Category Archives: Startups

DEVELOPMENT OF AN IMPACT INVESTING INDUSTRY

These are issues that I believe impact investment professionals will grapple with for the foreseeable future:

Impact Measurement. There is still no clear consensus on how to measure the social impact of impact investments. A number of methodologies have been developed, each seeking to create a standard that can be used across a wide range of investments.

  • IRIS is a catalog of impact metrics managed by the Global Impact Investor Network. IRIS is intended to provide a common language for measuring social, environmental and finance performance.
  • GIIRS ratings, developed by B Analytics uses the B Impact Assessment to rate the impact of a given investment or portfolio. The GIIRS rating includes an Overall Impact Business Model Rating, Overall Operations Rating and a Fund Manager Assessment.
  • The UN Global Compact measures companies’ performance in meeting universally recognized standards of human rights, labor, the environment, and anti-corruption. The Global Compact also encourages alignment with the UN Sustainable Development Goals.

In addition, several organizations have their own impact measurement methods tailored to suit their specific circumstances. Impact investors and social enterprises will need people who can sort through these methodologies, and understand how to apply them to their organizations.

Mainstreaming” of Impact Investments. When will impact investing become the norm? Will companies ever report social results alongside financial results as a matter of course?

Based on my experience at the IBL workshop, much of impact investing mirrors the startup world, involving relatively young and small companies whose value proposition includes some form of groundbreaking innovation. One sign of mainstreaming will be when we see larger, institution-sized impact investments. In addition, one wonders if we will see established, Fortune 500 companies reporting social impact results. These are companies that have tremendous influence on the global economy, the global workforce, and on communities and municipalities. They usually discuss their interactions with stakeholders in their annual reports, but that is not the same as an objective measurement of impact. How will impact influence executive compensation? Firm value? Corporate governance? Professional recruitment? These questions are being asked and discussed but the answers are still some distance away.

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IMPACT INVESTING IN EMERGING MARKETS

Recently, I along with a group of mid career professionals participated in a 3 day workshop entitled “Break into Impact Investing.”

The workshop consisted of seminars from leading practitioners in the field. They represented organizations such as Village Capital, Accion Venture Lab, Infodev (World Bank), and the Calvert Foundation.

Impact investing is a broad category that addresses many topics of concern around the globe. This workshop devoted much attention go early stage ventures in the developing world.

  • The Village Capital seminar for example focused on a case study featuring an a successful entrepreneur turned investor who need to allocate investment dollars between two mission driven startups, and Village capital’s own investment fund and a donation to Village Capital’s non-profit entity.
  • Infodev provides funding and support to entrepreneurs in the developing world. The seminar featured a startup in Kenya and dealt with several issues faced by impact investment funds such as how to define success, fund structure, and governance.
  • The Accion Venture Lab presentation offered insights on assessing a social venture at its earliest stage.
  • The Calvert Foundation discussed fixed income investments in the impact investment context, using vehicles such as the Community Investment Note to fund several kinds of loans to social enterprises, and the Ours to Own campaign to raise capital to revitalize urban centers including Denver, Baltimore, and the Gateway Cities of Massachusetts. The Calvert Foundation is a bit of a departure in that it uses debt instruments for impact investing.

All the presenters gave us frameworks to guide the process of impact investing. They had in common the identification of a value proposition or unmet need, development of a business model, and building a strong management team. It seem the elements of a promising startup are the same regardless of whether or not social impact is a factor.

It is also interesting to note that most of the cases and enterprises discussed were in Asia and East Africa. It was pointed out that Kenya is considered one of the more attractive countries for impact investing. East Africa’s popularity among the impact investment community is largely due to the advanced startup ecosystem in East Africa compared to other parts of the continent. The concerted effort to make Nairobi an African technology hub, plus the impressive regional integration efforts of the East African Community have attracted investment of all kinds including impact investment.

Careers in Impact Investing

In addition to learning about the industry, the workshop included insights on career options in impact investing.

The workshop organizer, Impact Business Leaders is in the talent development business, so the workshop was very much about career development and creating the talent pool for the impact investment industry.

Throughout the weekend career paths were revealed both implicitly and explicitly. Some of them include:

  • Portfolio manager – working with financial statements, managing relationships with portfolio companies.
  • Analyst/CFO – Overseeing accounting and financial analysis, being a resource to management for understanding financial issues.
  • Adviser/Consultant – working directly with entrepreneurs providing advice and technical assistance.
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8 WAYS TO ASSESS THE IMPACT OF #AFRICAN #TECH #STARTUPS

 

I. Jobs Created

  • We of course want to know the total number of jobs created by startups. In addition we need to understand the type of jobs created and how that fits with the profile of the national labor force. What are the salary levels and how do they compare to the local statutory minimum wage? Will these startups have a significant impact on their local labor markets?

