Impact Investing: Will Your Business Pay for Success?
Pay for Success (PFS) is an innovative new funding mechanism that is used to finance social-benefit projects with high-quality impact metrics. PFS projects are popping up in every sector from homelessness, to healthcare, to education. New models prove that PFS projects can be used to stimulate investment in commodities, as well as workforce development. What impact will this have on the private sector? Will your business Pay for Success?
The Common Fund for Commodities unveiled a Development Impact Bond (DIB) to modernize cocoa and coffee production in Peru’s Amazon region, the Ashaninka. This first standing commodity-sector DIB breaks into a new frontier of Pay for Success (PFS) possibility.
DIBs follow the main principles of PFS projects, but they feature a third-party end payer, rather than a government. In this case, the Common Fund for Commodities has agreed to repay the investor, the Schmidt Family Foundation, once pre-determined target outcomes are successfully achieved.
Rainforest Foundation UK is the service provider for the project, and the organization has already started experimenting with leaf-rust resilient coffee strains. Last year, the leaf rust disease plagued almost 70% of coffee production areas in the Ashaninka.
Due to global recognition as a top-notch commodity, Peruvian cocoa has experienced a substantial demand increase among foreign consumers. Driving supply to meet demand, higher-efficiency cocoa production methods are being implemented right on time.
This Peruvian coffee and cocoa project raises the question of whether DIBs can be used to modernize other types of commodity production. Could a DIB be used to supplement exports of quinoa, corn, and salt from the Peruvian Andes?
Sustainable Tech and Water:
During the Social Entrepreneurship at UVA Pay for Success Conference, one participant raised the question of whether or not PFS projects could be used to fund sustainable technologies and water conservation. The possibility exists. Based on the Peruvian model, a fund for California commodities could pay an investor when a non-profit produces wide-spread adoption of sustainable planting methods. Would you invest in California’s water conservation?
What about climate change? A clean energy fund could pay an investor, contingent on service providers spreading the adoption of sustainable technology. PFS projects are all about aligning interests, so as long as you have a problem, partners, and payable outcomes PFS possibilities exist.
Entrepreneurship and Art:
To successfully complete a PFS project, you need a fund, a fiduciary and a non-profit service provider. Venture capital funds could act as end payers, investing in non-profit entrepreneurship accelerators. If the accelerator achieves a certain measure of success, private investors, potentially well-connected angels, will get paid. Success could be measured in the number of companies to meet a prerequisite rate of growth, target revenue, or social-impact metric.
Dual-incorporated businesses with a non-profit branch may be able to experiment in-house with the PFS model. Village Capital, which consists of a non-profit and stand-alone fund, could essentially structure an in-house DIB. If private investors wanted to invest in the non-profit, they could enter into a PFS agreement with VilCap Investments.
From an art accelerators standpoint, they could scale their operations with a PFS project, similar to entrepreneurship accelerators. If art investors wanted the McGuffey Art Center to expand its artistic co-op model, the investors could provide up-front cash, and a fund, even local government, could step in as an end payer. This PFS model could easily be piloted in Charlottesville, VA if art-backing investors step-up to the plate.