Dondi Hananto's Hypothesis on Impact Investment: Scalability is the Key

This article is a part of DailySocial’s Mastermind Series, featuring innovators and leaders in Indonesia’s tech industry sharing their stories and point of view.

There is no doubt that impact investing as a concept has gained more popularity than before. Directing capital to ventures that are expected to yield social and environmental benefits as well as profits provides investors with a way to “do well by doing good.” Dondi Hananto has been trying to do similar work with Patamar for the past seven years.

For over 15 years, Dondi has built specialization in microfinancing, risk, portfolio, and credit management through the banking industry. Although he claimed the intention wasn't purely passion, he came to find his niche in technology and impact through this industry. His very first private fund, Kinara, relied on curiosity but already used the impact-focus investment concept. It was also several venture experiences until he decided to be better focusing on the investment side of the ecosystem.

One of the biggest questions about impact investing is: "Can funds achieve both social impact and returns at scale?"

In fact, only a small proportion of funds has consistently generated market rate return and measurable social and environmental impact at a large scale, especially in equity. Through this piece, Dondi is to share some stories on the impact investment area and the key to its sustainability.

As a banker-turned-investor, Dondi Hananto has been actively taking part in building the Indonesian entrepreneurship ecosystem, investing in early-stage, scalable companies. DailySocial has an opportunity to have an exclusive interview on his extensive insights on the impact business and investment. Below is an excerpt of his story.

Let's begin from when you were in the banking industry. How has technology affected your life and shaped your career?

I graduated amidst the financial crisis in 1998. It was very hard for most people to do basically anything. Banking was the first job offer I got, and I took it out of desperation. However, although my intention wasn't purely passion, I came to find my niche through this industry. There are a few things about banking that I really fit into and support me along the journey. It's all related to tech.

My educational background is in computer science, but I'm not really digging into coding. In the long run, I was encountered big projects in system implementation. I was quite invested in the retail lending team, such as credit cards or KTA, and I feel good. Not only that I was still working with the IT team on the technology, but it is indeed necessary to have someone being the bridge of tech and business matters. I kinda fit that position.

My second niche was before the term "big data", but what we did was basically the origin of data science. One of the great projects I've worked on is creating a specific scorecard for Indonesia given that I was working in the global bank. We've learned so much from the headquarter team and the implementation projects. That's when my passion grew, on how to utilize technology to simplify human work.

What is the turning point that makes you decide to enter the tech investment industry?

After 13 years of working in the banking industry, mainly in the capital loan for MSMEs, my curiosity arose on how early-stage tech companies raise funding. I've searched for ways to learn about this but banks don't do that. Also, there were not enough sources around Southeast Asia back in 2009-10. I realized that I can't do this through banking, so I quit.

Prior to that, I started creating a small private fund for early-stage investment named Kinara. The business was based out of curiosity and craving for digging some more. From then on, funding becomes a necessary foundation, but that is not solely the problem. We need the whole ecosystem to work, one way to get closer to that is through the community. That time, I also had some talks with my fellow friends about coworking space. One thing led to another, since we haven't settled on a building, we can use this opportunity to create a business, have an office and gather a bigger entrepreneur community.

We finally had an office, the coworking space named Comma. For a while, I was also involved in a crowdfunding platform for creative projects called Wujudkan.com. The cycle goes on with the entrepreneurship ecosystem, raising funds to invest, creating coworking space to tighten up communities, and crowdfunding for creative business. I've learned bit by bit how to run a tech startup.

How does it feel to build your own venture? What kind of lessons have you learned during that time?

I believe in the concept of learning by doing, that's what I did with the first two ventures. In fact, running a company is hard, but it is harder when you have to run three.

At that point, I was starting to be a full-time partner on Patamar and decided to focus on that. With my knowledge and experience, I know that I would be better focusing on the investment side of the ecosystem.

When did you realize that you grow interest in this impact business and investment?

My last corporate job was with Bank Sampoerna, I was in charge of the micro-credit department. It is kind of heavy on impact. My biggest question at that time was "How to apply my experience in the financial industry for something impactful, but still under the same framework?". Along the way, I was getting more invested in the idea.

Starting with Kinara, my network is expanding, then I met my current partners in Patamar. Back in 2014, they were raising a fund for Southeast Asia and I decided to join. Although I'm not a co-founder, part of me always feels that this is my own fund. Since I am also a partner, that counts as my skin in the game.

In Patamar Capital, how did you do fundraising? Considering the different angle with most mainstream VCs

This might not always be the highlight, but VCs, funds like us are all fundraising, just like startups. We did pitching to the investors, the process is practical as usual. First, we'll provide them insights on the industry, startup, and the Southeast Asia region before detailed discussion about our fundraising objectives. Our investor base is global, some of them highly concerned about the impact, while some find it as a "nice to have". However, of all our investors, there will always be a financial return target, some even very specific. Our biggest investors are impact-focused, therefore, they closely monitor the metrics, measurement, and reporting on the impact.

