Tools of the Trade: Building a Robust Deal Pipeline of Impact Companies in Emerging Economies – Part 2
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 3 parts) outlines how various actors in the impact investing space are involved in identifying and investing in environmentally-focused companies in emerging economies.
Whether you’re JP Morgan or a startup social enterprise fund, everyone faces inefficiencies, setbacks, and dead ends in finding and scaling companies. But there is some strength in numbers, and identifying the problems is the first step in solving them.
This article in particular discusses the main barriers and inefficiencies in identifying and selecting impact companies in emerging economies. In order to better understand these issues, I returned to six people involved in helping both identify and invest in environmentally-focused companies in emerging economies. I asked these leaders, whom I previously introduced in part one, how they find companies, the inefficiencies in the process of finding companies and how these inefficiencies can be mitigated.
Limited physical infrastructure, few logistical resources, a lack of incubators and accelerators, and a scarce in-country support networks, were all cited as the top reasons why finding high quality companies is difficult. Interviewees suggested a variety of ways to rectify these inefficiencies, including reaching out beyond the ‘usual suspects,’ funds teaming up with accelerators and incubators, and actively engaging in the creation of in-country support networks.
Once again, 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.
Get beyond the “usual suspects”: Jones has found that going outside of the nascent world of social enterprise (i.e. in the more mainstream transportation sector) can be a great way to access entrepreneurs because a lot of enterprises don’t yet label themselves “double or triple bottom line”. He finds a lot of potential companies in more mainstream industry events or newsletters.
Aggregation of certifying agencies: Root Capital, which mostly works with rural businesses, must overcome the challenge of identifying companies in remote places with limited infrastructure and technology resources. Last is aware of efforts amongst various organizations in Africa and Latin America, including certifying agencies, trade associations, and technical assistance providers, to bring together the companies they support and put them in touch with financiers that can support long-term, sustainable growth. Root Capital also leverages its Financial Advisory Services arm – a program that supports small and growing businesses in developing financial management capacities – as a source of pipeline.
Compromise between strictly “environmental” and “social” investments: Jones is also finding a lot of momentum among many environmentally-focused funders such as Verde Ventures, which are realizing that preservation is not the complete answer. Many eco-investors have concluded that they need to work with social investors to ensure viable livelihood opportunities for residents living in the areas targeted for preservation.
“It’s been a siloed approach thus far that has to end if we’re gonna make it on this planet; we need more funds that can capture different investor streams,” Jones says.
Use a combination of online resources and in-person contact: Gilkey, of Clean Wave, isn’t convinced that emerging online platforms, which match social enterprises with investors, will on their own increase the efficiency of deals. “The old fashioned ‘just meeting people’ still has a lot of value – but ideally you have a combination of both – technology allows us to maximize our ability to make contact and get to know contacts that weren’t available, but there’s still value to building a relationship in-person,” says Gilkey.
Create the in-country support infrastructure: GBF would like to see more available information on sector analyses and pipeline development for various sectors of choice (i.e. in Indonesia, there is a relatively small, albeit growing ‘social’ VC industry). In order to remedy some of these inefficiencies, GBF has staff based in country, and these staff work closely with several prominent Indonesian business leaders. Together with these leaders, GBF has supported the formation of an Angel Club called SEI, which is modeled after angel investor networks in the U.S., and is composed of prominent local investors.
Lack of logistical resources: Vargas from E+Co laments that they simply don’t have enough logistical resources to find companies; for instance, E+Co has a satellite office in Costa Rica and they do a quarterly sweep in various Central American countries, like Nicaragua, to find companies with in-country staff, but this isn’t sufficient. He also commented that he would like to see a central place where enterprises can go to get access to all of the funds, accelerators, and so forth.
More Business Incubators and Accelerators: In order to rectify the issue of locating higher quality and less risky early stage companies, the William James Foundation works to provide specific, targeted, value-add feedback to companies through their business plan competition. In their case, this means finding and matching companies with the right mentors with the right experience that can provide them with high-level feedback.
Business accelerators can also serve a really important purpose because they help get companies ready for investment. Vargas from E+Co would like to see more business accelerators in Central America, where there are currently only two that he’s been in touch with. In the future, E+Co may consider developing close partnerships with business accelerators.
Note: Part 3 of this article discusses the major lessons learned in finding high quality companies.