Tools of the Trade: Building a Robust Deal Pipeline of Impact Companies in Emerging Economies (Part 1)
Editor’s Note: Led by contributors from NextBillion’s Managing Partner, New Ventures, this is the third in a series of articles (the first can be found here and the second is here) showcasing the achievements of environmental entrepreneurs with insights from impact investing leaders on how to further scale these enterprises. This article (broken into three parts) outlines how various actors in the impact investing space are involved in identifying and investing in environmentally-focused companies in emerging economies.
Investors in the impact investing space say they want to see more high quality deals and more companies with successful investment track records that are quantifiably measuring impact. Apparently, billions of dollars of investment capital could be poised and ready if these three issues can be addressed; for instance, the 52 investors who responded to the JP Morgan online survey (read a NextBillion post on this issue here) have indicated that they plan to invest a total of USD 3.8 billion in the 12 months following the survey, which was conducted between July-September 2011.
In order to better understand the first two of these challenges, I interviewed six people involved in helping both identify and invest in environmentally-focused companies in emerging economies. Although these entrepreneurs and executives use a variety of tactics and resources, it’s clear that old-fashioned networking is still the tried and true method. Attending industry-related events and meeting companies in-person, as well as creating strong on-the-ground partnerships that can recommend companies, still remain the most widely used methods for finding investible companies. The interviewees included:
Ian Fisk, executive director of the William James Foundation, a non-profit organization that manages socially responsible business plan competitions for venture-phase and idea-phase entrepreneurs.
Amos Gilkey, CEO of Clean Wave Group, a for-profit business catalyst and the creative and strategic advisory services business that provides unique and customized client and venture opportunities, strategic partnerships, and new markets potential.
Kevin Jones, co-founder and convener of Social Capital Markets, an annual event series that connects leading global innovators (investors, foundations, institutions and social entrepreneurs) to build the social impact market.
Jesse Last, senior lending and strategy associate at Root Capital, a nonprofit social investment fund that grows rural prosperity in poor, environmentally vulnerable places in Africa and Latin America by lending capital, delivering financial training, and strengthening market connecting for small and growing agricultural businesses.
Walter Vargas, investment officer at E+Co in Costa Rica. E+Co makes clean energy investments in developing countries to provide lasting solutions to climate change and poverty.
Michael Stulman, communications officer for Grassroots Business Fund, a global impact investing organization whose mission is to help build and support High Impact Businesses that provide sustainable economic opportunities to millions of people living at the base of the economic pyramid.
I asked them how they find companies, the inefficiencies in the process and how these inefficiencies can be mitigated, and the main lessons learned.
Taking a value-chain approach: Investors and pipeline providers can work with actors along the entire value chain to find high quality businesses and build shared value. For example, Root Capital collaborates with a variety of partners; ranging from large companies, like General Mills, Green Mountain Coffee Roasters, and Starbucks, to traders and importers who facilitate trade between agricultural businesses and the companies that they supply. RC also works closely with technical assistance providers, certifying agencies, trade associations and other investors, in addition to bilateral and multilateral agencies.
Hosting events for investors and companies to connect: Kevin Jones of SOCAP addressed the challenges of finding companies for his first fund, Good Capital, by co-founding a cornerstone event for impact companies and investors. “Five years ago, people didn’t even think this space existed, so we decided to start a conference to allow social entrepreneurs to come share their stories and to also try and reduce the company sourcing costs for investors,” he said. “We also validated a category of companies along the way. We thought the best way to create the companies we wanted to invest in was to create a market.”
Kevin also usually avoids companies that pitch business models that require significant market-demand shifts, like requiring that consumers decide to stop driving single occupancy vehicles entirely. Investors view this as a big risk because it’s very hard to actually create such large-scale changes in consumer behavior.
Do-it-yourself research: Despite a lot of developments in the space, Amos Gilkey of Clean Wave Group still finds himself doing a lot of his own research on companies, which involves a significant amount of personal networking. “It’s very much still the wild West out there and it often requires the use of personal networks to figure out who the key players are, where they go, and what they are interested in,” he said.
Word-of-mouth: Walter Vargas from E+Co reiterated the fact that he attends a lot of events, specifically energy fairs, and also gets a lot of referrals from renewable energy associations and through the ANDE (Aspen Network of Development Entrepreneurs) network, “but these companies also find us, and if they’re not ready for investment, we also play a role in referring companies to other institutions,” he said.
Relying on on-the-ground investment staff: Grassroots Business Fund relies on the investment staff in the field to find and select companies; they also work through a robust network of partners, industry associations, and local banks.
Strong relationships are key: The William James Foundation does a larger sweep since they are looking to build high-value deals, and don’t expect these companies to necessarily be “investment-ready.”
Beyond the one-third of William James companies that have already come through business plan competitions or fellowships, WJF identifies promising companies through partnership organizations that have good on-the-ground contacts. (It’s a win-win for the partners, because the business plan competition helps them ultimately strengthen their deal pipeline down the road); and by conducting interviews with all the past entrants and mentors to see if they know other companies that could benefit from future competitions.
Also, if you’re in DC and interested in an opportunity to connect with some emerging market entrepreneurs, check out the William James Foundation’s annual business plan competition event that is taking place on April 13-14, 2012 at the World Resources Institute. Learn more about the event at: www.williamjamesfoundation.org/gathering.
Note: Part two of this article discusses some of the major barriers and inefficiencies to finding companies, and how interviewees believe these inefficiencies can be mitigated.