Building A Social Entrepreneurship Ecosystem In Ecuador With Local Investors

Building A Social Entrepreneurship Ecosystem In Ecuador With Local Investors

Most impact investing in Latin America so far has eschewed startups looking for investments of $10,000-$500,000. There’s microfinance for really tiny rounds and institutional funding for $1 million-$2 million and up. But not much for the missing middle.

That’s why Michelle Arevalo-Carpenter cofounded IMPAQTO Capital in Ecuador. Her aim: to attract local investors and, in the process, prove to international funders that social entrepreneurs in that middle range can generate both profit and impact. Plus, she wants to boost investing in the Andean region, which, she says, is often ignored.

“In North America or Europe, the view of Latin America is usually Mexico and Brazil,” she says. “But there are over 19 flyover countries with social enterprises that are overlooked.”

After a career in human rights law, Arevalo-Carpenter returned to Ecuador in 2013 with an interest in social enterprise. But she mostly encountered a lack of understanding about the viability of impact entrepreneurship, if not outright skepticism. So she decided what was needed was “an ecosystem of people who understood that you could do both enterprise and impact,” she says.

With that, she cofounded IMPAQTO Coworking, which, according to Arevalo-Carpenter, was the first such place in Ecuador. Eight years later, there are five spaces in operation. A few years later, IMPAQTO started an accelerator, which now serves seven Latin American countries. And they also launched a consulting service aimed at large NGOs.

Local Checks

But more recently, Arevalo-Carpenter started pondering what to do about the lack of funding for social entrepreneurs. While investors from abroad would visit, they tended not to follow through. What was needed was to develop local investors—businesspeople who understood the local context and could reduce the risk for international funders, potentially attracting much larger investments from those deeper-pocketed firms.

The solution: Form a fund called IMPAQTO Capital with money from local investors who had a nuanced understanding of the market and could help fill the investing gap. “This is very different from other funds,” says Arevalo-Carpenter. “We’re after a lot of local checks.” The goal is to build an ecosystem in the region by educating local folks about the opportunity in impact. Ultimately, the plan is for international funders to piggyback on IMPAQTO’s due diligence and come in as co-investors.

Fundraising started in late January aimed at raising $2 million, the better to make investments of no more than $10,000 to $15,000 a piece. Arevalo-Carpenter expects to have the first $1 million raised by October, at which point she’ll start making her first investments. The effort is what she describes as a “pilot”. “We have a hypothesis to prove,” she says. According to Arevalo-Carpenter, IMPAQTO has a pipeline of potential companies already established to draw on.

The fund’s focus is on revenue-based financing, through which companies pay back their investments to IMPAQTO as a percentage of revenue. Arevalo-Carpenter figures it will take four years to disperse all money in the fund and another four to get paid back.

During Covid, IMPAQTO’s coworking sites were closed for about seven months, then opened at around a 30% level. But demand for the company’s consulting services skyrocketed. So the coworking staff was trained to do online events for those clients. For example, one NGO hired them to run a virtual hackathon during which volunteers built ways to address the rise in gender-based violence during the pandemic. One group of designers came up with a plan to include messages in tampon boxes with information for women about how to seek emergency help.

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