Interview – Daniel Izzo

The Social Enterprise World Forum, billed as the premiere global event focused exclusively on social enterprise, and on creating global awareness of the effectiveness of social enterprise in solving critical social problems, will take place in Rio de Janeiro in October. Daniel Izzo, partner and co-founder of Vox Capital in São Paulo, Brazil, described as Brazil’s first impact investing firm, will be a speaker at the Forum.

Alliance asked what led him to impact investing, how he sees the concept developing in Brazil, and what the future holds for social businesses. The point he keeps coming back to is that impact investing needs examples of success before the field can take off – and those will be a few years coming still.

Why did you found VOX Capital?

Before founding Vox, I was responsible for developing new businesses for BOP [bottom of the pyramid] consumers for Johnson and Johnson and I realized that you have to take a different approach: less based on taking protocol percentage on a new customer segment, more on trying to develop ways to raise the standard of living of these people while you bring business to them.

So I started developing a network of people who were already working with what we then called social businesses and I became a major investor in one of them. Based on identifying the key needs and challenges of these businesses and seeing the development of the field as a whole, it became clear that there was not only the opportunity but also the need for a fund exclusively for this type of business. My other partners had come to the same conclusion independently. The other co-founder, Kelly Michel, is founder of Artemisia, which is a local accelerator for business with social impact and an organization that helps develop human capital for this field. Antonio Moraes Neto, the other partner, was already developing his fund, so this common objective brought us together.

Would you describe Vox as an impact investor? Do you expect both financial and social/environmental returns on all your investments?
Yes, we consider ourselves an impact investing fund. We will not invest in any business if we do not see a potential for delivering high social impact. We are doing this through the structure of a venture capital fund.

As well as the high social impact, what sort of financial return are you looking for?
Our first investment was a little bit less than three years ago, so we haven’t had an exit yet, which makes it hard to answer this. The fund will have a ten-year lifetime over which we are planning on investing in ten projects directly. On an aggregate we want to get back something between 15 and 20 per cent a year.

We consider social impact both qualitatively and quantitatively. In terms of qualitative research, we are using a methodology developed for the World Bank by Angelo Felton in 2007 that takes into account how much of different sorts of capital are delivered through the business – financial capital or protective capital through work; productivity or physical capital like housing and durable assets; human capital based on education and health, or social capital like access to information, access to networks and so on. We look at these before we take a decision to invest in the company and then after we invest, we measure their social impact, mostly through IRIS [Impact Reporting and Investment Standard] and GIIRS [Global Impact Investing Rating System].

So the main goal of the fund is to bring social impact, but it is important also to deliver financial return because in that way you can attract more money to create more businesses and help more businesses achieve a greater impact. The financial return is the means to the final goal, which is scalable social impact. We only look for investors who are completely aligned with this objective; we are not looking for investors solely concerned about financial impact.

I understand you are hoping to leverage money from private foundations. Can you say something about that?
We already have two private foundations committed to the fund. One of them is putting in their endowment money and the other their grant money. But it’s a very small percentage of their endowment, probably less than 5 per cent. So from their point of view they’re trying it out to see how it works.

Presumably for the foundation that’s giving you the money out of their grantmaking money, financial return is not such an issue because they expect to give away this money through grants anyway?
Even then, they want to have a financial return as well, just as the foundation putting in the endowment money wants to see a social return. They understand that both things have to come together for this model to be considered successful. It’s money they will otherwise give away for minus 100 per cent return anyway, so it’s money that can take more risks, but they want to see a return on their investment, that’s why they joined.

Did you expect private foundations that joined to take it from their endowments or their grantmaking and which do you think is likely to happen more in future?
It all depends on the results of the impact investing sector as a whole. So far, it doesn’t have enough of a track record for people to say what type of returns an investor can hope for. Everyone is promising results based on forecasts or on wishful thinking. I’m not talking about microfinance here. If the sector produces a high financial return, we can expect their endowment money to be directed to it, if not we can expect only the grant money. I really hope it comes from endowments in future, but it all depends on how well disbursements go.

I think there is a big risk in our going to the market and promising risk-adjusted return with social impact without a track record, the risk of attracting money that is not fully aligned with what you want to achieve.

What is your assessment of the field of impact investing in Brazil?
It’s new, but it’s picking up. Just last year, we saw two new funds being developed and already looking for investments, and in the last three months two people have come to me asking what I thought about them developing their own fund. But it’s still new. I think the most important thing right now is to develop a big success story, a company where you can showcase a really big impact, so that it can attract more and more entrepreneurs.

