‘The term impact investing is so broad, I think there’s a danger of disappointment when people actually find out what it’s about.’

In 2008, Stephen Dawson, having made the journey from venture capitalist to venture philanthropist in the UK, returned to venture capitalism, co-founding Jacana Partners to help build the venture capital market in Africa. The idea behind Jacana was that developing the VC industry would in turn stimulate the growth of the SME (small and medium enterprise) sector as the principal engine for African development. Have his views changed, Caroline Hartnell asked him How does he see Jacana’s impact compared with that of impact investing or grantmaking?

When we talked four years ago (Alliance, August 2009), you had just founded Jacana because you believed that venture capital was more likely to have a lasting impact than venture philanthropy. Do you still think so?
I do. I still believe that charity is really important, particularly when in a crisis. If people are starving, you need to feed them; after a tsunami, you need to find them shelter. But I am increasingly convinced that if you want to tackle the root causes of poverty, you need investment in businesses, creating jobs, creating wealth, creating an entrepreneurial culture. In fact you need different kinds of investment, from socially oriented through to an absolutely for-profit approach.

Jacana originally started out to support other VC firms. Is that still the case?
That’s the big change since we last spoke. Originally, we worked through local partners, one in East Africa and one in West Africa. Now we’re going to merge all three entities. The funds that we raise will continue to invest in the six countries where we currently operate – three in East Africa and three in West Africa – and in some new territories, but it will be direct investment in small businesses.

Why the change in strategy?
The main reason is the difficulty of managing a small fund. Our East Africa fund is $12 million and that’s fairly typical of most first-time funds – and the fees are not nearly enough to pay people of the calibre we need to invest that fund. So we decided that the best way to tackle this is to build a bigger group and, most importantly, to make a permanent commitment to the SME space. What generally happens is that when a VC firm finally makes it, it abandons SMEs.

When we talked before, you said your investors were likely to be people with a social as opposed to a purely commercial outlook. Is that still the case?
I think we’re moving along the spectrum from really socially oriented investors to purely commercial investors. The funds that we’re operating in East Africa are more for social investors. In West Africa, we have three development finance institutions (DFIs), government-funded agencies whose mission is to achieve both financial and social returns. They need to make successful investments to demonstrate to their political bosses that this does actually work – they have seen too many unsuccessful funds, particularly in the SME space. Also, they recycle their funds, and unless they get returns they can’t exit and invest in new things.

The fund that we’re raising at the moment is aimed mainly at the DFIs but we hope to appeal to other social investors such as foundations and high net worth individuals. For the next fund, we’re hoping to bring in some purely commercial investors, who probably won’t care what we’re doing but want to make financial returns, as well as some of those we have at the moment.

Do the different kinds of investors come in on the same terms?
At the fund level, yes. But Jacana itself has four individual investors, and here we’re not expecting to get a return for a long time. So as we expand, we need to find new investors who take either a PRI [programme related investment] or a grant approach. The main reason is that we’re investing a lot in recruiting and training people, so helping to build capacity in the VC industry.

Second, we’re planning to go into some new territories. Top of our current long list are Ethiopia and Nigeria, and we’re talking to people from francophone West Africa. Then there’s a group of countries in southern Africa – Zimbabwe, Zambia, Malawi, possibly Mozambique.

These are at different stages of development. Ethiopia, for example, has virtually no SME investment market, so we’ll have to recruit people with relevant experience – say, microfinance or banking – and train them. Only then can we start making investments. That will require about five years and an outlay of around $1 million, so we’ll be looking for grant or PRI funders to help us. In Nigeria, there are a lot of bigger investors but very few at our end of the market. We think we can find Nigerians with experience, so it will need investment and development, but less than Ethiopia.

What’s your aim for the new round of fundraising?
$75 million, which is roughly double our current investment from the funds in East and West Africa. It would enable us to extend what we’re doing in those places, and also to go into some new places.

How do you see the respective roles of VC organizations, impact investing and grantmaking?
I think they all have a part to play. I see jobs as the clearest direct benefit of what we’re all doing. That’s a common denominator, it’s easy to measure, and it has all sorts of spin-off benefits for the community.

We don’t have a deliberate focus on the hardest-to-reach groups because we think what we’re doing is difficult enough without putting too many constraints on it. But part of what we’re doing will benefit the bottom of the pyramid. Many of the jobs we’re creating are unskilled or low-skilled. When we invest in things like agricultural processing, we’re potentially benefiting smallholder farmers. We have an eye clinic in Nairobi which is doing some work in slum areas on a free or highly subsidized basis. So I think there are direct and indirect benefits.

Another benefit, often underestimated, is bringing people from the informal into the formal economy. They start paying taxes and that helps to create healthcare, education and infrastructure. More importantly, it gives people a stake in their economy and makes them more concerned about political governance.

Do you see impact investing as playing a different role?
I think there’s an overlap. Some of our investors would see us as an impact investing organization and themselves as impact investors. I think it does do some good work and impact investing funds will cover some parts of the market that are harder to cover.

But I have two worries: one is that the term ‘impact investing’ is so broad, I think there’s a danger of disappointment when people actually find out what it’s about. The other is, can you move from being an impact investor to getting the sort of investors who place more emphasis on financial returns, and then ultimately to the real scale up, which will come from purely financially oriented investors. I think there’s a danger that impact investors will say, ‘We’re doing all these fantastic social things so don’t worry about the financial return!’ and so it won’t ever produce the financial returns that would enable it to help a lot more people and still have a strong social impact.

Do you think they could become scalable if they focused on slightly more developed organizations?
Certainly people who focus entirely on start-ups run a massive extra degree of risk, and the more constraints you add, the riskier it becomes. If you focus on climate change, which is an area we’ve looked at, or women entrepreneurs or rural communities, you’re adding an extra set of constraints. In a sense, that’s what impact investors are there for, but you must be careful not to take on too many risks otherwise it becomes impossible to make that transition.

Is there a basic problem that funds dealing with things for poor people will never have high enough margins to be scalable?
I don’t think so. We invested in savings and loans in West Africa and the organization grew well and made reasonable  returns – and that sort of investment is very much about the bottom of the pyramid. The classic area is mobile phones, which has made lots of money for some very big companies. I think it’s more a question of judging what are reasonable constraints, and not putting on too many.

What about the opportunities in Africa?
There are lots of barriers to investing in SMEs in Africa, but there are also fantastic opportunities. Going into Ethiopia, for example, there will be obstacles, both for us and for the businesses we invest in, but there are opportunities because there will be little competition. The latest issue of The Economist has a big supplement on Africa. The economy is growing at 6 per cent on average, and obviously some countries  are growing a lot faster than that. So although there are difficulties, there is also the potential to make some excellent returns.

Stephen Dawson is chairman of Jacana Partners. Email sdawson@jacanapartners.com