Let me tell you a story

by Laura Hattendorf

Nov 01, 2019


Komaza grows tree in Kenya

I’m pretty unhappy with impact investing these days. Let me tell you a story.

Once upon a time there was a brilliant, naïve young man. He found himself studying malaria on the coast of Kenya, but became much more interested in the much bigger problem of getting people out of poverty. So he decided to start a forestry company. In a desert. With no infrastructure. Or business experience.

I mentioned naïve.

Why forestry? Where he lived, even very poor people had land. They farmed some of that land, but the soil in the region is lousy, and much of it is left fallow. Food crops aren’t profitable for a variety of reasons – labor scarcity, absent markets, changing climate, unavailable credit. At the same time, native forests in Kenya and the rest of Africa are being devasted by an insatiable demand for wood. Even cutting down native forests is not enough to fill demand – imported wood is booming. It’s terrible problem, but this clever person found a clever solution: Grow trees on fallow land, buy them from smallholder farmers at fair prices and sell them into existing markets where demand outstrips supply. Some of the poorest people on earth get the biggest windfall they’ll ever see. Huge potential impact. A simple idea. Complicated to make happen.

Fast forward 11 (very tough) years. Against all odds, the company still exists. It’s called Komaza. They’ve planted 5 million trees with 20,000 farmers. For the first few years the company was a non-profit, funded with grants. Once it became clear that the trees could survive and numbers started to show the potential for a real business, they formed a for-profit and raised money from very risk-tolerant investors. Collectively, $21M has gone into the company – de-risking the business model, testing market assumptions, reducing cost and mastering operations. It turns out that there is a real opportunity to get people out of poverty and give investors a 20% IRR. The dream is within grasp!

But they are about to drown in 3 inches of water, 5 feet from the shore. (give more detail about what that means in terms of the what’s happened with investment)

Here’s another story. (this isn’t really a story….)

Over the last decade or so, “impact investing” became a thing. There were lots of debates about what impact means, what investing means and what they mean together. There is still debate. Me? I’m over that debate. It’s a big umbrella. What I care about is that investors are clear, honest and transparent about what they think their money is doing. Most impact investing is targeted at relatively low-risk, proven business models in rich countries like the United States. That’s because most investors want risk-adjusted market-based returns and that only happens when markets are efficient. This excludes places where deep poverty is endemic, where people are hungry and where kids die young.

That seems to make sense to most people. What people don’t like to admit is that most impact money in rich or middle-income countries has low additionality. In other words, their money is creating impact that probably would have been created anyway. By that very same efficient money market.

This is where our two stories meet. In the impact investing world, there are foundations, development finance institutions (DFIs), and family offices who have wealth (a lot!). All of them share the goal of change for the better and the ability to take risks, yet so many of these investors (and the funds they are in) are sitting on that money. The deal is too big, too small, too early, too late, too risky. There’s a million reasons to sit it out.

The result? While a growing number of intrepid investors are putting money in super high risk, start-up ventures – like all those who funded the first $21M into Komaza – what follows is a valley of death. Even though these companies have significantly de-risked the venture. Even though they have built the team to deliver against the next set of challenges.

Why is this happening? Because these ventures – often big and transformative in nature, but not your run-of-the-mill local enterprise – don’t fit into the traditional financing stack. Despite tremendous de-risking, positive cash flow is often years away. In efficient markets, extraordinary returns and established exit opportunities might justify years of deficits: Investors know to think about that risk/return calculation. But with these kinds of ventures, positive earnings might still be years away (this resttes the above.). Exit opportunities are not clear and investors become scarce.

Here is where those DFIs, family offices and foundations should come in. They have the money that can sustain these huge-impact opportunities through this valley of death. They need to stop creating a million reasons not to do the deal and start to think about risk in the context of impact – not financial returns. The more potential impact (additionality and scale) the more risk they should take.

I use the story of Komaza because it illustrates exactly where impact investing is not working. Komaza has systematically eliminated or mitigated many risks. It’s led by an absolutely irrepressible founder, complimented by a team of senior managers. Komaza now presents a reasonable amount of risk for a healthy projected return. This is a company that should not drown. Distributed forestry is not a pipe dream. They’ve got millions of trees in the ground and wood markets are still booming. You investors – the ones who say poverty or climate change are the kinds of problems you want to help solve – it’s time to get real and put some of that money at risk. If you say you are in the game, play the game. Push your models of investing beyond your comfort zone. Otherwise, let’s all just admit that impact investing is mostly business as usual, addressing problems on the margin for relatively wealthy people.


Komaza grows trees in Kenya

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