Nitin Rao

Too Much Money Chasing Too Few Investments?

In recent years, the capital markets have infused millions of dollars into the ’development sector.’? While we applaud the growing interest in development through enterprise, the question arises: are there enough quality investees?? Or, more simply, is too much money chasing too few investments?? Let’s take a closer look:

The novelty of the venture philanthropy model and the (debatable) success of microfinance in particular have helped attract large tracts of new capital to the development sector.

  • In February 2007, Orient Global Foundation announced the creation of a USD 100 million Education Fund committed to supporting entrepreneurial solutions to improve the quality and availability of education in developing countries around the world.
  • A new USD 17m Small to Medium Enterprise Investment Company for India has been announced by, the Soros Economic Development Fund (SEDF), and Omidyar Network, aimed at creating job opportunities and driving increased economic participation for a larger portion of the country’s population.
  • The Gray Ghost Microfinance Fund, Inc. is a $75-million, for-profit portfolio of investments aimed at connecting private social investors with microfinance opportunities worldwide.

Add players like Legatum, Minlam, MicroVest, and new entrants such as IGNIA, and one gets a sense of where we could be headed.Academic Research:
Regular readers will be familiar with academic research at the base of the pyramid, including work by C. K. Prahalad, Stuart Hart, Al Hammond, V. Kasturi Rangan, Ted London, Mark Milstein, Erik Simanis, Aneel Karnani, Jean-Louis Warnholz, Nancy Landrum, Anand Kumar Jaiswal, Juan Luis Martinez – the list goes on.

From anecdotal experience, I have come across top talent managing fund portfolios, advising donors, consulting and taking on similar roles of indirect participation — but not too many driving entrepreneurship that taps into this capital.

Indeed, the Microfinance Banana Skins 2008 survey (which makes for a great read) found that the current flood of investment into the microfinance industry could overwhelm those microfinance institutions (MFIs) that are not equipped to meet the pressures of rapid growth and rising competition. This could disappoint the high expectations that people have of microfinance both as a social movement and a financial investment. Of course, this concern is much bigger for microfinance than for other BoP investments.

There could not be a better time for DOers to take the plunge, launching profitable vehicles to use this capital to create services for those who need it the most.

(This post is inspired by a conversation I had with development entrepreneur and MIT alum Ayan Sarkar)