22 Mar. 2016 | Comments (0)
In my series of working papers on Asian philanthropy, published by NUS Business School, we’ve most recently been looking at how corporate philanthropy in Asia has been influenced by new models of giving and the opportunities afforded by the rise of social enterprise. In coming months, I’ll be sharing some of what we’ve found. Today, we start with a look at corporate venture capital for social impact, including a case study from Pearson. In my next post I will present a case study from MediPass.
Corporate Venture Capital (CVC) is one means for a company “to develop and acquire valuable resources and capabilities… integrating them with internal knowledge.”[i] CVC investments are seldom driven exclusively by financial return (although picking winners can yield big financial gains for the firm), but rather aligned with the company’s long-term strategy for developing new products or entering new markets.
In today’s world, few companies will survive by separating the pursuit of profit from their relationship with people and planet. For an increasing number of corporations, CVC is being used to invest in businesses that intentionally create social or environmental value. The potential for CVC to “invest with impact” has been explored only recently. Notably, the certified B Corporation Volans collaborated with Global Corporate Venturing to better understand how some CVC funds were investing in deals which offered financial return and social impact, and to encourage more activity in this space.
The Volans report cites examples of large corporations using venture capital as a means of furthering their social and environmental priorities. For example, Patagonia has established “$20 Million and Change,” an internal fund to help like-minded, responsible start-up companies bring about positive benefit to the environment and GE Ventures supports the company’s “healthymagination” strategy to invest in affordable healthcare.
Like Volans, we found fuzziness between CVC and impact investment, which seeks to blend social and commercial return. Our own study profiles two companies that used CVC to enter emerging markets with products or services that reach lower-income communities at the base of the economic pyramid. Pearson PLC did so intentionally, whereas Medipass (see next week) did so somewhat serendipitously.
London-headquartered Pearson PLC is the world’s largest education company. Nearly 15 percent of its 2015 sales revenue came from growth markets, including China and India. The company states that “commercial solutions can accelerate access to quality education… especially in places where education standards fall well behind the best in the world, [and] require us to challenge the way we think about our business.”
In 2012, Pearson launched its $15 million Affordable Learning Fund (PALF), topped up with an additional $50 million in 2015, to invest in “novel educational innovations with commercial potential.” PALF has invested in 11 start-up ventures in South Africa, Ghana, India, and the Philippines, half of which are led by female entrepreneurs.
The role of private enterprise in delivering affordable education, whether directly, for example through privately owned, fee-paying schools, or contracted by government to provide services in the public sector, is growing. Sudiksha, a business venture in India uses a franchise model run by female entrepreneurs to offer pre-school services to low-income communities in the Hyderabad area. We mentioned Sudiksha in an earlier working paper, which explored angel investing for social impact.
Needing capital beyond the angel stage, PALF identified Sudiksha when it scored highly in an accelerator program run by Pearson and Village Capital. Sudiksha became PALF’s first investment in the early childhood sector, providing the company with insights into a potentially high-growth area where social benefit to low-income families is blended with a potentially profitable business model.
Arvind Nagarajan, PALF’s investment director based in New York City, says the investment in early childhood learning “has huge potential from an educational point of view, while a child’s brain is still developing. We liked that the Sudiksha model was very affordable, utilized female entrepreneurs and had strong community buy-in.”
PALF views these as a strong foundation for long-term success, even though early-years schooling is a service people are less willing to pay for. “Despite it being a tough area financially, we are keen that Sudiksha gets on top of the unit economics to find a model that can be successfully scaled,” says Nagarajan. PALF is an active investor, taking a board seat and a “double digit” minority equity stake.
The PALF team is small and constantly on the road covering multiple geographies, so it can be a challenge for them to stay close to investees. However, they are supported by Pearson’s local staff, who sometimes take advantage of opportunities to support PALF portfolio companies by mentoring or taking a board seat. For example, the CEO of Pearson South Africa sits on the board of a PALF-investee business. Pearson’s intention behind PALF is clear and explicit: to use venture capital as a means to “understand by investing” in affordable education models.
Stay tuned for another case study about CVC from Medipass next week.