What was the hypothesis on the founder or business in terms of Impact Investment with Patamar?

Humans tend to look for black and white, but we are standing in the middle, like grey area. We don't choose one over the other, our objectives are both financial returns AND impact. While we're eye-ing for the company and building hypotheses around the attractive sector, we actually looking for a company in which the impact is embedded in the business. Therefore, as the business grows, the impact will follow.

Take one use case, there are some businesses that put impact after the business. Toms Shoes company uses this concept, when someone buys a pair of shoes, for instance, the company donates a pair of shoes to a child in a poor country. If we look closer to the financial model, this impact will create costs for the business. When the business goes under pressure, the cost could possibly be cut.

It is things like this that we've been trying to avoid, where the impact related to the business but in a way didn't grow together. Some businesses have set aside revenue for impact, yet it is still cost-structured. It may be consistent today, but who knows what the future holds.

Take another example, Sayurbox. With the current business model, as the growth continues, they need to look for more farmers/suppliers. Instead of creating a cost, the impact to farmers grows along with the business. As a fund, it is only fair to say that we are after both impact and profit.

In Patamar, our impact thesis includes financial services, SME and agriculture, healthcare, and education. We invest in these sectors because it is closely involved with people in the aspiring middle-class level, which means most of the people in this country, including the grassroot.

Patamar Capital aside, do you have any particular interest in another impact sector?

Personally, there are two things I've always been interested in but they are outside of Patamar's impact mandate at the moment: environmental impact and creative industry. Why do I think of creative industry as an impactful sector? It's particularly job creation. There are lots of artists who rely on this sector. In the film industry, for example, lots of people can be employed through one movie. It is indeed impactful. Many impact investors are focused on culture preservation and arts. However, when it comes to business models, it is quite hard to define.

The key is scalability. Lots of art/culture-related businesses have issues with growth due to indefinite business models or limited scalability. In fact, I haven't seen lots of art-related companies scale fast. I'm actually thrilled to see the wave of web3 and NFT reach the art industry first. Aside from helping the artists scale by reaching the global market, the smart contract ability can generate constant royalty to the artists. Again, as a tech geek, I have always been keen on this area.

What is your personal aim in this impact investment industry? How about the long-term gain?

Personally, the reason why I started this might be different with some of my partners with the western point of view. They have done it before, in the US-Europe and they look for new markets to implement the concept. I started as an Indonesian who sees great potential and opportunities to improve the life of 270 million people in Indonesia, 600 million in Southeast Asia.

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In my definition, improving life is done by increasing income or improving the currently available product or services with higher quality and accessibility. For me, the personal aim is to see more Indonesian people and in SEA, to live a decent life. There is actually one thing that I'm still learning and exploring the solution, on how to improve the wealth distribution in SEA's countries, especially Indonesia.

If we look closely, All the biggest companies are centralized in the capital cities. There is very few large corporations headquartered in cities outside of Java. In the US, for example, different states have their own giant company. I'm kind of afraid if everything revolves around Jakarta only, it won't be healthy. I don’t know the solution yet, but that’s one of the big goals I’m still trying to discover.

We talked about all the potential and benefits of running the impact investment, but what is the worst-case scenario if it doesn’t work out?

In fact, the 'Holy Grail' is to invest in the impact companies and still generate financial returns. If the cycle completed, there will be more investors to enter this industry. Who didn't want to grow money, plus make an impact? However, if it doesn't work out, the impact investing industry alone will still be there, but probably the money will only come from philanthrophy sources. Only, the impact investing industry wouldn't scale up. Once it stops scaling up, that's my worst-case scenario.

To wrap this up, what can you say about the projection of impact investment in Indonesia? Also, to those who are building impact businesses in the country.

The impact industry is expanding and growing. I find it interesting when there is an intersection of impact-focused investors with more traditional tech VCs. A report by Angin in 2020 on Investing in Impact in Indonesia shows many tech VCs are starting to invest in the impact business and I think it's very healthy for the ecosystem in order to grow.

We also saw many interesting and impactful projects that failed to attract investors due to inconsistent business models. Equitiy investors like us, will most certainly look for scalability. For equity investors, it is a high risk, a high return, therefore, entrepreneurs should also think about how to scale and expand their business  That is not easy, but it is possible. Note that this is not the only way to grow a business, but if you're looking for equity investors, that is the reality. You can also choose to grow your business more slowly, but the consequence is that you may not be able to access the available equity-based capital.