Latin America’s socents: poised for flight

This story originally appeared in our June 30th, 2011 e-magazine. Click here to download the pdf e-magazine.

While most of the social enterprise and impact investing spotlight remains on Africa and South Asia, Latin America is making its own strides to develop a solid foundation in the industry.

While the term social enterprise seems to be picking up steam worldwide, much of the focus remains on Africa and South Asia.

There are many reasons for that, says Mark Hand, an investment analyst with First Light at Grey Ghost Ventures. The language barrier, cultural and political differences all play a part in why Latin America has been slower to attract attention than others. “What we’ve seen in the impact investing space, especially the kind of venture funding circles that we swirl around in, is that people overlook Latin America,” he said.

William Portilla, a senior loan officer with Root Capital – which has operations in Latin America and Africa – says that developed countries have a “stronger strategic political interest” in Africa and South Asia than they do in Latin America.

“The money that is most commercially minded is most drawn to India. The money that is most charity minded is most drawn to Africa,” he said. “In that spectrum, that leaves few people that are operating in Latin America.” For its part, Grey Ghost has a few investments in Latin America, but Latin America represents a “much smaller percentage than other regions.”

On the flip side, though, many impact investors operating in Latin America focus exclusively on that region. Agora Partnerships is one example. Founded in 2005 and headquartered in Washington, D.C., and Managua, Nicaragua, Agora has helped 25 small businesses get more than $2.5 million in funding—including more than $1 million from foreign investors. More than 4,000 entrepreneurs have attended Agora’s educational events in Nicaragua, and more than 400 small businesses have received business advice.

Ricardo Teran Teran, co-founder and Managing Director at Agora Partnerships, says that the sector is growing in Latin America, and the term “social enterprise” is starting to be better understood despite the varied definitions. In fact, Agora prefers to call its entrepreneurs “impact entrepreneurs” instead of “social entrepreneurs.” But, Teran says, no matter what you call it, the concept is catching on.

“I think the use of business as a force for good, and the application of a business model to address social concerns – the two conceptualizations of social enterprise that I best understand – are definitely starting to be known,” he told Beyond Profit. “It will take some time to move away from what has become traditional belief that attacking these social problems is done only by governments or NGOs (non-governmental organizations) who get financing from international financial institutional international organizations.”

“Social enterprise is still relatively unknown in Latin America. People tend to confuse it with Corporate Social Responsibility or sustainable development/micro enterprise,” said Katie Storey, Director of Communications at NESst, which works to solve critical social problems in emerging market countries by developing and supporting social enterprises
that strengthen civil society organizations’ financial sustainability and maximize their social impact. “(There is) also confusion around social entrepreneurship which is solving social problems in an entrepreneurial way versus social enterprise which is the creation of a sustainable socially driven business, (which is) NESsT’s focus.”

At the Ground Level

Despite its infancy, however, there are standouts within the social enterprise space in Latin America. “There are many social enterprises that are implementing successful ideas that have been done in other parts of the world and doing it directly or indirectly with some larger organizations,” said Teran. “This is a great way to reduce the time to market, leverage existing know-how and centralize management and information systems. Having said that, there are some awesome models being developed in Latin America that I think can be scaled to the rest of the world, and these have a unique opportunity to define what social enterprise looks like coming from our region.”

Both Hand and Teran point to Frogtek– which earlier this year won the award for the best smartphone application that benefits women at the bottom of the pyramid (BOP) at the Mobile World Congress – as an example of a successful social enterprise emerging from the region.

Frogtek developed a point-of-sale application for mobile phones to help small shopkeepers with their finances and inventories.With Tiendatek, transactions are recorded at the same time they are made instead of doing it manually at the end of the day.

Another enterprise making strides is CO2 Bambu, a for-profit social enterprise using bamboo as a sustainable building material for pre-fabricated, low-cost housing, rural schools, and emergency shelters in disaster areas such as Haiti. CO2 Bambu works with NGOs and international organizations to develop low-cost pre-fabricated houses for areas in Haiti. In Nicaragua, it is completing a project funded by Spanish NGO Junta Andalucia to construct 84 houses in the Rosita municipality that was badly hit by Hurricane Felix in 2007.

Additionally, CO2 Bambu has designed a bamboo school that meets the requirements of the Nicaraguan Ministry of Education and will be implemented to reduce the deficit of schools in rural areas.

Building Capacity

While an enterprise success story can do much to inspire future entrepreneurs, organizations working to build the foundation of the sector and provide community, advice and capacity-building are needed.

Hand points to three “hubs” that are developing the space: New Ventures in Mexico, Start-Up Chile and Agora in Nicaragua. New Ventures, an initiative of the World Resources Institute, operates worldwide and has been active in Mexico for over a decade. It mostly focuses on green businesses with portfolio companies that work in the areas of biodiversity conservation, water management, natural resource conservation, energy efficiency and pollution and waste management.

Start-Up Chile is an initiative of the Chilean Government with the stated goal of ‘converting Chile into the innovation and entrepreneurial hub of Latin America’. What’s unique about it is that it aims to attracts foreign entrepreneurs to bring their ideas to Chile giving a $40,000 subsidy last year to 23 teams across the globe.

From 2006 to 2010, Agora ran the Launching New Ventures in Nicaragua program that provided enterprises with strategy consulting and technical assistance. The Agora Accelerator program aims to relieve the bottleneck in the pipeline between entrepreneur and funding.

How to Strengthen the Sector

In many respects, the Latin America market faces the same challenges as the more developed social enterprise sectors in Africa and South Asia: access to funding, scalability and sustainability. “The key will be figuring out the two-headed monster of sustainability (enough cash-flow to cover costs and be able to reinvest) and scalability,” said Teran. “Eventually, you will see, I think, what will look like a wave of mergers and acquisitions, where players will join forces and consolidate themselves, some will disappear, others will get stronger, and I don’t think this is a bad thing.”

Storey of NESst said there continues to be the lack of an enabling environment for social enterprises. The sector is further hobbled by
the lack of long-term funding, a paucity of capacity-building, unrealistic impact expectations from donors, and the lack of financial instruments, including soft loans and equity. “Social enterprises are not on the radar of most donors,” she said.

A few things that can strengthen the sector, Hand says, are local seed stage funds as well as local groups of angel investors.

“There’s a general lack of early stage investing in the region and in a lot of ways, the development of [commercial investments] would do a lot for the development of early stage impact investing,” he said.

Teran sees potential in both new technology and the youth in the region who are getting involved in the sector. “Technology innovation is being harnessed by the private sector and civil society to lower costs and increase the quality of services,” he said “Young people across the region are using many of these technologies and applying their skills to figure out how to use them for social enterprise.” He thinks that eventually, as the sector grows, we will see the region’s top talent seeking out opportunities in the space as you currently see in both Africa and South Asia.

Photo credit: Unreasonable Institute and Agora Partnerships