For the final part of our series of articles focusing on the GSBI® Accelerator program, we are publishing an interview in which GBSI talked with Mark Straub and Aparna Surendra from Khosla Impact.
GSBI: The impact investing industry is approximately six years old, by some measures – a fairly young category compared with traditional venture capital. What was it like to see a cohort of social enterprises that had, in a sense, graduated from startup level and were being mentored in preparation for seeking funding?
It’s hard to comment on things like how old impact investing is, or even to compare it to the amount of technology venture capital, which is over $20 billion a year in the United States. Angel investor Mitch Kapor says: ‘All investing is impact investing, it just depends what kind of impact you want to have.’ We generally agree.
At the recent GSBI conference it was encouraging to see enterprises that had passed the early stages of development, the ‘pre-product-market fit’ phase. Many had been through experiments to learn and adapt their product or service for their markets. A few were underway with the next phases, mastering the per-unit economics of their product and finding efficient, scalable forms of distribution. We think that the next step for many of these groups will be figuring out what sorts of changes will be required in their existing distribution methods to achieve that elusive thing called scale, or the ability to reach exponentially more customers or beneficiaries, while keeping per-unit costs below prices. Often the tricks and tools that get a business successfully to 200 or even 1,000 customers aren’t the same tools necessary to take them to 10,000. One or two of the companies I met with afterwards were starting to think through and experiment with multi-channel scaling strategies.
Did any company stand out as being on the cusp of scaling?
I think Husk Power (featured in a blog article earlier this week) is figuring this out. They have been experimenting now for a while and have hit several walls to scaling but the team is tenacious and is adapting and partnering with a variety of stakeholders in India that should help them grow faster in the next three years than they did in the previous three. There was an interesting mobile feedback company called Labor Link, which makes an anonymous system that allows workers in developing countries to report feedback on their working conditions. The company is talking with the right kinds of partners at large multinational brands who are potentially well-aligned with the Labor Link mission. But navigating those big companies will be tough for a startup; it’s like dancing with elephants. Such partners may be keen to improve their international profiles by offering the system but Labor Link will have to align themselves all the way down the chain of command from brands to floor managers to workers. You don’t win by antagonizing the big companies, you win by making it easier for them to manage what was previously unmanageable. Seeing partner interest like that is a good indication that there is demand for the product or service, which means there is potential for scale, if you can get the business model right.
Did any of the companies suffer from what you call ‘vanity metrics’ – feelgood data that is emotionally compelling, but for an investor means very little?
Most of the companies we saw at the GSBI showcase featured little in the way of vanity metrics, which as investors we focus on very little. How many villages you have touched, how many trees you have saved, or how many girls are in school now because of you – those things make people feel good, but they don’t necessarily explain how you are solving the problem that you are focused on. And they don’t tell you much about whether what you are doing can scale exponentially, which is the way we think about the impact we are aiming to achieve with our portfolio companies. We have a portfolio company called Embrace, which makes warmers that do in fact save the lives of very vulnerable infants. But we don’t measure things like infant lives saved, because it’s hard to measure and it’s not helpful in managing the company. We measure the number of units sold and sales channel efficiency. We measure cost of goods sold and gross margins. These things help us grow the company faster – which has the intended effect of saving more lives and creating more impact. We are very focused on understanding the unit economics that prove you have a value proposition that works for many people, and that the cost of delivering it to exponentially more customers is lower than that price you can charge those customers.
What was the one gap you noticed the most?
The one gap we found ourselves pointing out frequently during the interactive feedback session at GSBI was that of how to drive faster growth. Online in the GSBI feedback forum we often asked ‘how do you make this BIG?’ In some cases the plan for scale was underway, while in others it was just getting started.
No matter how successful you’ve been so far, it is not enough to tell an investor ‘I’m smart; I’ll come up with a scale solution’. And until you have predictable sales officer efficiency metrics, it is even worse to say ‘we’ll just hire more people’. Take the example of Kopo Kopo, a mobile-payment merchant acquisition company that attended GSBI a few years ago. We funded Kopo Kopo when they were still ‘pre product-market fit’, in 2011. They had around 25 users for their system that helps merchants accept the now-ubiquitous mobile money M-PESA.
Kopo Kopo’s business model works a bit like Square does here in the US. But before even thinking about scale, first the company had to find ‘fit’ for its service – one that offered merchants a way to accept M-PESA and was free to buyers. We worked with Kopo Kopo as they designed two-week ‘sales sprints’, or experiments with a variety of merchant groups. The sprints went on for six months and helped determine which merchants, such as those who stay open late at night, were a good fit for Kopo Kopo’s service. And it worked. Once they got their first 200 merchants we knew they had ‘product-market-fit’ and it was time to think about scale. That only came with a switch in tactics. Instead of door-to-door two-week sales sprints, they established a series of sales channels, some of them with external partners. Now they’ve added over 6,000 merchants in Kenya and are growing at the rate of several hundred merchants every week.
Were there other companies at GSBI that caught your interest?
We found some of GSBI’s India-based energy companies interesting. If we were going to dig in with energy in India (which we are not at the moment because of the government’s extensive kerosene subsidies) we’d want to focus on go-to-market channels that allow for scale, and unit economics that allow them to compete effectively with existing alternatives. Husk and Nishant Bioenergy (both GSBI attendees) are two interesting companies that are worth exploring for investors in this space.
Mark Straub and Aparna Surendra of Khosla Impact are in the business of supporting entrepreneurs and teams who are developing market-based solutions to poverty.