By now, it’s likely that you’ve heard of impact investing — investing in for-profit startups for a double return of measurable social impact and financial ROI. Capital under the umbrella of impact investing totaled about $114 billion as of May 2017; though it’s still only a small slice of the capital invested in traditional venture investments, it’s a significant increase from the estimated $50 billion worth of impact investments in 2010.
But back way up to the early 2000s, before impact investing was even considered its own category, Brian Cayce was working for a private investor who wanted to move beyond helping entrepreneurs in emerging markets through microfinance, into a true equity play to invest in for-profits in those markets. Gray Ghost Ventures started in 2006 as one of the very first mission-driven tech investing firms — focusing on early-stage companies that improve the lives of underserved populations through tech.
Now Gray Ghost’s Vice President of Investments, Cayce estimates that at the time there were as few as two to three other firms in the country practicing what we now identify as impact investing. Gray Ghost now has over $125 million in several funds under its belt, but the team has maintained its focus and mission.
Cayce’s background was uniquely suited for the job — though not an investment professional at the time, he had served overseas in multiple capacities, as a Peace Corps volunteer (based in Turkmenistan), a non-profit employee, a business consultant, and a technology executive. He knew firsthand the challenges that entrepreneurs in emerging markets faced with getting their product funded and a company built to scale.
“This grounding and empathy for the customer is perhaps the most important attribute in my job as an impact investment venture capitalist,” says Cayce.
Cayce points to a number of challenges specific to impact investing — namely, higher risk than other types of investing (yes, even higher than traditional venture investing!), helping the entrepreneurs navigate additional challenges like reaching customers, and aligning the goals of stakeholders while balancing expectations.
He also cautions that the field of impact investing may be facing another challenge a bit closer to home — the growing popularity of the industry. Though counterintuitive, he says that as impact investing becomes more mainstream, there’s a risk that those who champion it may not fully understand the unique commitments it entails and challenges it may engender.
However, Cayce is generally positive about the state of the industry, and the potential this type of investing has to generate positive outcomes even in our own backyard. Here, he talks to Hype about how he and the Gray Ghost team approach an investing strategy, the true definition of an impact investment, and his favorite success story in his decade-plus investing career.
You have a unique background that combines non-profit, for-profit, and overseas work. How has this helped you with your work as a leader at Gray Ghost?
Having been a U.S. Peace Corps Volunteer and then having lived and worked in emerging markets for half of my career, I have a natural understanding of and empathy for the target customers our pipeline and portfolio company entrepreneurs seek to serve. This has also given me a realistic and healthy understanding of the market challenges and environments in which we invest.
At the same time, one of the special skills I have come to appreciate about impact investing in emerging markets is the need to understand and align the incentives of a variety of stakeholders.
I learned early on that not only is it important to understand the market context and consumer realities, but also that it takes a special understanding to guide the interests of the folks who are attracted to socially-impactful ventures.
Having sensitivity to the goals of these stakeholders has helped us to secure and align the incentives of nearly all of our portfolio companies for those concerned. This keeps the startup focused on iterating toward solutions while not getting distracted by pursuing donors’ requirements. Some of my greatest attributes in this work are that awareness and understanding of the different priorities of those involved as well as the market context in which these startups are operating.
There are a lot of questions about what qualifies as an impact investment. What is your definition?
This is a heavily debated topic. Broadly, we search for evidence of two things: intentionality and measurability. Companies that go the distance with us have an intentional and “hard-wired” objective to achieve both financial return as well as create societal value. These companies will have identified and integrated KPIs which show how their efforts towards underserved communities make a positive contribution above what would likely occur in their absence.
At Gray Ghost, we apply some additional screens. Our investment thesis has remained to bridge the “access gap” for underserved and emerging consumers. Specifically, we seek companies applying technology-enabled solutions to bridge access gaps in health care, financial services, education, sanitation and logistics. In addition to tracking the number of interactions our portfolio companies have with customers, we evaluate the opportunities they provide for enhanced productivity as well as how they eliminate frictions and costs for customers.
What was it like to be one of the very first impact investing firms, before this was really even recognized as a viable model? What challenges did you face?
I had a hunch that there was a better way of doing things than what I had seen from international development aid in reaching the mass market across South Asia and Sub-Saharan Africa. The poor do have money, but they do not have safety nets of savings or wealth — they will pay for what they value. It gave me the comfort to suggest to Gray Ghost’s initial investor that there are entrepreneurs out there who understand these market needs.
There was significant skepticism, for sure. That same initial investor said on more than one occasion that he would have been happy to have lost his money slowly if it was creating social value in a unique way. As the results started to come in for Gray Ghost, that was no longer the expectation. It was around this time that impact investing began to gather buzz. Having been a pioneer in the field, working with the great team at Gray Ghost as well as many extraordinary colleagues throughout the years, is an immeasurable honor for which I will always be grateful.