But we’re already seeing a radical increase in entrepreneurs wanting to develop businesses for BOP that can deliver social impact. And the ecosystem is beginning to develop. Two years ago, we launched the ANDE (Aspen Network of Development Entrepreneurs) chapter in Brazil, which is the largest outside the US. We have 16 organizations – accelerators, funds, technical assistance providers, funders already joining forces to develop an ecosystem here in Brazil – but it’s far from being well developed. The founding members of the ANDE chapter were Artemisia, Vox, AVINA, Endeavour and New Ventures.

What are the barriers to expansion of the field – lack of funds, lack of organizations to invest in, lack of ecosystem infrastructure, lack of supportive legislation?
I would say to some extent all of the above. Legislation plays a big role for entrepreneurship as a whole in Brazil. It’s very hard to do business here. Opening a company is very bureaucratic and very costly. Specifically on impact investing I would say we still need to develop a better ecosystem and we need to increase knowledge of the concept among a broader audience.

Right now it’s very much of a niche in Brazil. When you talk about impact investing, you end up seeing the same few people. We need to attract more universities, more angel investors, more highly skilled professionals and entrepreneurs. As I said before, I think our main milestone for this would be to have a huge, important successful case to show that it is possible. I think this is going to take a while, so one thing that we also need to do is control anxiety about results, to keep doing what we’re doing and developing the businesses that we are supporting so we can deliver the results that are going to make the sector grow faster.

In many places people say that there is a problem with the pipeline of organizations ready to be invested in. Is that a problem in Brazil?
It would have been a problem three years ago when we started out, but right now not really. The whole entrepreneurial sector in Brazil has grown really fast in these last three years. The type of company that we see now is a quantum leap in quality from the ones we were seeing in 2009. To give you some idea, at the moment we have six very interesting companies in our pipeline which we are going to do due diligence on at the same time. There’s always something of a challenge – we look at over 100 companies to invest in one – but I’m really excited about our pipeline right now. The problem is really to overcome the other roadblocks, especially the bureaucracy road blocks, to help these guys grow.

Vox Capital’s website says it aims to support high-potential businesses that serve the Brazilian low-income population with products and services with the potential to improve their lives. Could business of this sort become the dominant form of business – in Brazil, or in Latin America more widely?
When we talk about the low-income population in Brazil, we at Vox consider what we call here the C, D and E social classes. C, which is the highest earning of these, consists of families that earn up to 12,000 reais a year. These three groups account for 80 per cent of the whole population, so we’re talking about close to 150 million people. There’s a huge potential to scale if you find the right business model.

I truly believe that if you deliver a solution to a need they have, really trying to make their lives better, you’re going to create huge loyalty to your service or your brand. If you want to do business with this population, you have to take this into account. It might take some decades, but I wouldn’t be doing this if I didn’t believe it’s the way people will be doing business in the future.

How big a role in supporting the growth of this sort of model can impact investing play?
It all depends of course on how successful the first pioneers are, but I really think that in future most funds are going to be impact investing funds. I see this as a next step in the development of concerns about the impact of the businesses you invest in. First, you worry about negative impact, then you start looking for positive impact – it’s a logical progression.

What is your assessment of the field of impact investing in Latin America more widely? How does this compare with other parts of the world?

Some Latin American markets are developing faster than others because they are larger economies – namely Mexico, Colombia and Brazil. Mexico is further ahead than Brazil, despite being a smaller economy, because they started quickly.  If you look at the countries that are more developed in impact investing, most of them have one or two successful microcredit operations. Brazil hasn’t had anything of the scope of Compartamos in Mexico, for example.

Other countries are having a very hard time attracting capital because of the size of their markets. And I still don’t see many initiatives to try to develop cross-country funds that would be needed for countries such as Ecuador or Venezuela or Uruguay and even Argentina. But we are also seeing a growing interest from US-based funds that are starting to develop operations here in Latin America. So impact investing is growing, but it is mostly focused on these three largest countries so far, and the others are still lagging behind unfortunately.

Compartamos in Mexico has provided an example of success but it has been much criticized for making so much money on its IPO. What do you think about this?
I don’t have any problem with their making so much money out of an IPO, but I would have problems if they were making people over-indebted or being too aggressive in collecting the repayments. But I haven’t heard these things about Compartamos. I really think that if entrepreneurs can create true solutions that are scalable and really deliver an impact or a solution, why shouldn’t they earn a lot of money out of it? My concern would not be that they’re earning a lot of money, but about the impact they are making on the population they serve, and I don’t know enough to have an opinion about that.
Social Enterprise World Forum
For more information on Vox Capital

For more information on the Social Enterprise World Forum

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