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Understanding the Role of NGOs/NPOs for Impact Investing

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Understanding the Role of NGOs/NPOs for Impact Investing

  1. 1. Understanding the Roles of NGOs/NPOs for Impact Investing Presented By Bijon Islam Co-founder & CEO LightCastle Partners 1
  2. 2. Table of Contents 2 1 Impact Investing- a Recap 2 Impact Investment – What is Happening in Bangladesh? 3 Introducing Social Impact Enterprises 4 Notable Case Studies: Impact Investing
  3. 3. Let’s recall! What is Impact Investing? 3
  4. 4. 4 Impact Investing – An analysis of Definitions
  5. 5. 5 “Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Impact Investing – The Result?
  6. 6. 6 • Emerging Asset-class that focuses on “Beyond” – Financial Return and creates positive social/environmental impacts • Typically made in private markets by providing debt or equity to mission-driven businesses • Return expectations: concessionary to market- beating. Potentially USD 1 trillion investment opportunity (by JP Morgan) Wide range of investors: including large-scale financial institutions, pension funds, family offices, private wealth managers, foundations, individuals, commercial banks, and development finance institutions Cash Fixed Income Private Equity Public Equity Cash Senior Loan Subordin ate Loan Equity Grant Support Below Market Investments Market Rate Investments More Risk Less Risk More Risk The Impact Investment Continuum Adapted by F.B. Meron Foundation Impact Investments Happen in a spectrum between Impact, Risk and Return
  7. 7. Impact Investment – What is happening in Bangladesh? 7
  8. 8. 8 Who are the Investors in the Ecosystem?
  9. 9. 9 ✓ Institutional investors (e.g. pension funds, asset managers, banks,…) ✓ Traditional venture capital funds ✓ Most impact funds ✓ Most private investors & business angels, crowd investors ✓ DFI’s ✓ Some impact and social venture funds ✓ Some private investors, family offices, (social) business angels and crowd investors ✓ Venture philanthropists and some foundations ✓ Foundations ✓ Private philanthropists, crowd platforms (donations) ✓ Development agencies Investors expecting NO financial return Investors seeking BELOW market rate financial returns Investors seeking market rate financial returns (or more) Impact Only Impact First Finance First Donations, Grants Equity, mezzanine, debt, hybrid + innovative instruments Equity, mezzanine, debt Who are these “Impact Investors” and what do they want?
  10. 10. 10 Capital Demand Side Impact entrepreneurs Beneficiaries = vulnerable, excluded, minority communities Impact investors and other funders Ecosystem builders and intermediaries Facilitators, service providers Capital Supply Side Snapshot of main stakeholders in an impact ecosystem
  11. 11. 11 More impact More commercial Let‘s look at some examples: Where would you place them? A big question: What exactly is an impact enterprise – and what is not?
  12. 12. 12 Startup Funding Raised in USD Mn Investment Breakdown by Sector 43.48% 23.71% 13.57% 43.48% in Fintech, 23.71% in Logistics & Mobility, 13.57% in E-Commerce/Retail, 5.28% in Consumer Services 5 0.13 0 10.30 15.12 20.06 6.88 6.55 102.87 87.78 39.03 31.61 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Source: LightCastle Bangladesh Startup Ecosystem: Funding Landscape, 2020 Data Are impact enterprises investible?