II. Capital Raised

  • Are these startups attracting new capital to Africa?
  • Are they attracting foreign capital from other African countries?
  • Are they attracting capital from within their own countries?

III. Increase in Skills and Know-How

  • Are the startups introducing new technology or management practices
  • Are skills and know-how spreading beyond the universities to the general population?

IV. Return on Capital Invested

  • Have investors in African startups experienced favorable outcomes?

V. Export Revenue Within and Outside Africa

  • Are African startups exporting?
  • Are African startups enabling exports by other companies in their home countries?

VI. Supportive of African Business

  • In what other tangible ways have these startups helped foster the growth of African businesses?
  • Training
  • Access to customers
  • Access to capital

VII. Social Impact

  • Environmental
  • Education
  • Poverty reduction
  • Financial inclusion

VIII. Intangibles

  • Inspiration – Is there a 12 year old girl in a village saying “I want to be an entrepreneur too!”
  • Positive influence on government – Is there a community of entrepreneurs who can make their voice heard in the halls of government to strengthen the entrepreneurial ecosystem?
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EMERGING MARKET INVESTING PART III – 5 KEY TAKEAWAYS FOR THE ENTERPRISE

For managers and entrepreneurs seeking private investment to fund an enterprise, the current environment is challenging, though still an improvement compared to prior decades. In Part III of our series, we offer 5 takeaways from 2013. These are concepts that are particularly appropriate to current market conditions and sensible in any period in the cycle.

1. Be mindful of the investing environment. We recall from Part I that private equity activity was down somewhat in 2013. Deals were down 7% and fundraising down 19% from the previous year. We know that the BRICS and other emerging economies have slowed down. So for the time being at least the emerging markets have lost some of their luster. All this has affected investor’s attitudes. Yet the long term outlook still looks good which is the message we stick to and the reason emerging economies still attract investor interest.

2. Owners and management should have a realistic understanding of the value of their enterprise, and where it fits into the spectrum of potential investments. They should also have thought through carefully their mission and objectives for the enterprise, for themselves, and for their communities.

3. Demonstrate the strength of the business model including evidence that the business or project can provide consistent cash flow. Examples include:

  • Signed contracts for current and future sales
  • For housing developments, a significant proportion of homes pre-sold either to residents or a large employer buying for its staff.
  • Offtake agreements for energy and power projects
  • Infrastructure projects that can collect tolls or user fees

4. Government support never hurts. Although most developing countries have improved business and political climates, they are still relatively difficult places to do business. It is therefore desirable to be on good terms with the relevant government bodies so. When everyone’s interests are aligned the red tape can be minimized.

The extent to which government backing is needed varies with the type of deal. For small startups it may not be necessary at all. In some cases the government is the customer then of course the company must be in a position to win a contract. In lieu of a contract, an MOU or government guarantee may be sufficient.

It should be noted that while government support is crucial, companies should avoid any activity that can be construed as corrupt as it will be an immediate turnoff to the investor. US investors are especially wary of running afoul of the Foreign Corrupt Practices Act. Any investor not appropriately concerned is probably one to avoid.

5. Strength of the management team. Investors look for relevant experience, a level of professionalism and an understanding of international performance standards. Most important, management and founders/owners should be prepared to act in the interest of building the value of the enterprise.

Current market conditions in emerging market PE investing indicate a plateau in deal growth. In this environment founders/owners should pay special attention to those factors that attract good investors. We think this is a short term phenomenon—a sensible pullback from the emerging market fever of the past few years. However the broader demographic, economic and geopolitical trends will continue to favor emerging markets in the long run. We believe capital will flow towards companies that have strengthened their foundations during the current slowdown.

 

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Angel Fair West Africa 2014

 

 

In our last post on emerging market private equity we mentioned the African startup infrastructure and its potential to attract local and international venture capital. The startup community will be on full display in two weeks at Angel Fair West Africa, starting March 31 in Lagos, Nigeria.

 

Startups at the seed venture and growth stages will be featured. There will be two rounds of entrepreneurs pitching their businesses and panel discussions from founders and investors. In addition to the home country there will be startups from Cameroon, Ghana,Kenya and Senegal.

 

African venture capitalists and other investors will also be in attendance including 32 members of the Lagos Angel Network.

 

 

For more on Angel Fair West Africa, click here.

 

 

 

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