Tara Sabre Collier

Impact Investing in the Base: A chat with Vox Capital’s Daniel Izzo

At GroFin, one of our impact objectives is to fulfill the need for vital goods and services for a critical mass, especially at the base of the pyramid. GroFin specializes in financing and building the small and growing businesses [SGBs] at the base of the pyramid, and these SGBs are among the biggest service providers to the BoP.

As we look to expand our BoP portfolio, I hoped to learn from fund managers with real-world experience doing just that. Luckily, I had access to the insights of Daniel Izzo, who took some time out to chat with me. Daniel is the pioneering co-founder of Brazil’s first impact investing fund, Vox Capital, which focuses exclusively on BoP-serving businesses.

Vox has invested in 12 companies, six with equity stakes and six with convertible debt investments. Although the Brazilian market and the African/ Middle Eastern markets (where I work) are quite different, I knew Daniel would have some cross-cutting insights about the ins and outs of reaching this demographic.

TSC: What percentage of businesses actively try to serve the BoP in Brazil?

DI: Less than 10 percent of business targets them. Most corporations are serving the C segment (the emerging middle class) and some are yes gradually blending into the D segment (one to two minimum wages per household). Most companies skip the E class (less than one minimum wage household) entirely – it’s just very hard to reach them both in terms of pricing and distribution. So generally the government administers any goods/services for this group or at the very least, they subsidize it.

TSC: When we last chatted, you mentioned you had lots of potential investees, even more than you can process. Is that still the case? And if so, how do you build so much deal flow for such a specific niche?

DI: Well, yes, the pipeline is pretty good. For example, we have a five-year investment term and it’s only at year 1.5, and we have already found 60 percent of the companies we want to invest in. Let’s remember, we want to invest in 10 companies over the entire term and, however good the pipeline is, the businesses still have to be evaluated as far as viability.

So to build the pipeline… you have to be around, you have to go local, to go to events, talk to people, read blogs, talk to journalists – we are always talking to people and building deal flow. A lot of good comes from the accelerator programs and the ecosystem. However, we don’t limit ourselves to the social entrepreneur labels – the best entrepreneurs we find are not even the ones who call themselves social entrepreneurs.

TSC: So, for example, would you also go within those BoP communities to find local entrepreneurs who are identifying market gaps?

DI: They almost never are from those communities because the most scalable entrepreneurs rely so much on networks education and sophistication to become scalable, things that, unfortunately, are still lacking due to the poor educational system we have in Brazil.

Whenever we have an entrepreneur with quality and a good business idea, we try to implement a lean start up methodology and take them to hit the market with an MVP (this refers to the Minimum Viable Product, as espoused within Eric Ries’ Lean Start-Up method). We will strategize and evolve as the market requires.

We also are very lucky to have a co-creation methodology for designing business models in collaboration with low-income communities, which we implement in conjunction with Plano CDE. Plano CDE is a market intelligence company focusing on low-income communities, and also one of our portfolio companies. It’s a strategic asset in our company, not only in terms of being a growing company, but also providing data and information that helps us better understand the needs of the BoP.

TSC: Given that businesses can have mixed audiences, and even really big companies like Lojas Americanas or Bompreco have BoP customers, how do you qualify a business as BoP-serving?

DI: We do this in the due diligence phase by focusing on the problems they solve and whether these problems are critical to the BoP. When we look at solutions, we look for something designed for the severity and nature of the problem within lower-income communities, but designed with such a quality that it can be desirable by any income demographic.

For example, when you look at low-cost education in Brazil, it is intended for the BoP and unfortunately, doesn’t end up helping advance the (student) as much as it could, in cases where it delivers a level of education that no upper income person would ever accept or ever want to send their kid to. We are trying to help cut down on this because even though it serves a market gap, it extends certain disparities. We are trying to invest in a way that actually addresses the inequality of opportunity here in Brazil.

On the other hand, our investee, Sautil, started off addressing a specific problem faced by the BoP, but the product was so good and relevant, it ended up generating lots of demand even among upper income groups.

TSC: And what is Sautil and what do they do?

DI: Sautil offers information on free or governmental health care options based on geolocation – 75 percent of the Brazilian population does not have private health coverage and with the current system for government online communication, a lot of people just don’t know where to go or where to get information on basic health service. So Sautil has geo-localized heath care information – but what happens is that the large insurance companies that serve the upper income segments also ended up wanting to buy it to reduce their costs.

At first, this was a dilemma for us – it wasn’t intended for this population. But then we realized it was a good indicator. It is a relevant service for any population, and now we are ensuring that all people with or without health insurance have access to information. And that is once again improving equality of access and equality of opportunity here in Brazil.

But anyway, we still want the BoP to comprise over 50 percent of customers for our investees.

TSC: Have your investees had specific challenges that relate to serving this market? Anything from irregularity of cash flows to security to distribution problems, anything that cuts across several investees?

DI: Most of all, they are linked by distribution problems. Because you have to go to the last mile to reach the BoP, especially when they live in suburbs and in the periphery. The delays in transport then make the development curve of the business longer. So you have a longer challenge as far as cash burn and cash flow. If, for example, the cost of reaching the BoP is too high and transportation or access costs make it so they have to include other markets, then OK – we want the business to be viable. But we have to see a strategic plan that still addresses the mission and the BoP.

It’s easier to deliver services than products, so we take this into consideration.

In general, we try to launch as fast as possible and then research often comes from learning about customer response and being able to pivot, it’s that lean start-up methodology again.

Tara Sabre Collier is an impact investing specialist at GroFin Capital, a pan-African impact investing fund.

Impact Assessment, Social Enterprise
Base of the Pyramid, impact investing