If You Build It, They Will Come: Four Ways Impact Investors Can Boost Ecosystem Development
As a debt impact investor focused on early stage, high-impact businesses in emerging markets, I am interested in understanding and working more cohesively with equity investors. When we’re considering making debt investments through OPIC’s Social Enterprise Finance Team, it’s essential for us to better understand equity investors’ mindsets, and the likelihood that they’ll provide additional funding to support a project’s long-term growth after our involvement is over. This is especially critical in the emerging markets context, because the availability of multi-stage financing and traditional exits for equity investors is often limited.
I’ve learned that one key element equity investors use in determining an investment’s viability, sustainability and financing is the presence of a strong ecosystem. Ecosystems have an important impact on a company’s ability to recruit a capable management team, hire skilled staff, benefit from effective mentorship and source new capital for growth. While I always viewed a strong entrepreneurial ecosystem as a positive indicator for a company’s long-term success and investor performance, it has become increasingly clear that this is not just nice to have, but a necessity. And an ecosystem’s strength is even more relevant when the focus is on ensuring sustainable development impacts.
As the U.S. Government’s development finance institution, OPIC has investments in almost 100 developing countries. And as an impact investor, it is in my best interest to partner with investors who seek not only to make good investments, but also to proactively support the development of stronger ecosystems in the markets where we are active.
While promoting a strong ecosystem may seem out of scope, given OPIC’s focus on underwriting high-quality loans, a stronger ecosystem can have a direct, positive impact on these investments, resulting in higher growth and improved performance, strong repeat business and a higher developmental impact. A stronger ecosystem can also create new investment opportunities, as a more conducive environment for startups will lead to the emergence of new businesses. Further, a strong ecosystem can be a powerful risk mitigation tool, since it provides a framework and resources to support entrepreneurs.
Here are some concrete actions investors can take to build ecosystems:
Reward the Ecosystem Pioneers
It’s essential to invest in entrepreneurs who are committed to supporting their local ecosystem. Many venture-backed companies in emerging markets are pioneers in creating new regulations, market structures and business models in order to successfully launch their businesses. Companies that recognize early on the significance of proactively working with diverse stakeholders to establish and strengthen their local ecosystems benefit from stronger performance and higher returns.
OPIC’s loan to Medical Credit Fund illustrates this point. Medical Credit Fund provides financing to healthcare companies in sub-Saharan Africa through direct lending, but also by partnering with local financial intermediaries using a risk-share model that encourages them to lend to these healthcare businesses. Through its business model, it not only provides much-needed capital, but it also helps these small healthcare providers establish a track record of borrowing and repayment to build eligibility for larger bank loans. Additionally, these loans are connected to an elaborate clinical and business improvement program offered in collaboration with technical assistance partners.
In sub-Saharan Africa, where the healthcare sector is severely underfunded, Medical Credit Fund is building a financing ecosystem for its clients by connecting healthcare companies across the value chain with the capital they need to grow.
Invest Globally, Build Locally
It’s also important to target companies with a demonstrated commitment to investing in and building local staff. One of the key measurable social impacts for impact investors is job creation. This is a direct benefit to a company, since local staff are less expensive and more likely to have a long-term commitment to the market – along with deeper community relationships and greater expertise in the local market. Over the longer term, this has a ripple effect: As local staff develop professionally, they are more likely to move into leadership roles in other companies, or start their own companies within that ecosystem.
Through our Portfolio for Impact program, OPIC supports earlier stage, highly developmental companies with debt financing of up to $5 million. One of our targets is to track and measure the developmental impacts of these projects. OPIC recently closed on our first development impact loan, which went to the Africa Eye Foundation to fund operations of the Magrabi ICO eye hospital in Cameroon, a state-of-the-art facility providing much-needed cataract surgery in the region. One of the fundamental social goals of the hospital is to increase the number of local eye health professionals through the facilitation of a robust training program. The Africa Eye Foundation’s commitment to increasing the capacity of local medical professionals will enable them to recruit and retain competent staff to support sustainable operations, which has the dual impact of building out the ecosystem of eye health professionals in the region, and providing it with sufficient human resources to support expansion and growth.
Think Relationally, Not Transactionally
An ecosystem approach requires investors to bring a broader perspective to our investment strategies and project focuses. While individual transactions are important, looking at the impact of financing on other investments and stakeholders is key to building the ecosystem. Investors can do this by leveraging our networks to make introductions that can result in collaboration and partnerships for mutual benefit. At OPIC, we also focus on building long-term relationships that will allow us to grow with co-investors and provide financing to their portfolio companies. This is evidenced by our financing of investment funds that have led to viable investments in their portfolio companies – which have been vetted and supported by trusted investors that know OPIC’s DNA. Some examples are Greenlight Planet, an investee of long-term OPIC client and fund manager Global Partnerships, and Bayport Management Limited, a portfolio company of Helios Investment Partners, another long-term OPIC client.
Play the long game
Throughout this process, it’s important to target business development with a long-term perspective. So much media focus is given to Silicon Valley entrepreneurs whose companies reach unicorn status, while few people talk about the 80+ years it took to build the ecosystem that supports them – an infrastructure established by multiple stakeholders, including industry representatives, academics, lawyers, regulators and policy makers.
As an investor, I am willing to “play the long game,” which means broadening the scope of my business development process to include a wider range of companies – some of which may be premature, but could become future clients. By being inclusive in my business development, I am contributing to the ecosystem by providing feedback to these companies, whether or not I ultimately invest in them. The success of these companies and entrepreneurs will contribute to the growth of the ecosystem.
Taking this long-term approach also means looking at my role as something broader than just underwriting the next transaction. Instead, it requires me to explore new ways to leverage my role as an investor to support new market initiatives and prudent regulations, and to promote best practices that can help create a better operational environment for the company, its customers and the broader sector.
Note: The observations in this article were informed by 500 Startups’ VC Unlocked program, which provides a comprehensive look at venture investing in Silicon Valley and globally.
Dia Martin, CFA is Managing Director for Social Enterprise Finance at OPIC, the U.S. Government’s development finance institution.
Photo via pxhere.