Wednesday
February 8
2012

Daniel Gonzales

Supranational and Cross-Sector Collaboration: The Best Idea of 2011

For inclusive business to develop, it is essential to have adequate information about the habits and needs of the population at the base of the pyramid. Even though many countries in the region are developing monitoring systems for populations living in extreme poverty using mobile technology in the style of the “Red Unidos” (United Network) of Colombia’s government, and even though these mechanisms are contributing significantly to reduce extreme poverty, they aren’t necessarily listening to the voices and solutions of these communities. Mobile Metrix began operations in Brazil with a business model that identifies needs and solutions in vulnerable communities using mobile technology. Mobile Metrix also trains people in the community who, in addition to conducting reliable surveys, also open spaces for dialogue between the company and public entity that funds the research. Finally, thanks to its network of partners, it obtains the information to generate benefits to the community, not only because the decision makers have better information, but also because it is the community that ultimately owns the data and may use it however it chooses or to sell it to other players.

Another challenge that inclusive businesses face is the lack of a large-scale supply of their products and services. This happens with the global fair trade market that demands more than producers can generate. As a solution, an initiative promoted by Fair Trade USA and a wide range of global, regional, and local partners, “Fair Trade for All” was born. This is an innovation strategy that, by 2015, will double the impact for farmers who sell Fair Trade coffee to the United States, today a $1 billion annual market. Today, Fair Trade standards successfully support cooperatives and independent farmers of products other than coffee. In tea, flowers, and bananas, the Fair Trade certification also benefits small producers who are not yet part of a cooperative. Given that Fair Trade is a model that seeks to counteract poverty and empower farming communities, the fact that the independent coffee farmers can’t benefit from Fair Trade is an inconsistency and systematic exclusion within the Fair Trade system. This situation must change. In order to create a more appropriate and consistent Fair Trade model, Fair Trade USA will adapt the exiting Fair Trade standards for tea, bananas, flowers, and other products and apply them first to coffee and then to other categories over time and in permanent alliance with small farmers.

2011 also saw the birth of collaborative acceleration. Entrepreneurial support programs exist in the form of contests and access to seed capital around the world. However, personalized assistance is very limited. And when it does exist, it is usually carried out by an incubator or accelerator for “their entrepreneurs,” as if strengthening businesses was possible by a single actor. In Bogotá, the Bavaria Foundation, Ventures, Endeavor, Partners with Colombia, the University of the Andes and AVINA have created the Impact-A program to develop effective mechanisms for strengthening companies using a collaborative method of assistance. This group, expanded by their network of partners and contacts, will diagnose high-potential companies in Bogotá and work with them to implement its recommendations, assisting each business using the strengths of each one of these organizations and their partners. Companies will no longer “belong” to one or the other, and will become companies of and for Bogotá and Latin America. Among every member of Impact-A, all efforts will be exhausted to fulfill the goals established in the acceleration plan.

Even though Impact-A didn’t restrict the selection process to inclusive and green businesses, the results still showed companies with high social impact. This indicates that an important part of the innovation Colombia generates lies in the development of inclusive businesses. Without high-potential businesses with above average performance, it will be impossible to change the status quo and convince more traditional sectors to invest in this type of business. It is dangerous not to understand the distinction, as many players have positioned all inclusive businesses as high-potential businesses, when reality has shown that the great majority are subsistence businesses.

Finally, we arrive at the challenge mentioned by everyone: access to capital. At a global level, JPMorgan estimates that investment in green inclusive businesses will generate between $183 and $667 billion in profits for investors with an invested capital from $400 billion to $1 trillion in the next 10 years (Source).

The lack of access to funding is not due to a lack of financial resources but a lack of the facilitating environment described throughout the article. Some call the facilitating environment for inclusive and green businesses Inclusive Markets. There are resources, there are companies, and there are entrepreneurs in Latin America. What is missing is a facilitating environment that aligns their expectations. Investors look for consolidated companies with sizes that allow them to access traditional banks for their short-term or low-risk needs. Seed capital programs generally rely on inappropriate incentives; microcredit is only a mitigation of poverty if it isn’t used directly to improve quality of life, and the entrepreneurs don’t want to give up control of their company and require smaller amounts of capital at higher risk.

It is essential in this regard to promote the impact investment industry in Latin America by investing and creating funding mechanisms along the entire capital curve. In 2011, Latin America took a quantum leap in its global position due to the ideas that were implemented that year starting with the First Latin American Impact Investment Forum. This forum united many of those who would lead the development of this type of investment during 2011. In Mexico, Angel Ventures Mexico, in partnership with Toniic, New Ventures Mexico, US Mexico Foundation, Halloran Philanthropies and other partners are supporting the strengthening and internationalization of the network of angel investors interested in inclusive and green businesses. In Argentina, Equitas Ventures began as an alternative seed capital for early stage businesses. In Brazil, sitawi offers credit to nonprofit entities. In Nicaragua and Boivia, PYMECapital offers subordinated loans to SMEs with social and environment impact. In Chile, Mexico, and Colombia, more traditional private capital funds focused on businesses with high social and/or environmental impact began to operate and are FIS, Adobe Capital and Inversor, respectively.

A recent study by the University of Santa Clara and the Aspen Network of Development Entrepreneurs says that the main impact investors at the moment are individuals and foundations. This makes sense because as a nascent industry, the evaluation systems are in development and therefore are bound to be assumed as pioneers.

The same study confirms that Latin America, has the highest potential for profits and growth in the industry. Although this type of business and investment has had a lot of growth in India and Africa, the practice has already shown that the majority of these businesses, with effort, will achieve break-even point and won’t achieve more than a 10 percent return. On the other hand, Latin America can generate positive returns that could reach 24 percent. This study also confirmed that one of the best ideas of 2011 was positioning Latin America in the global impact investment industry.

However, much remains to be built and advanced in order to really know how inclusive businesses create impact. Initiatives like IRIS, an indicator system that seeks to create tools to measure the impact levels of each company, are advancement step forward. But they still have a lot to implement and universalize, starting with changing the current English-only availability. Without the collaboration of all the sectors, regions, and communities, it won’t be possible to seize the opportunity that Inclusive Markets represent for the region. If investors and entrepreneurs don’t collaborate with the new investment funds, the entire market will fail because if these models aren’t successful, it will create a negative precedent that will alienate investment and support for inclusive green businesses.

In 2012, the impact of initiatives that open new avenues for the development of Inclusive Markets will surely be verified. It will be important to reach communities that have benefitted little from inclusive business models, such as migrants, and generate the first steps in developing a regional public policy for businesses that advances the integration of Latin America under its own development model. Additionally, it will be valuable to participate in the second Latin American Impact Investment Forum from Feb. 13-15 in Mérida, Yucatán to see what ideas will shape impact investing in 2012.

Categories
Entrepreneurship
Tags
AVINA, financial inclusion, impact investing, New Ventures, SME finance