Supporting Financial Health Startups: Four Lessons for Impact Investors, Foundations and Governments
As the global fintech venture capital market grows rapidly – topping $50 billion in the first half of 2021 alone – social-minded investors have shown growing interest in technology’s potential to democratize access to financial services in emerging markets and other parts of the world where inequality is rampant.
Over the past few years, Village Capital has run Finance Forward, a global coalition created with MetLife Foundation, Moody’s, PayPal and local partners to support early-stage entrepreneurs building tech-enabled solutions around financial health in the United States, Latin America, Europe, the Middle East and India. We recently published a report that analyzed data from the more than 1,000 companies that applied to our Finance Forward programs around the world.
The findings paint a picture of the global state of impact-minded fintech startups – what we call financial health startups. These are market-based innovations that are focused on democratizing access to financial services and economic mobility – including tools and services that help people manage their income, get a loan when they need it and plan for their financial futures.
The report has lessons for impact investors who want to go further in advancing equitable fintech investment – and for foundations and government leaders who can also play a part in growing the ecosystem for financial health innovation. I’ll discuss some of those lessons below, sharing findings relevant to each of these three stakeholder groups.
Impact Investors: Seek out female-founded ventures
There is a well-known gender gap in fintech: A 2020 Deloitte study found that less than 7% of global fintech founders are women.
Our applicant pool paints a slightly rosier picture for impact-driven companies, but still shows only 29% of financial health startups reporting a female founder or co-founder. That ranges from 15% of startups in Europe reporting gender diversity, to 45% in the United States.
This needs to change. Hundreds of millions of women around the world are already excluded from the financial system, and it’s a problem if new technology is designed without their voices or perspectives.
Investors who are committed to improving equity and access should make a point to seek out female-founded fintechs. That could be as simple as looking beyond your traditional networks and reducing reliance on the “warm introduction,” or it could include a more fundamental change to your due diligence process. On a deeper level, there has been some compelling research around steps that investors can take to reduce implicit bias in their due diligence – for instance, asking consistent, objective questions to all startups that you speak with, in order to avoid the known bias that investors tend to ask more risk-oriented questions to female entrepreneurs.
Impact Investors: Take a long-term approach that includes post-investment technical assistance
It’s important for impact investors to offer more than just catalytic capital. They also need to make sure to factor in the need for continued venture building support.
One place investors could start is impact metrics. Impact measurement is a growing priority for impact investors; one study found that 83% of impact investors consider metrics “very important” when deciding whether to make an investment.
Yet many early-stage entrepreneurs lack the resources they need to track and analyze those metrics. They’re too busy running their businesses. Data from our applicant pool demonstrates that the majority (72%) of financial health startups around the world still do not track impact metrics. In India, Latin America and the United States, the number of startups that track metrics using the most common standard systems (IRIS+ and GIIRS) is less than 30%.
This creates a Catch-22: Investors are requesting impact data from their portfolio companies before they open their wallets, but entrepreneurs lack the resources to provide that data until they receive investment capital.
There are some models to follow on how to offer entrepreneurs post-investment technical assistance, focused on impact metrics as well as other pain points. Mercy Corps Ventures, for example, tailors its assistance to each individual startup, instead of using a “one size fits all” approach. Accion Venture Lab provides all of its portfolio companies with in-house technical assistance, which helps it maximize the success of these businesses while also informing its future investment decisions. And Acumen has spun off its “lean data” methodology to create 60 Decibels, which helps social entrepreneurs collect customer data from the ground up.
Foundations: Support financial health startups with catalytic capital
This approach seems to be very common for financial health startups today: Our report found that one in four financial health startups receive philanthropic funding.
This philanthropic support comes in a variety of different methods, the most common of which is grants – for instance, small gifts to advance the development of a certain product, or prizes from pitch competitions. But more and more funders are making direct investments in early-stage startups.
For instance, MetLife Foundation recently launched its Financial Health Innovation Fund (which is managed by Village Capital), to invest directly in early-stage financial health startups. The foundation made a program-related investment to launch the fund, giving it the opportunity to achieve both impact and financial returns on its investment, and sending a powerful market signal that foundations can use different financial tools to seed the innovation economy.
Policymakers: Create rules and regulations that promote, not inhibit, fintech innovation
Regulation can make or break fintech innovation in a given country or region.
There is a good reason that fintech regulation exists: Consumers need protection, and financial institutions need guardrails. To create a regulatory process that doesn’t stifle innovation, some countries have introduced “sandboxes” and experimental policies that allow innovators to develop new approaches, while providing an onramp to compliance. That often takes the form of “startup acts” – legislation specifically designed to support startups, address regulatory barriers and provide a legal framework for entrepreneurship. For instance, Mexico was the first country in Latin America to enact regulations that set nationwide standards that govern fintech innovation.
Other startup bills are broader. For example in Tunisia, the government passed the Tunisia Startup Act in 2018 to incentivize entrepreneurship in the country. The legislation was praised as a “bottom up” bill that was designed with input from entrepreneurs. It included government support for entrepreneurs (for example, exemptions from corporate taxes, and a “startup grant” that covers founders’ living expenses for a year), while also adding clarity to the definition of a startup
But as promising as these developments are, more progress is needed. In order for financial health innovation to thrive around the world, we need all actors, both private and public, to re-evaluate the role they play in supporting startups. We hope our report can help provide some guidance – and inspiration – to these efforts.
Photo courtesy of PICHA.