Growing up in Zambia, investment associate Mercy Zulu was passionate about wanting to contribute to the development of Africa in a transformational way that was also sustainable. “I wanted to help change the story for Africa,” she says. Zulu lives in Cape Town, where she has worked for the Amsterdam-based impact investment firm Goodwell for the last four years. “I joke that I have the best job – the fundraising team has to raise the money and my team gets to spend it.”

Zulu’s job is to find local entrepreneurs who want to better the lives of what she calls “unserved or excluded populations”, people who have the money to pay for the goods and services they need, but whose needs are not met by established systems of finance and commerce. “A lot of money changes hands on the African continent,” she explains, “but the larger institutions don’t know how to reach these people; they don’t know them, and don’t know how to create appropriate and affordable goods and services for them.” Once Zulu has found suitable local entrepreneurs who are able to help these people, Goodwell invests in these companies, making an impact by reaching these “excluded populations,” and at a return on their investment.

There’s a new investment in town

Impact investment (the term emerged around 2007) is about striving for financial return, just like traditional investment. However, it also seeks to address social or environmental issues. Socially conscious impact investors often consult the UN’s Sustainable Development Goals, drawn up in 2015, which address global challenges related to issues such as poverty, inequality, climate change, environmental degradation, peace and justice. Impact investment is on the rise. According to estimates by the Global Impact Investing Network (GIIN), the market was worth more than $500 billion in spring 2019, more than double the $228 billion GIIN estimated in June 2018.

Dutch impact investment firm Goodwell was founded in 2004 by Wim van der Beek. Alongside its social investments, it has also provided microfinance services since 2006, when Els Boerhof, now a managing partner, met Van der Beek: ”For years, I had to explain to everyone exactly what I was doing. Back then, most people thought microfinance was a form of charity.” When Boerhof and Van der Beek met, their visions and values were so aligned that they decided to join forces. “Goodwell is the bridge between money in the developed world and small entrepreneurs in emerging markets. We have made 30 investments over the past 10 years and only three of them have resulted in a loss.”

Local knowledge and insight

According to Boerhof a key reason for this success is the fact that Goodwell always works with local teams such as Mercy Zulu’s in South Africa. “They have a much better view of the local market than we have from half a world away. This local knowledge and insight helps us to make wiser investment decisions and these teams are better able to help local entrepreneurs when they run into problems.”

The drive, and the heart, to make everyday goods available to people regardless of their location or access to technology is also behind successful e-commerce company Copia, active in rural Kenya. Copia was founded by American Tracey Turner in 2013. They couldn’t have done it without capital from impact investors such as Goodwell. “When we started, traditional investors wouldn’t take a risk with a company targeting middle to lower income Africans, one that would need to build a distribution system. Getting a business off the ground in Africa requires patience, and regular investors didn’t believe it could be profitable.” That changed when the company started to be successful. “Now, commercial investors ride on the shoulders of impact investors.”

Empowering business model

Copia’s system is simple. Potential customers visit a local Copia agent and select what they want online, pay the agent – who orders the goods – and pick them up themselves when the goods arrive. This way, explains Turner, Copia empowers every player in the supply chain; customers can access goods without having to travel to the city, and local vendors get a commission from being Copia agents. According to Copia’s website, they serve over 600,000 customers and work with 11,500 agents, usually small ‘mom-and-pop shops’, and agents increase their income by 37% on average. “The global economy is spinning faster and faster for most of us but this market was getting left behind; we are essentially bringing it to their doorstep.”

Copia grew quite dramatically in the last year, and that growth has continued during the Covid-19 crisis. In the beginning of the crisis the Kenyan government deemed it an essential service allowing it to continue its operations. This spares customers from having to visit crowded markets. With every purchase, Copia provides a free bar of soap and a flyer with information about the virus. “The board agreed early on that our number-one priority throughout the crisis would be to do everything we can to help. Commercial considerations come second. It sounds trivial, it sounds obvious, but for a business that needs to be commercially viable that was a significant decision.”

The heart, the head and the hands

“Impact investment has become quite trendy from a fundraising perspective,” says Mercy Zulu, “so we look for entrepreneurs who have a genuine interest in improving the lives of underserved and excluded populations and who have three elements: the heart, the head and the hands.” She gives the example of one company whose founder moved from his comfortable house in the city to a less comfortable home in a rural area to be closer to his customers.

But entrepreneurs also need to have the head, Zulu says, because being an entrepreneur in Africa is not easy. They need to have a vision for a better Africa, with thriving households and businesses, and innovative ideas to transform how Africans live and work. We are attracted to founders who have that drive, grit and resilience. And finally, they need hands, the ability to actually execute their vision.”

Moving into the mainstream

Goodwell’s founder Wim van der Beek says he wanted to merge the world of finance, where he spent the first half of his career, with development and ‘making an impact’. “We invest in companies in the early stages, helping them grow from startup to scale-up, getting them to a point where they can demonstrate to mainstream investors that they are a valuable business opportunity worth funding. If the impact investment world gets it right,” he adds, “the term ‘impact investing’ will become obsolete as it moves into the mainstream.” And there are signs that this is already happening. “We see mainstream asset managers using the term a lot, and large management firms – especially in private equity – embracing the term and launching specialised products. My guess is that most private equity professionals wouldn’t have heard of impact investment a couple of years ago.”

Confusion and criticism

Critics of impact investing say that it’s hard to get a return on investment from projects dedicated to meeting the fundamental needs of poorest people: education, sanitation, clean water, health services and food. “Impact investment is sometimes confused with semi-philanthropic programmes,” Van der Beek says. “In the world of impact investment there is a debate about how much profit you can have. I believe that you have to have profit and a worthwhile return on your investment to make an impact.”

“I think the confusion arose because a lot of philanthropic or publicly funded initiatives started to embrace the term ‘impact investment’. You need to distinguish between impact investment projects that give a worthwhile return, and those that focus mainly on achieving philanthropic goals.”

Copia’s Tracey Turner agrees. “From an entrepreneurial perspective, the impact investors that are most effective are the ones who understand that to make an impact you need to be commercially successful. You can’t have one without the other. The bigger we are, the more customers we can reach, and the stronger we are commercially, the lower our prices can be for our customers. If you can address a societal problem with sustainable capital in a profitable model that can sustain itself, that’s great.”

Entrepreneurs – the investors of tomorrow

Mercy Zulu and her team try to visit their portfolio companies once or twice a year to meet not only the entrepreneurs and employees, but also their customers. She recently visited an agricultural company working with smallholders. “These smallholders don’t have access to financial systems or to support from banks. They’re among the most vulnerable groups in society because they rely on seasonal work and income.” One smallholder Zulu spoke to, generated enough income to send her children to secondary school (and her oldest to college), upgrade her house and open a grocery store in her community. “This isn’t about numbers and statistics. People’s lives are changed.”

“You’re solving social economic challenges as well as generating market returns on investments. But you’re also creating ‘real wealth’. It’s Africans providing solutions for Africans. Some of the entrepreneurs that Goodwell works with will become investors themselves, for other Africans, and for me that’s very important, it’s really contributing to the growth of Africa.”