  13. 13. 13 Homegrown Startups have raised USD 300Mn+ of foreign investment over the last decade Full Funding Undisclosed U$ 4.7Mn TruckLagbe Logistics from ARIA Group, Betatron & Mount Parker Ventures U$ 3.5Mn Maya HealthTech from Osiris, Anchorless Bangladesh U$ 4.9Mn SOLshare cleantech from IIX Growth Fund U$ 12.8Mn Paperfly Logistics from Ecom Express U$ 9Mn+ Zero Gravity (Sindabad & Kiksha) ecommerce from Aavishkar VC & Frontier Fund U$ 6Mn Sheba.xyz service marketplace from Epyllion Group, BFP-B DFID and Local Angel Investors U$ 26Mn+ SureCash fintech from Osiris Group U$ 8.8Mn+ BDjobs job marketplace from SEEK U$ 36Mn+ Pathao logistics from GO-JEK, Osiris Group Openspace Ventures, and Battery Road Digital Holdings U$ 19.6Mn+ Shohoz logistics from Linear Venture, Golden Gate Venture U$ 28Mn+ Shop Up Fintech and B2B Commerce from Sequoia Capital India, Omidyar Network, Flourish Ventures U$ 19.5Mn+ Chaldal ecommerce from IFC, IDLC, Mir Group, Y Combinator U$ 81Mn+ Bkash fintech from Money in Motion, BRAC Bank, Gates Foundation & Ant Financial U$ 10.6Mn Praava Health HealthTech from SBK Tech Ventures and Angels U$ 7Mn+ Bongo entertainment from Razor Capital Not an Exhaustive List* Source: Databd.co, Crunchbase & LightCastle Analysis
  14. 14. 14 Notable Deals of 2021: USD 33 Mn+ investments raised in first half of 2021 Source: LightCastle Partners Startup Dashboard Startup Deal Lead Investor Investor Source Investment Type Investment Pre-Seed Vint Valley Global Venture Fund $110,000 Pre-Seed _ Global Angels $200,000 Seed Robi Local Corporate $400,000 Seed IDLC Local Venture Fund $470,000 Seed Anchorless Bangladesh Global Venture Fund $500,000 Seed Osiris Global Venture Fund $2,160,000 Bridge Skycatcher Global Venture Fund $3,000,000 Series A IFC Global DFI $3,000,000 Series A _ Global Angels $5,600,000 Series B Adjuvant Capital Global Venture Fund $6,000,000 Series A Ecom Express Global Corporate $11,800,000
  15. 15. 15 Expense Types: • Setup Costs – Branding, Legal • Capital Expenditures • R&D; Product Development • Market Testing Revenue Drivers: • Friends and Family Expense Types: • Admin and Operations • Marketing and Distribution • Market Testing Revenue Drivers: • Early Adopters and Users Expense Types: • Admin and Operations • Marketing and Distribution • Product Development /After sales • Financing Expenses Revenue Drivers: • Early Majority and Late Adopters Expense Types: • Product Extension/ Modification • Marketing and Distribution • Liquidation (if relevant) Revenue Drivers: • Early Majority and Late Majority Types of expenses and revenue Drivers that vary across the lifetime of the impact enterprise
  16. 16. 16 Source: Stakeholder interviews; Dalberg analysis Difficulty identifying potential investees— largely network driven Companies reluctant to register as LLC in order to qualify for investment Companies want small investment, cannot absorb large capital Investees reluctant to use capital to grow; instead see it as a rainy day fund Difficulty repatriating investment Small number of desirable companies; early entrants have taken “low hanging fruit” Companies often lacking accurate or sufficient financial records, unwilling to share financials Mismatch between investor and investee expectations; investor expects controlling share Unclear investor protection laws; uncertainty about legal recourse in case of contract default IPO exit process not defined, no clear regulations and long lock in periods Difficulty in raising funds Difficulty in finding local talent to manage fund Limitations for local funds; many investors set up overseas fund Least Severe Most Severe Key Challenges Faced by investors and severity of impact Entry into Bangladesh Pipeline Development Screening Due Diligence Structuring for investment Managing investment/follow up Exit Challenges faced by investors and asset managers
  17. 17. 17 Source: Global Innovation Index 2019,Startup Blink, [5]Crunchbase, AngelList, Xinhua net, Swiss Global Enterprise & LightCastle Analysis Category United States China India Indonesia Bangladesh Global Startup Ranking 1 14 23 54 98 Global Innovation Index[1] 61.73 54.82 36.58 29.72 23.31 Total Number of Startups[5] 100,000+[3] 25,000+ 50,000+ 5,000+ 1,000+ Time taken to setup a new business (days) 4-8 30-40 15-30 15-30 15-30 Corporate Tax Rate 39% 25% 34% 22% 25%-35% Number of local VC Firms[5] 1000+ - 700+ 300+ 25+ Number of Angel Investors 300,000+ - 1,800+ 5,000+ 200+ Number of Accelerators/ Incubators 1,500+ 12,000+[4] 250+ - 20+ [1] The Global innovation Index ranks the innovation performance of 128 countries based on 82 indicators [2]Global startup ranking by Startup Blink ranks the top 100 countries based on the quantity/quality of startups and enablers in the ecosystem coupled with business environment and critical mass. [3] United States has the highest number of startups in the world [4] China ranks #1 in number of incubators and accelerators across the world due to Chinese Government initiatives Bangladesh Startup Ecosystem Ranks far behind in comparison to the Global Startup Ecosystem
