NB Financial Innovation
Blueprint for Ignition: How the Catalyst Fund Got Started
Impact investors collaborate to address funding gap for startups
The emergence and rapid adoption of new technologies like the Internet, cloud computing and smartphones are transforming the way the poor and underserved access financial services. Startups are at the cutting edge of these innovations. They are catalyzing the next leap forward in financial inclusion by proving new ideas for enabling consumers and small businesses to access a wider range of high-quality, affordable financial products and services. As exciting as these developments are, inclusive fintech startups frequently suffer from a lack of capital and support. The result is that promising ideas and entrepreneurs often don’t have the “runway” to experiment with ideas and scale new businesses.
Accion Venture Lab is an impact investing fund that was built to address this “pioneer gap” in funding seed-stage financial inclusion startups, but too often the companies we see are still pre-investable. Since our first investment in late 2012, we have reviewed over 1,100 investment proposals, ultimately investing in 24 of the most exciting financial inclusion startups in the world. While we are incredibly proud of our portfolio, the acceptance rate is indeed daunting for any new company that approaches us. In some rare cases, we decide to invest based on the strength of an idea and team alone – i.e., at PowerPoint stage – even when there hasn’t been much other progress. But in most cases, we look for tangible growth indicators, usually a successful prototype or pilot that gives us the confidence that these companies could potentially grow into world-changing businesses. Even though we are one of the earliest investors out there, we still find ourselves frequently saying no to startups with great ideas and innovative business models to serve unbanked and underbanked populations because they are just “too early.”
In 2014, the Bill & Melinda Gates Foundation organized a roundtable that brought together a group of investors with experience investing in emerging markets. We challenged the roundtable to identify common barriers faced by financial inclusion startups in developing countries and to brainstorm about potential approaches to bolster their success. The investors, including Venture Lab, struggled to support companies that we found promising, with exciting potential impact, but were all in the “pre-investment” stage.
Despite the great progress made in the impact investing space in building an ecosystem for startups, the consensus at the roundtable was that supporting very early stage startups remains a challenge. Incubators and accelerators exist across the world. They provide very valuable services for networking and sharing knowledge and they are beginning to establish track records, but they are only pieces of the puzzle. Startups face steep learning curves and intense management challenges while they scrape together capital, develop their product and platforms, and try to focus on their first customers. The roundtable highlighted that the best young startups need fast, catalytic funding with few strings attached coupled with mentoring and expert support that propels them down the runway towards a minimum viable product, capital-raising, and growth.
Following the roundtable, Venture Lab continued working closely with the Gates Foundation to develop a collaborative solution. We needed a different kind of fund, one that maximized support for startups and got them to an investable “proof point” by leveraging what investors do best – screening and advising promising businesses. Our design coalesced around three core functions:
- Grant-making: A funding mechanism that works the way startups do – something quick and flexible that could give them capital when they need it.
- Advisory services/mentoring: Expertise through advisory services and early involvement of investors through mentorship, their networks and insights.
- Learning: Insights from startups on business and technological innovation in new financial products and services, their impact on financial inclusion and lessons learned from establishing these businesses.
By summer 2015, we came up with the blueprint for the Catalyst Fund. The intervention is specific: a fund that provides small, flexible grants of up to US $100,000 alongside mentoring and advisory services from investors and a robust learning agenda, dedicated to supporting innovative but pre-investable inclusive fintech startups. Equally important, we joined the fund’s dual objectives – catalyzing startups and shaping the financial inclusion field – by targeting “proof points” in innovation, such as a new way to engage with customers digitally or to lower the cost of credit. We believe that these proof points will enable startups to raise capital while demonstrating how the financial inclusion field can reach, serve and benefit new customer segments.
The Catalyst Fund aims to accelerate the financial inclusion industry’s collective understanding of new business models and technology that make it cheaper and easier to deliver financial services to unreachable or underserved customer segments. We not only fund promising startups, but we support them with expert advisory services while generating insights for the industry at large.
The Venture Lab team worked with the Gates Foundation to identify a pool of like-minded partners to join this effort. JPMorgan Chase & Co came on board early on, contributed substantial input into the design of the learning agenda and the advisory services and ultimately committed to supporting these components. Leading impact investors Quona Capital, Gray Ghost Ventures and the Omidyar Network then joined the partnership as investor committee members. The Rockefeller Philanthropy Advisors joined us to administer the fund as fiscal sponsors. We looked to BFA for their specialized expertise in the development of inclusive financial services, to cultivate the learning agenda and run the advisory service engagements.
In December 2015, the Catalyst Fund was launched at the Financial Inclusion Forum in Washington, D.C. This event was hosted by the U.S. Department of the Treasury and the U.S. Agency for International Development (USAID) and was attended by Treasury Secretary Jacob J. Lew and Bill Gates, among others. Catalyst Fund stood alongside a number of other great initiatives that are committed to accelerating progress on financial inclusion efforts in the United States and worldwide.
Here is how the Catalyst Fund will work: Grantees will be selected by a sponsoring investor and mentored by that investor, who also is a member of the investor committee. As investors already meet many companies every week, they can suggest companies they find appealing, but are still too early for investor capital, for an investment by the Catalyst Fund. Selected companies would receive a quickly disbursed grant, technical assistance and a first step that could lead to a deeper relationship with a prospective investor. Recipients, either directly or over time, would use the funding as operational runway to iterate as necessary and achieve established milestones. Startups would benefit from mentorship by motivated, prospective investors, whose engagement would improve the startup’s investment readiness. Investors would benefit by building relationships with high-potential, and ultimately investable, startups. For the benefit of the broader sector, all lessons learned would be published for shared learning, knowledge building and promoting the insights from the learning agenda.
In the second quarter of this 2016, we expect to evaluate candidates for our first cohort of Catalyst grantees and issue our first grants. Over the next three years, Catalyst will deploy $2 million in grant capital and $1 million in in-kind advisory services to about 20 startup enterprises globally. Currently, BFA is leading the effort to finalize an investment process. We’re also working together to establish advisory service modules and a learning agenda that will ensure we meet goals of accelerating early-stage ventures and sharing insights with the financial inclusion industry.
We are eager to roll up our sleeves and test this new model for leveraging investors’ sourcing, networks and insights to ultimately answer the funding gap for innovative, new startups in the financial inclusion field. We are equally excited to generate new proof points for financial inclusion, targeting opportunities in the role of emerging data, smartphones, user experience, social networks and non-traditional ways to offer, fund or underwrite services and products for the unbanked and underserved. While we are just at beginning stages, we believe the Catalyst Fund has the potential to develop new funding and support mechanisms and hopefully accelerate the next generation of inclusive fintech startups around the world.
We can’t wait to get started.
Image credit: Vern via Flickr.