to the business world as well. Today’s business as usual can be better and it is encouraging that young people entering the business world today are not satisfied and trying to change the business environment they will be a part of – an environment where people and planet are just as important as profit and where business is a tool of positive impact, not only economic, but social and environmental as well. The students competing at the GSVC are all examples of this shift.

We couldn’t miss this opportunity to catch up with one of our favorite social ventures, So Soap, so Jana and I headed over to IFC to speak to Amy Tang of Agnes b. and Eve Chan of So Soap to learn more about this unique partnership.

Agnes b. has had a long history of supporting charitable causes in the community, but realized that in addition to helping to raise money for charity, it could also leverage its brand to work with social enterprises, defined by Agnes b. as organizations which achieve special social objectives, which are fundamentally related to providing supportive services to those who are in need, providing products needed by the community, creating job opportunities, or protecting the environment. Through the exhibition, Agnes b. aimed to draw attention to their products and to raise awareness among the Hong Kong community about social entrepreneurship. So Soap’s strong brand and commitment to help local Hong Kong communities helped it to stand out from among the other ventures in Hong Kong:. “Everything is very sincere.” says Amy. “You can’t just buy it from the supermarket. This is really a good product, and every bottle has the name of the person who made it.”

In addition to the obvious benefits of gaining increased visibility and credibility as a result of the partnership, Eve also named product development as one of the perks of working with Agnes b. For the exhibition, Agnes b. and So Soap worked closely together to develop an exclusive co-branded travel set, expanding So Soap’s product line to include hair and face products. “It’s actually a very fun experience working with Agnes b.” says Eve. “They are really responsive and they have a certain standard of quality control, which is wonderful, because it helps us stay on track, and they give us constant feedback.”

Even though this is her first time working with social ventures, Amy is already thinking of other ways to expand Agnes b.’s support of social ventures by involving other country offices and other departments such as the food and beverage team to integrate social entrepreneurship into the business. For example, the Agnes b. LE PAIN GRILL?in IFC will launch O Bean soymilk products from the New Life Psychiatric Rehabilitation Association on 17th March 2012 (fun fact: O Bean plastic bottles are reused as soap bottles for So Soap!). Amy hopes to explore other longer-term partnerships between Agnes b. and social ventures, but she acknowledges that there is still a lot of work to be done first. There are many considerations such as logistics and quality control that will need to be addressed before Agnes b. can engage in a longer-term partnership.

“I think corporates can really help social enterprises by working with them and giving them constant feedback, because they are so experience in the commercial field already”, says Eve. “They also have a great marketing platform, contacts, and networks, which help to promote social enterprise.”

What other interesting corporate-social venture partnerships can you think of? How else can corporates partner with social ventures? What can social ventures do to be attractive partners for corporates? Let us know your thoughts!

Missed the exhibition? You can still purchase products from these social ventures at the following Agnes b. outlets around Hong Kong:

• World Trade Centre, 280 Gloucester Road, Causeway Bay
• Fashion Walk, 2-4 Kingston Street, Causeway Bay
• St. Francis Mansion, 4&6 St. Francis Street, Wanchai
• The Sun Arcade, 28 Canton Road, Tsimshatsui
• Miramar Shopping Centre, 132 Nathan Road, Tsimshatsui

Photos courtesy of Agnes b., So Soap, and CoLab.

Part 1 of this blog post highlighted some difficulties faced by social entrepreneurs in Asia; Part 2 profiles Synergy Social Ventures, which supports social enterprise, and ties in lessons for the broader world of social finance.

Synergy Social Ventures is a not-for-profit organization that was created in response to the challenges we saw preventing social enterprises from accelerating in Southeast Asia and China. In our work with entrepreneurs throughout the region, we identified a number of commonalities.

Firstly, the vast majority of ventures are in their early stages, in need of support to navigate the new sector they are entering. They need access to knowledge and to learn about best practices related to building social enterprise models. Secondly, there is a lack of appropriate financing for their impact-focused ventures – financing that is aligned with their impact-focused strategies.

One particular gap we’ve identified in our region is a deficiency in capital available to impact-focused enterprises who cannot meet a hurdle financial rate of return for investors. Financial returns are a significant consideration for funders – even those that self identify as “impact” focused investors usually seek a return of 3-5% in addition to social return. There is a lot of buzz and hype about impact investing, in particular “financial-first impact investing” – the idea of achieving both a social impact and a competitive financial return through an investment.

