Guest Articles

Monday
February 4
2019

Ami Dalal

A Microfinance Pioneer Branches Out: Early Learnings from FINCA’s Experiences as an Impact Investor

The pace of innovation across all industries is accelerating rapidly. Financial institutions, corporations, NGOS and even central banks are eager to accommodate this pace, working overtime to process breakthrough ideas, better adapt new technologies and invigorate their practices. But how can impact investors keep up? Drawing on successful initiatives born in other sectors, we at FINCA have taken similar steps toward strategically incorporating rapid innovation into our work. And we’ve already begun to accumulate important lessons on how best to approach these practices.

The move to create strategic internal functions for processing breakthrough ideas is popular, widespread and successful. For example, the Bank of England launched an accelerator to keep up with innovation in the financial services space, explaining that it “helps us understand emerging technologies firsthand, enabling us to better recognize as well as monitor the incidence and integration of these developments in the market.” In India, YES Bank launched a program called YES SCALE to support startups in sectors crucial to the country’s economic future. In the corporate world, Salesforce launched an impact fund to complement “previous investments in companies driving positive social change and … to strategically invest in companies built on the Salesforce Platform.” And in international development, INGOs are diving headfirst into partnerships with companies that offer innovative, market-based approaches to development challenges.

Our organization, FINCA International, also saw a need to better understand and evaluate emerging innovations and their impact on our future and our customers. We launched FINCA Ventures, a systematic mechanism to support innovation, for two reasons—we believe it will improve our business strategy, while also furthering our mission. We know that emerging technologies, particularly in basic services like energy access, create a demand for new financial products as productivity grows. And we believe that FINCA’s assets and on-the-ground infrastructure can support these basic service innovations to grow faster and smarter. If we then paired access to basic services with financial inclusion, we could accelerate our ability to achieve our mission of alleviating poverty.

Over the past two years, FINCA Ventures has made seven investments in six social enterprises operating in sub-Saharan Africa. Our portfolio companies are working to boost the productivity of poor and low-income families through improved access to life-enhancing basic services or new agriculture business models. And by lifting productivity, these companies are increasing household income and driving demand for essential financial services.

While we are still in the early stages of this journey, we’ve learned a few lessons along the way that influence how we seek to partner and invest.

 

Building Strong Relationships with Co-Investors is Crucial

As we look across the FINCA Ventures portfolio and our work over the past year, we’ve noticed that we communicate with our co-investors nearly as much as we do with our portfolio companies. We seek to build partnerships with our co-investors, so we can think together about how our individual organizational competencies and networks can collectively support our shared investees. We are sounding boards for each other, providing mutual guidance on how to provide investee advice, on the relationships and networks we want to introduce, or on how to respond to opportunities, setbacks, successes and failures. And while we don’t always agree, we collaborate with a shared focus on the investee’s growth and success.

From the get-go, we spend time with our co-investors to understand their goals, motivations, strengths and approaches, and we try to be transparent about our own. When it works, this approach becomes a force multiplier. For instance, our co-investors in Amped Innovation are Schneider Electric and Starway (the investment vehicle of Amped’s manufacturing partner in China). Together, we’re able to provide diverse but complementary perspectives on the market, product sourcing, manufacturing expertise, strategy, customers and competitors. In Amped’s own words, this is a strategic value-add well beyond the capital we each bring to the table.

 

Delivering Value Beyond Capital Requires Persistent Cultivation

Every investor seeks to provide counsel to their portfolio companies, and experienced investors can help companies avoid others’ mistakes. At the same time, one thing we continue to consider is how to deliver specific, tangible value that goes beyond the capital that we provide. As a global microfinance pioneer, FINCA has a clear core competency in delivering socially responsible financial services. The challenge becomes how to build the bridge between one of our microfinance subsidiaries and the dynamic needs of an early-stage social enterprise. This type of post-investment support requires cultivation—it takes time, trust and dedicated resources. But as companies in the FINCA Ventures portfolio demonstrate ways to lift productivity and income, there is a natural demand for financial products and services. We’re optimistic that financial services combined with basic services can drive productivity growth in measurable ways.

While it’s still in the early stages, one of FINCA’s microfinance subsidiaries in sub-Saharan Africa is actively exploring how to provide savings accounts to smallholder farmers at our investee, Good Nature Agro (GNA). GNA’s business model is proving that farmers can more than triple their incomes, and a partnership to expand financial inclusion for these farmers, many of whom do not have a savings account, will enable them to grow their businesses and improve the quality of life for their families.

 

Seeking Businesses on Different Growth Pathways Demands Patience

We are early-stage impact investors, not venture capitalists. We seek to support bold and innovative social entrepreneurs who are creating transformative solutions. In doing so, we fully recognize that our portfolio companies will have varied growth rates and different pathways to scale. Many kinds of businesses are deserving of catalytic equity capital, and by supporting companies that offer different growth pathways, we acknowledge that patience in “patient capital” needs nuance. So, as we are investing in an array of business models, we may need to think about structuring exits more creatively. We are watching how others in the market approach this challenge (for instance, through different dividend structures) as well as considering how to engage potential buyers earlier in a company’s lifecycle, in coordination with company management.

Many of the entrepreneurs we work with have spent years building their products or services. As they accept our capital, they acknowledge that they now have a new stakeholder to “report to,” and worry about how this will impact their businesses. We hope that by developing collaborative relationships with our co-investors, by focusing on investor competency in our support to entrepreneurs, and by recognizing that markets need businesses on different growth pathways, we can meaningfully contribute to sustainable and impactful growth.

FINCA Ventures is deeply anchored in the FINCA mission and in how we think about financial inclusion. Some 35 years after launching our work in microfinance, we are adjusting our lens and scope to support even greater impact, and we’ll be sharing what we learn as the journey unfolds.

 

Ami Dalal is Vice President at FINCA International and Managing Director of FINCA Ventures.

Photo credit: Unsplash

 


 

 

Categories
Finance, Investing
Tags
financial inclusion, impact investing, impact investors, investment fund, microcredit, microfinance, poverty alleviation, social impact