Illustration by Marcos Chin

It’s market day in Barrio Curtidores, which means the main thoroughfare is packed with shoppers perusing makeshift stands that offer everything from jeans and blenders to vegetables and tacos. Moto-taxis putt-putt by, pausing occasionally to drop off new customers.

Market day also means it’s a busy day for Gregoria Alvarez Reyes, whose store sits on an adjacent corner, right in the path of foot traffic. For the past 11 years, Reyes has owned and operated Farmacia Fradoni in this northwest section of Chimalhuacán—an 18-square-mile mass of gray concrete-brick buildings 10 miles east of Mexico City that is populated by some of the country’s poorest citizens.

Over the past two years, though, market days have been busier than normal at the store—all thanks to a little silver service booth just outside the shop. Customers can use the Internet-connected terminal inside the booth owned by tech startup Barared to do everything from place phone calls to pay bills, deposit money, and buy minutes for their mobile phones. It’s a convenience for her customers, Reyes says: Chimalhuacán has only two bank branches to serve its more than 600,000 people—meaning branch visits often require bus fare—while the Barared booths can be accessed on weekends and off-hours. And customers feel safe topping up their mobile phones here, says Reyes. They tell her that other companies take their money but fail to deliver the credits.

For Reyes, the booth is a differentiator—something to keep the slow creep of the chain stores at bay. She also earns money directly from the booth, collecting half of the 30-cent user fee. (The other half goes to Barared.) All told, Reyes says the booth makes her 1,000 pesos a week, about 2 percent of the store’s total income. There’s also a halo effect: Anyone who uses the booth to, say, make a bank deposit might also remember to pick up shampoo or soap from her store.

Reyes’s booth is one of about 600 installed in mom-and-pop stores in Mexico City; the company plans to have 1,000 in place by the end of the year. Writ large, Barared’s effects could be considerable: There are an estimated 800,000 locally owned stores like this in Mexico, meaning potential revenue increases for what is, collectively, one of the largest employers in the country. And by allowing wider access to banking, Barared also provides a salve to a population where, due to lack of access, only 27 percent have a bank account—a number that drops to 12 percent in the lowest-earning 40 percent of the population, according to the World Bank.

This is the kind of transformational opportunity that Àlvaro Rodríguez-Arregui (MBA 1995) saw in Barared. As cofounder of the IGNIA Fund, along with HBS senior lecturer Michael Chu, Rodríguez looks for investments that serve what he calls “the base of the pyramid.” In 2010, IGNIA invested $3.1 million in Barared, helping it transition from phone-only services to the current Internet-enabled, branchless banking model.

But Rodríguez doesn’t just hand these companies money and wish them well. He wants them to thrive—to grow and scale. He wants them to do so well, in fact, that they attract competitors, forcing prices to drop and quality to rise, all to the benefit of consumers.

And here’s where the historical philanthropic paradigm gets turned upside down: Rodríguez wants IGNIA investors to get real financial returns on their money. Not just make their money back—money that can be reinvested—but maybe even beat the market. No longer, his thinking goes, do philanthropists need to be donors. Doing good doesn’t mean giving away all their money.

In fact, if all goes according to plan, they’ll make some.

Barared plans to have 1,000 booths in Mexico City mom-and-pop stores by the end of the year. (Courtesy of Barared)

While “impact investing” has become a buzzword of late, this kind of model didn’t even have a name until October 2007. Sitting around a table at a Rockefeller Foundation–sponsored retreat in Lake Como, Italy, with some of the early leaders in the field—including representatives from the Skoll Foundation, the Bill & Melinda Gates Foundation, and J.P. Morgan—Rodríguez helped give the nascent movement a moniker.

More than just a tangential part of the movement’s creation story, the name gave it a useful center, says Matt Bannick (MBA 1993), managing partner of Omidyar Network, eBay founder Pierre Omidyar’s impact investing firm. “When the name came out of Lake Como, people had something to hang these ideas on. The name helped create momentum.”