While it is great that financial investors are looking at the effects that their investment activity has on society and the environment, the excitement about the possibility of having it all – solving problems while generating strong financial returns – is creating a gap, through which many social ventures with high potential to generate significant social returns are falling.

At Synergy Social Ventures, we work with small and early stage ventures tackling difficult problems in some of the poorest areas of the world. Most are addressing issues that, until recently, have only been supported through direct and ongoing grants and donations. These new entrepreneurs, however, are working toward more effective solutions that are also sustainable, in that they will not need to rely on ongoing donations in the long-term.

This step alone has had a significant effect on the social returns on a financial investment?, even when the investment is a grant that will set in motion impact that will continue to be generated in the future. Taking this to the next level, if the venture is able to return the original grant, or even a portion of it, and the funds are used to seed another venture, the social return generated by the funds increases further.

Social finance encompasses a broad spectrum of means of using financial capital to create social impact. What’s happening in our region reminds us that to fully benefit from the opportunities afforded by different models of social finance, we must not get caught up in one aspect that happens to be the “model du jour”.

Instead, we must assess situations within their own contexts to determine how financial capital can best be used to catalyze social impact. This could be through investment capital that generates social in addition to financial returns, but it could also be through philanthropic capital that is stretched further than the traditional 100% loss. Or it could fall somewhere in between.

The question to ask is not what financial return was generated, rather, was financial capital utilized in the most effective way possible to address a particular need? Looking at social finance models from this perspective will open up a wider range of possibilities to effectively use capital to create social impact.

The concepts of social enterprise and social entrepreneurship are newer to Southeast Asia and China than to other parts of the world. If someone was asked to name the most successful social enterprises globally, it is unlikely that an individual or organization from Southeast Asia or China would be the first to come to mind.

But a closer look at the region reveals many entrepreneurial individuals and teams creating impact in innovative ways and striving to develop business models that will financially sustain and grow their organizations. Across Southeast Asia and China, impact-focused enterprises are sprouting, growing and building solutions to social, economic, and environmental problems through different business models. They are creating opportunities for women who face barriers to employment, developing distribution systems designed to meet the needs of the poorest consumers and smallest retailers, and developing local economies by creating livelihood opportunities.

As these enterprises demonstrate how impact can be achieved through innovation and interaction with the market, more entrepreneurs with exciting ideas are developing new ventures and turning their ideas into impact.

Take Charles, a student from Hong Kong for whom access to a computer and the internet meant the ability to find the answer to any question. He wanted students like himself in all parts of the world, even those without internet or electricity, to have access to information that would allow them to learn and explore. To address this problem, Charles modified a modern desktop computer to run at low voltage, using solar power. The computer is equipped to hold a large digital library, and comes pre-loaded with offline educational content. Through his social enterprise, SolarLEAP, Charles has now brought computers and digital libraries to off-the-grid communities in Nepal and the Philippines, and beyond Asia to Ghana, Ethiopia and India.

Despite the impact created by entrepreneurs like Charles, new social entrepreneurs in Southeast Asia and China face many challenges. There is often a lack of local understanding of and support for their models. Language barriers prevent some would-be entrepreneurs from accessing available resources, and the sector is still fragmented, in need of strong sector networks through which entrepreneurs and their supporters can build relationships and collaborate.

One of the greatest hurdles to overcome is the lack of appropriate financing available for impact-focused ventures. Time and time again we see entrepreneurs in this region spending a disproportionate amount of time and energy looking for funding, instead of focusing on building and growing their ventures. One cause of this funding gap stems from the fact that different models of social finance that were developed in specific contexts in different parts of the world were introduced in Asia all at once, leaving new funders confused about what a social finance model should look like. What kind of financial returns should social investors seek in addition to social returns? What does the ideal social enterprise look like? Is social finance philanthropy or is it investing?

While there is no one answer to these questions, the confusion about the different models of social enterprise and social finance has resulted in a situation where few matches between funders and entrepreneurs are being made, and entrepreneurs have little access to the critical capital they need to seed their ventures.

Consequently, there is a need for an organization that can provide support to social enterprises and help them answer these tough questions. Part II of this blog post profiles just such an organization.