  18. 18. 18 Source: IMF, Crunchbase, Statista, Yourstory.com, Anchorless Bangladesh and LightCastle Analysis Funding in Bangladesh As percentage of GDP is significantly low The already low Startup Funding State of Bangladesh (GDP 10x lower than India), (GDP 50x lower than China) - is at stake due to COVID-19 $0.12 $0.03 State of Startup Funding in Southeast Asia (2018)
  19. 19. 19 Source: UNCTAD World Investment Report, World Bank Data Foreign Direct Investment Comparison with regional peers Despite the excellent progress, the country’s Foreign Direct Investment (FDI) in CY 2019 stood at a mere 3% (U$ 2.87Bn) of the country’s total investment. With policymakers devising policies to attract FDIs, investments are expected to increase in the new decade 0% 1% 2% 3% 4% 5% 6% 7% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 FDI as % of GDP Bangladesh India Indonesia Myanmar Pakistan Sri Lanka Vietnam 0.5% 1.8% 2.2% 4.2% 0.8% 0.8% 6.2% (FDI as % of GDP, 2019) Comparison with Regional Peers: FDI as % of GDP
  20. 20. 20 Source: World Economic Forum, Doing Business 2020 - World Bank, Doing Business- Economy Profile Bangladesh - World Bank, Destination Bangladesh - PwC Doing Business Index Govt. has taken an initiative to become double digit by 2025 Ranking in 2020 63rd 70th 73rd 99th 108th 168th Bangladesh The World Bank Group’s Doing Business 2020 study ranked Bangladesh 168th in the global ease of doing business rankings this year from 176th in the previous year. The government of Bangladesh has undertaken a number of initiatives to improve the ranking : • Setting up a new business became less expensive with the reduction of registration and name clearance fees and removal of the certifying fee for digital certificates. • In Dhaka, obtaining an electrical connection was made more efficient as the city invested in digitization and human capital. At the same time, the country reduced the amount of the security deposit required for a new connection. • Access to credit information was improved thanks to expanded coverage by the credit information bureau. This reform delivered Bangladesh’s most significant improvement. • Bangladesh Investment Authority (BIDA) has introduced an One Stop Service Center to assist foreign investors. Maldives India Sri Lanka Vietnam Indonesia
  21. 21. So what differentiates impact enterprise from the rest ? 21
  22. 22. 22 Social & Impact Enterprises systematically build business model beyond profit profit potential profit potential old school not- for-profits old school corporations new school of conscientious entrepreneurs + + - - What is Social Impact Enterprise?
  23. 23. 23 Impact Enterprises Ordinary Enterprises Generate positive financial return on investment ALSO generate positive measurable social and environmental impact Generate positive financial return on investment Contrasting ordinary enterprises and impact enterprises
  24. 24. 24 Understanding NGOs Understanding Impact Enterprises NGOs cannot personally or monetarily profit from their business. Utilize strategic tactics to earn commercial and impact investment funds Contrasting NGOs and impact enterprises
  25. 25. 25 Traditional Charity Social Enterprises Traditional Business Impact Investing Achieve measurable social impact alongside financial return Primary driver is to achieve social value Primary driver is to achieve financial value Purely charitable funding from grants donations or endowment Additional market-based revenue stream Potentially self- sustaining > 75% market revenues Social Busines: Profits are reinvested Mission driven for profit enterprise CSR & corporate philanthropy (target for SRI) Pure profit orientation of regular investors Business models of social enterprises Business model spectrum revisited
  26. 26. 26 [ ] Social Enterprise + + Traditional Nonprofit Traditional Business Added revenue generating stream Legally declared social purpose Nonprofit Social Enterprise For-profit social enterprise Business models of social enterprises
  27. 27. 27 Impact Enterprises Business Model in a Spectrum