Results helped, too. One of the impact investing movement’s earliest highlights was when Mexican microfinance bank Compartamos Banco completed its IPO in April 2007, raising $467 million—a 250 percent return for original investors. (It is now Latin America’s largest microfinance institution, serving 2.6 million clients.) Chu—then head of microfinance organization Accion International—was part of the group that founded the bank, and Rodríguez was a longtime chairman of the board.

Friends since Rodríguez heard Chu speak at the inaugural HBS Latin American conference in 1995 during as a second-year MBA, Rodríguez took his first post-HBS job working for Chu at Accion, accompanying loan officers into the field everywhere from Ecuador to Brooklyn. (Seeing firsthand the effect business solutions could have on poor communities was transformational for Rodríguez: “I made a decision that I didn’t want to be a spectator to poverty anymore.”) The IPO was a high-profile demonstration of the duo’s long-held vision. “It showed us that mainstream capital markets could be created,” says Chu. “And that was really, really key.”

A few months after Compartamos’s IPO, the longtime friends met for breakfast on the Spangler patio at HBS and discovered they had both been thinking along similar lines: What if we can build more of these companies that serve a social good and get solid investor returns? “It was a critical moment,” says Chu. “We had to decide to either fish or cut bait.” After a weekend hashing out the details, they decided to fish. The IGNIA Fund launched in July 2007, and in August 2008 they made their first investment—a housing development company in Chiapas, one of Mexico’s poorest states.

They weren’t operating in an empty market, though. In addition to a few more veteran impact investors like the Acumen Fund (founded in 2001), there was a trickle of new entrants.

At about the same time that IGNIA launched, Maya Chorengel (MBA 1997) was debuting a similar organization, Bangalore- and Seattle-based Elevar Equity. Her childhood summers in the Philippines, with its extreme poverty and extreme wealth, inspired an interest in development; a career in private equity and investment banking had taught her how to invest. On the conference circuit in 2004, she started to hear about groups that were bringing financial services and capital to the poor using a business framework rather than a philanthropic one. “That really struck a chord with me,” says Chorengel.

After founding a microfinance investment fund called the Dignity Fund in 2005 with Elizabeth Collet Funk (MBA 1996), she started Elevar in 2008, widening the investment scope to include housing, education, and health care. One of Elevar’s greatest investment successes is Vistaar, a financing firm that offers funding to small- and medium-sized businesses in India that fall into the “missing middle”: too small for commercial bank loans, too big for microfinance. Since its launch in 2010, Vistaar has funded $74 million in loans to more than 30,000 Indian businesses and created nearly 1,000 jobs. “It’s really structured in the exact same way as a small venture capital or private equity firm,” says Chorengel. “It’s a proven model—you get a group of talented fund managers together who are looking for outstanding management teams and business models to invest in.”

In their early days, both Elevar and IGNIA got funding from the Omidyar Network, one of the earliest players in the movement. Matt Bannick, who left his role as president of eBay International to help shift the foundation to an impact investment model, says that one of the challenges in building the operation was that the lack of existing models simply made it hard to explain. “People had prototypes for foundations. And they had prototypes for VC funds. This was neither.”

Now seven years after Lake Como—and countless numbers of conferences, journal articles, and blog posts—the movement seems to have reached a critical media mass. In June, the White House announced more than $1.5 billion in impact investment commitments from more than 20 private investors—including the Omidyar Network—as well as the release of a status report compiled by a related task force. That same month, the Vatican held the “Investing for the Poor” conference, which included an impact-investing talk featuring Bannick as well as speeches by the CEOs of Catholic Relief Services and the Aga Khan Foundation U.S.A.

And while these are great advances, it still seems like early days to most. “I think there is a growing consciousness around some of the centers of capitalism, but I don’t think it’s a wholesale movement,” says Chorengel. “As much as there is a tremendous amount of interest in impact investing, the floodgates have not opened yet.” The June White House report reinforces this point, noting that impact investments “still represent only 0.02 percent of the $210 trillion in global financial markets.”

How to open the floodgates, then? How can impact investing go mainstream?

