Early Risks, Big Returns
Reconsidering what’s “investable” in impact investing.
Impact investing is on the rise, right? A 2013 JP Morgan report indicates that 99 surveyed investors committed $8 billion toward impact investments in 2012, and they intended to commit $9 billion in 2013.
But these numbers can be misleading: Including investments in traditional developing market industries, and double-counting limited-partner investments into funds and the fund investments themselves inflate promising statistics. A narrower definition of impact investing reveals a much lower volume of activity and pace of growth. Why, despite the clear interest in doing more, is so much money waiting on the sidelines?
Lack of quality dealflow remains one of the most common complaints slowing the growth of the impact investing space: The same JP Morgan report and a Village Capital survey both identify a lack of investable opportunities as the biggest barrier to deploying more capital.
Part of the challenge lies with the enterprises in question: It’s hard enough to build a business that makes money in emerging markets without focusing on social impact. But that’s only part of the issue. Investable companies are out there, but too often we’re looking in the wrong places—or, we need to reconsider what’s “investable.”
So far, Accion Venture Lab has found a rich pipeline of investable companies where others haven’t, thanks in part to our three-prong strategy: investing earlier, tolerating more uncertainty, and concentrating on big-picture priorities over returns. Granted, we’re new at this, but we believe we can cultivate a new wave of market innovators and feed the pipeline for later-stage investors. So far, we’re thrilled with what we’ve found.
Venture Lab focuses on post-R&D companies that are often pre-proof of concept, pre-revenue, and even pre-operational. To most investors, these companies are squarely pre-investable. Even impact investors typically prefer to invest at a later stage when concepts are proven and risks are lower. As a result, innovative enterprises often fall into a “Pioneer Gap” and find it difficult to access the capital and support they need to prove new concepts.
But we see this as our “sweet spot” and an opportunity to get in on the ground floor with the industry’s next leaders. We make this work by being thesis-driven with investments: We focus on trends such as increasing mobile or Internet connectivity and “big data,” and we bet on the evolution of financial inclusion to keep ahead of the curve. For most funds driven by management fees, small investments like ours aren’t economical, particularly when companies aren’t local; we’re different in that our nonprofit status lets us follow our own rules and elevate strategic and impact considerations over pure economics.
Regardless of stage, investing in startups isn’t for the faint of heart. There’s no question that we absorb greater risk and tolerate greater uncertainty than our later-stage counterparts. But it’s easier to take risks when the bets are small—our investments average around $300,000, and we still take our time meeting hundreds of companies before we say “yes” to a handful. We also recognize that all risks aren’t created equal—certain factors, such as an uncertain regulatory environment or unreliable access to capital, may be worth the risk if the potential for impact is high enough. But we will never cut corners on management integrity, shared vision, or our confidence in the business’s ability to deliver. We may fail sometimes, and when we do, we must learn from that; but when we win, we want to win big—and not just in terms of profit.
Ultimately, we are a nonprofit, and our mission is to give people the financial tools they need to improve their lives. With our core microfinance work, the name of the game is clear: higher quality services, better outreach to underserved customers, and lower costs. With Venture Lab, we pursue the same mission but do so in what may sometimes seem a roundabout way, focused on less quantifiable priorities such as innovation, synergy with our core work and capabilities, and industry contribution. For example, the early adopters for a mobile airtime payments business or “big data” credit assessment technology may come from the middle class, where individuals have better phone and Internet access than those living in poverty. When we invest in these companies, we believe that today’s up-market innovations can be the down-market game-changers of tomorrow. This “trickle-down innovation” may happen faster than we think: Consider how quickly mobile phones have spread to more than 5 billion people. And smartphones with data access are spreading nearly as quickly—in the United States, half of all mobile subscribers now have a smartphone, a jump of 14 percent in just one year.
Again, it’s early days for us here at the Accion Venture Lab, and we certainly have our own challenges—but so far, we’re happy to report that “lack of investable companies” hasn’t been one of them.