  28. 28. 28 KPI FINANCIAL HEALTH CUSTOMER RELATIONS SALES & MARKETING HUMAN CAPITAL CAPITAL BUDGETING IMPACT Sales Revenue Sales Growth Year-to-date Gross Margin Net Profit Margin Lead to Client Conversion Rate Customer Acquisition Cost Target Group Happiness Customer Loyal Customer Retention Net Promoter Score Customer Lifetime Value Gender Lens Employee Happiness Revenue Per Employee Theory of Change Defined Impact Metrics Measurable SMART Target Beneficiary Market -Increase in Income -Better Health -Empowerment PBP, NPV, IRR, PI Impact Enterprises: KPI
  29. 29. Cases from Bangladesh especially from Non-Profit to Blended 29
  30. 30. 30 Implementing Agency: BRAC Partner: British Asian Trust Key Features: ▪ Impact bonds are a variation of the traditional payment by results model, are the new paradigm for tackling recent cultural change and overcoming the limitations of traditional funding. ▪ The project is targeted towards implementing innovative funding mechanisms and identify key sectors where impact bonds might be most effective and have the greatest impact in spurring sectoral growth. ▪ Key partner British Asian Trust aims sustainable development projects that focuses on poverty eradication, injustice and supports development impact bonds (DIBs) through philanthropy 3. The outcome funder (Govt. If SIB and 3rd party if DIB) repays the investor if metrics are achieved 1. The investor provides upfront capital to the service provider to deliver services to a population in need. 2. An independent evaluator verifies whether the service provider has achieved pre-agreed impact metrics Impact Bond structure BRAC: Development Impact Bonds
  31. 31. 31 Implementing Agency: Infrastructure Development Company Ltd (IDCoL), a government-owned non-bank financial institution. Fund: Green Climate Fund, UN. Amount: U$256 Million concessional credit line Objective: The fund is targeted to promote private sector investment through large-scale adoption of energy-efficient technologies in the textile and garment sectors. Brief Description: IDCoL has received the approval of the funding proposal for its programme titled "Promoting private sector investment through large-scale adoption of energy-saving technologies and equipment for Textile and Readymade Garment sectors of Bangladesh". As the garment sector accounts for the highest CO2 emissions at 15%, while textile comes next with 12.4%, the fund is be expected to be of great help to effectively address the needs of the sectors. Total Programme Size U$423.50 Mn Financing from IDCoL, Local financiers and project sponsors Concessional loan from GCF, Tenure 20 years Grace Period 5 years U$256 Mn U$167.50 Mn U$100 Mn U$156 Mn Textile RMG Investment in building energy efficient technology IDCoL: Green Climate Fund
  32. 32. 32 Implementing Agency: International Finance Corporation Investment: U$ 44 Million Brief Description: ▪ IFC led Advisory Partnership for Cleaner Textile (PaCT) is a holistic program that support the entire textile value chain – spinning, weaving, wet processing and garment factories in adopting Cleaner Production (CP) practices. ▪ The programme engages with brands, technology suppliers, industrial associations, financial institutions, government to bring about systemic and positive environmental change for the Bangladesh textile sector and contribute to the sector’s long-term competitiveness and environmental sustainability.. PaCT has reached to 338 RMG factories in Bangladesh, trained 6,641 personnel through 399 training sessions and resulted in the following impacts (cumulative). IFC Partnership for Cleaner Textile (PaCT) Project
  33. 33. 33 Source: PACT Program, IFC Cost savings can make the project commercially viable – Abatement Curves Benefits of using better technology over mainstream production stack over a time period
  34. 34. 34 IFC Investments in Organizations; Chaldal and Truck Lagbe Chaldal: Chaldal is an on-demand grocery delivery service that provides a wide range of products to its users in Dhaka – Groceries, Fresh Produce, Diapers, Cleaning Supplies etc. The company uses an inventory-based model and has 13 warehouses. IFC Funding: • IFC invested $3 Mn in Chaldal to help the company continue to expand and generate 2,000 jobs —mostly of them for low-skilled workers who often struggle to find jobs in the formal sector. • IFC’s funding aims to improve the viability of venture investing in Bangladesh—ultimately attracting additional capital to the market. Truck Lagbe: Truck Lagbe is leveraging technology to optimize trucking logistics. Customers place shipping orders on the platform, and truck drivers bid for trips through an online auction conducted in minutes. IFC Funding: • IFC is investing $3 Mn in Truck Lagbe to support the expansion of the Company in the domestic market along with the introduction of ancillary services for partners. • The business plans to aggregate the platform and improve feasibility of usage for the consumers,