Today, impact investing is still a niche industry; however, there is awareness across financial institutions as well as among large endowments. Silicon Valley has taken note as well, with the leading venture capital trade association recently hosting a reception for industry players to learn more. This was hosted on the sidelines of a massive impact investing event, SOCAP, which has brought more than 15,000 people together over recent years to advance the industry.
At Gray Ghost specifically, how have you seen financial return for investors, when compared to traditional venture investing? Higher, same, or lower?
I always hoped that we would meet our goals of providing a meaningful financial return to our investors while at the same time creating significant social value. Fortunately, we have achieved that in a modest way. We frame our investments in the context of risk-adjusted financial return, and that is the target that we gun for in post-investment work.
When compared to tech startups in the U.S., one thing that is different, and is delicate, in emerging markets is that while the businesses may be less capital intensive, the customers may be harder to reach. We want our companies to compete someday with the greatest brands on the planet. However, many of these businesses must be designed from the outset for low-margins and high-scale. This implies possibly higher risk compared to traditional venture investing.
Ultimately, this is a funny business. Our portfolio financial results very much resemble what you would see from successful Silicon Valley firms. One to two investments which really hit escape velocity can make the entire portfolio for a fund. I do think that of all the capital available to support impact investing, early-stage venture capital sets up the highest probability to align impact and financial objectives.
What is your favorite success story thus far?
One of my favorite success stories so far comes from our portfolio company CellBazaar (founded 2006). This company was the first mobile-based online classifieds marketplace in Bangladesh. CellBazaar earned the GSMA’s Global Mobile Award for the “Best Use of Mobile for Social and Economic Development” in 2008 and was acquired in 2010 by Telenor. Our financial exit was respectable but not a blockbuster.
While all of this is a good story, my favorite tale about this company came from the founder, Kamal Quadir. He had been working on CellBazaar for a number of years and had a driver working for him most of this time. This driver was semi-literate and did not know English at all. Kamal, while being shuttled around the frenetic streets of Dhaka, would exclusively conduct his phone conversations in English as a habit. He never discussed CellBazaar with the driver.
One day, Kamal told me he had been in the back of the parked car when he overheard his driver on the phone conducting the sale of a refurbished mobile handset. When the driver hung up, Kamal asked him about it. The driver turned to Kamal with a big grin, and told Kamal that since driving him around he had learned about CellBazaar. He confided that he had been buying used handsets on CellBazaar, refurbishing them, and reselling them via CellBazaar for months. He joyfully declared that he had doubled his monthly pay by using CellBazaar!
While not scientific, I find this a profound anecdote of the social impact of this investment. I’ll never forget this story, and I would certainly chalk this up as a signal of success resulting from my work at Gray Ghost.
What is one thing about impact investing you would want people to know, that you don’t think is common knowledge?
The early skepticism of impact investing was understandable, especially for emerging markets early-stage venture. In addition to the significant risks of cross-border “frontier” market investing, there is also the reality that technology alone does not allow these founders to be successful. In almost all cases, our entrepreneurs have had to turn conventional business models on their heads and find new and different ways to reach consumers who have largely been overlooked. That is one of the most exciting things — that combination of applying technology and business model innovation to chip away at intractable social challenges.
I feel that people may be misled into understanding that impact investing is a panacea for all the ills of lesser-industrialized countries. That is certainly not the case. The one thing I would want people to take away is that impact investing is more like a tool in the tool belt — used appropriately, it may generate powerful results.
What do you see as the most important trends driving the industry over the next few years?
The impact investing industry is appealing to wider and wider circles. While it is arguable if the industry is now mainstream, it is certainly in the conscious of many top-tier financial organizations. As wealth is generated by and/or passed down to the Millennial generation, there seems to be a strong sense that there should be no more compromise — it is not enough to invest the money, it must be invested in alignment with the owner’s values.
At the same time, the risks for the impact investment community are real. One of the greatest risks is that fund managers and intermediaries who are operating under the moniker of impact investors fail to generate the returns they are promising. This has the potential to lead to disillusionment from the capital markets, which could lead to a pull-back of interest. A second risk is that the impact investment community fails to properly express, evaluate and report the social impact in a way that allows the broader capital markets to better understand what this industry is all about. Lack of consensus around impact frameworks could impede the impact investment community’s ability to tap into larger pools of capital.
One thing is for certain, there will be no shortage of brilliant innovations spearheaded by compelling individuals who want to make a difference in the lives of others. The emerging markets were early test grounds, but we will see this more and more as a viable and necessary ingredient for achieving value creation aligned with social justice and equity in our own backyards.