New & Noteworthy
Investing For Global Impact: Be Early, Be Patient
By Michael Schlein and Diana Taylor
May 16, 2012
Over the last several years, the world has woken up to the enormous market potential of serving 2-3 billion people at the base of the economic pyramid. A growing cadre of investors recognizes that we can create new ways to meet the needs of this huge population in a sustainable, business-like way. A new wave of socially responsible funds, institutional investors, microfinance investment vehicles, banks and even conventional venture and private equity funds collectively have raised billions to invest in social enterprises.
Some portion of the optimism stems from the success of microfinance – the provision of financial services to help those living in poverty. Today, microfinance has grown to reach over 200 million clients around the world who previously were ignored by mainstream financial services providers. As a result, 200 million people have access to loans and an increasing array of services including savings, insurance, payments and remittances that help them improve their lives and weather financial uncertainties.
Most of the incoming money, however, has been focused on more established enterprises. The newest, smallest – and perhaps, most innovative – companies are left out, considered “pre-investable.”
Conventional investment strategies may not fit the emerging demand. An April 2012 report from the Monitor Inclusive Markets in collaboration with the Acumen Fund finds the impact movement hampered by a “lack of sufficient absorptive capacity for capital” – that is, “an imminent lack of impact investing opportunities into which large amounts of capital could be placed investors’ required rates of return.”
This shortage does not bespeak a lack of bold innovation among entrepreneurs. A host of new entrants, many of them based in Africa, Asia and Latin America, are pioneering innovative solutions to help the poor access quality financial services, building on technological advances such as the spread of mobile phones, expanding access to the Internet, and new ways of doing business with cloud computing and big data analysis to improve outreach, reduce cost, and increase convenience and affordability. Frontiers include:
- Mobile phone-based businesses aspiring to create a world of branchless banking that may include services like savings accounts, remittances, credit and micro-insurance;
- Specialized credit to finance micro, small and medium sized enterprises, housing and education, and sustainable energy initiatives;
- Online or social media approaches that are pioneering peer-to-peer lending and other internet-based financial services;
- Pay-as-you-go or lease-to-own models for energy products, modular housing and other “embedded” financial services.
These start-ups have the potential to both complement and disrupt completely our concept of how to provide services to the poor. They run into trouble, not because they don’t have passion and ideas, but because they face extraordinary challenges in undeveloped markets – isolated and uneducated customer bases, suppliers with limited capabilities, and poor infrastructure, to name just a few. They need formidable resources – financial and managerial – to successfully prove their new business models and technologies.
Can impact investors provide the right kind of help at the right time? At present, as the Monitor report notes, “few impact investors seem prepared to provide money and technical assistance in these earlier stages…This poses the question: how will promising inclusive business models get to these later stages where they become investable without support earlier on in their journey?”
What’s required on the financial front is patient investing, focused on businesses that are earlier in their development cycle than those normally considered “investable.” This capital must be risk-tolerant, provided in combination with technical and strategic expertise, as well as access to potential partners and, when appropriate, later-stage investors. At this critical stage, small amounts of capital with hands-on support can have a huge impact.
To that end, Accion has launched a new initiative – Venture Lab – dedicated to providing seed capital and management support to start-ups at a stage when their product or service is ready to test the market but has not yet proved its ability to generate revenue. The amounts are small – usually $100,000 to $300,000 – but tailored to the needs of companies at this stage. Venture Lab will provide not only convertible debt and equity to portfolio companies, but also a dedicated team to assist with early-stage tasks such as path-to-scale strategy, analytics, financial modeling and business development
Small amounts of well-deployed capital can make a big difference in the lives of individuals; we see this every day in the microfinance industry. We are confident that the same will prove true of investment capital for those trying to meet the broader needs of the huge market at the base of the pyramid. The right amount for the right company in the right market may have a truly disruptive and catalytic effect.
Michael Schlein is President and CEO, and Diana Taylor is Chairman of the Board, of Accion, a global non-profit organization dedicated to building a financially inclusive world. Accion’s Frontier Investments and Venture Lab both provide patient capital and support to financial inclusion entrepreneurs world-wide.
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