  35. 35. 35 SmartCap Accelerating SMEs Background: SmartCap stands for smart capital. The program works with SMEs that carry immense growth prospects but lack financial accessibility and business know-how. By weaving four vital components together – business pedagogy, market connections, financing & technology – SmartCap inspires SMEs to thrive and grow. LCP in partnership with Syngenta Foundation, VIPB, Meghna Bank Ltd. And Southeast Bank Ltd., is escalating this program. Impact: • Capacity Development (Business Management + Investor Readiness) • Agri Technology (Seedling + Mechanization) • Forward Market Linkage Ambition: • Grow the Money Plus Plus model as an effective tool for MSE growth in Bangladesh • Leverage Impact Fund up to USD 20 million over 3 years and develop 300+ Farmers’ Hub all over Bangladesh Video Link: https://www.lightcastlebd.com/accelerator SmartCap received Special Mention Award at BFP-B
  36. 36. 36 Startup Bangladesh Limited “Shoto Borshe Shoto Asha Fund” Background: Startup Bangladesh Limited is the flagship venture capital fund of ICT Ministry. the first and only venture capital fund sponsored by the government of the people’s republic of Bangladesh started its journey on March 2020 with an allocated capital of BDT 500 crores. Key Features: • SBL signed investment agreement with 7 startups investing an aggregate of $2 Mn+. • The Fund provides investment in the form of equity, convertible debt and/or grants in pre-seed, seed and growth stage startups. It would invest thru co-investments, as a fund-of-funds and asset manager and provide other in-kind supports to startups and stakeholders. • It will support technology-based innovations to create new employment opportunities, promote under-represented tech groups, foster entrepreneurship culture and bring transformational changes to lives of millions. Ambition: • Aims to invest BDT 100 Cr ($12Mn) in 50 startups by 2021. • Catalyze the way forward of creating Digital Bangladesh. Portfolio
  37. 37. 37 Background: The OXFAM ‘Empowering Youth for Work (EYW)’ project aims to have a lasting impact on young rural people: increased employment, reduced vulnerability to climatic risks, improved sexual and reproductive health rights and increased influence and participation in decision- making. Key Features: ▪ LCP designed and deployed a quasi-equity instrument that would help generate greater impact and social returns for 15 promising impact enterprises across Khulna and Rajshahi. ▪ The introduction of the fund aims to create a new and innovative financing channel for SMEs that are in need of financing but are either not willing to or are not able to acquire a direct bank/equity loan. ▪ LCP targets that through this fund's recipients will be able to increase financial inclusion in the economy and thus promote financial stability and sustainable economic growth – which aligns with EYW’s goals. Empowering Youth for Work Blended Capital Facility for supporting SGBs by Oxfam and LightCastle
  38. 38. 38 Background In March 2020, a catalytic fund named Biniyog Briddhi was launched in Bangladesh powered by the Swiss Agency for Development and Cooperation (SDC) and Roots of Impact (ROI). The fund aims to both train, finance and advocate impact investors and enterprises through Impact Ready Matching Fund (IRMF up to USD 100 thousand) and Social Impact Incentives (SIINC up to USD 250 thousand). The programme is built around three pillars. Capacity Building • Initially, incubators, accelerators and impact entrepreneurs receive targeted capacity building in order to pro mote investment readiness (IR) and strengthen impact management (IM). • Train the trainer programmes for service providers and vouchers for impact entrepreneurs aim to bring these capacities to the next level. Catalytic Funding • Impact entrepreneurs and investors can benefit from more suitable and attractive forms of capital by using catalytic finance that attracts additional investment. • In addition, entrepreneurs are incentivized to manage their impact, which will create more transparency and engagement from business angels to invest. Advocacy • Policymakers and advocates receive fresh ideas on how to create a more favorable framework for social and ecological innovation and mobilize more capital for the benefit of impact entrepreneurs. Biniyog Briddhi Scaling Impact Enterprises of Bangladesh
  39. 39. Email: bijon.islam@lightcastlebd.com Mobile: +88 01747 353438 Web: www.lightcastlebd.com Thank You

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