First of all, says Chorengel, you have to show people results. “The data set is limited.” Of all the hundred or so funds investing in these “base-of-the-pyramid” markets, she believes only a handful can show investors a real return on investment. “That is not a sufficient data set for a mainstream institutional investor. It’s not statistically significant. Maybe the five of us got lucky.”

And for investors equally interested in the impact of their investments, there’s a similar lack of data—in part because of a lack of tools to measure it. Bannick says an increased focus on measurement has brought great progress, but there are inherent challenges. “How do you measure the value of a year of education for a poor person in Kenya relative to an evening of lighting for someone in India?” says Bannick. “It’s really hard—and ultimately subjective.”

With a nascent model and results that are just starting to come in, what impact investing really needs, all agree, are pioneers.

“We need more people who are willing to make high-risk bets on innovation in emerging markets,” says Bannick. “We need people who are willing to support the development of a sector, not just a firm.”

“Pioneer” can be an attractive title, adds Chorengel. “Investors are saying ‘We are taking the plunge, and we hope that by taking the plunge we are going to show others and to help build the sector in such a way that more mainstream capital will come in.’”

“In Silicon Valley terms,” says Michael Chu, “we need the people who were investing in Intel before Intel became successful. Right now, we’re at the pre-Intel stage. But if we succeed as we expect to, then we will have created the Intels of the world.”

So where do you find these pioneers?

Bannick says that if you picture a graph of the capital invested every year in the United States, it would look like a lopsided barbell: on one end, tens of trillions of dollars seeking the highest return possible; on the other, nearly $45 billion of philanthropic money seeking no return whatsoever. In the middle, very little. “We need to fill in that capital curve,” he says. One potentially viable pool: high net-worth individuals. The 127 people to date who have signed the Gates-Buffett Giving Pledge, promising half of their money to philanthropic causes, have a net worth of around $600 billion. The Forbes listing of the richest 400 Americans alone totaled just over $2 trillion in 2013. “The pools of capital are absolutely massive,” says Bannick. “And while some may still be looking to maximize their investments, a lot of these folks would be willing to invest and get a more modest return, perhaps, while having a fabulous social impact.”

That the return is kept modest is a necessary qualifier, says Kash Rangan, the Malcolm P. McNair Professor of Marketing at HBS and author of numerous case studies and journal articles on impact investing. “To me, impact investing requires a tradeoff. You have to put the impact before the investment. Otherwise, these are just investments.” And there needs to be a difference. “When investors in Google or Apple or Facebook make a 100 percent return, society doesn’t question it—it’s absolutely fine to make money if you are a smart investor or entrepreneur or just plain lucky, glory be to you,” says Rangan. “But just imagine making—on the backs of poor farmers in Africa—say, a 50 percent return. You think society will allow that?” There is a natural backlash to profiting from the poor and low-income populations, Rangan adds. It should be good enough to make a decent return, but not more—the investor has to factor in the social return.

Rodríguez takes a different approach. “You are never going to build a successful model that way,” he says. Set a low bar and you’ll end up with mediocre projects. “And it’s never going to scale, and it’s never going to create an industry, so it’s always going to stay as a cute little project that is just making us all feel really good.”

Success, Rodríguez contends, breeds competition, which creates better markets for consumers. Which means that not only would IGNIA’s investments like Barared, for instance, start to see rivals competing with their booths, but that IGNIA would get competition, too. “Once we demonstrate that this is a successful investment space, what is going to happen? There are going to be multiple firms like IGNIA, and then we’re really going to have a chance to address some of these fundamental issues, with broad access to capital for innovative business models that are trying to solve basic needs.”

That is the difference, Chu says, between IGNIA and a VC firm. “Our ultimate goal is improving society. If it were just to make money, we’d do things like try to delay competition,” he says. “And if [improving society] is the ultimate goal, you need to create industries. And if you want to create industries, you better have high returns.”

Chu and Rodríguez know that the only thing that will end the internal debate and push impact investing into the mainstream is results. So they need something big to hit that will make everyone sit up and take notice. They need Barared to become the next Intel.

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