The recently released Monitor Deloitte report Beyond the Pioneer examines why so few market-based solutions to poverty are getting to scale and what can be done so that they can deliver meaningful benefits to the poor. Based on research spanning Asia and Africa, the report’s main finding is that many of the barriers to scale cannot or will not be addressed effectively by any individual firm. What is needed is external support in the form of market facilitators that can remove these barriers at an ecosystem level. Our own experience at Artha Networks Inc (ANI) over the last ten years, helping to build ecosystems friendly to investors and SMEs in India, Africa and Latin America, bears out the report’s main findings.
Impact investors as market facilitators
In our view, impact investors are uniquely well placed to play the role of facilitator. Impact investing is still evolving and impact investors are therefore more open to new ways of working with firms and with one another. To use the language of Beyond the Pioneer, impact investors frequently have a ‘wider lens’ than other actors in the development space. In addition, their willingness to commit their own funds for periods of five to ten years gives them the heightened credibility that comes from having real skin in the game.
Unfortunately, much of this potential remains unrealized. Based on our experience, impact investors can be effective market facilitators when they do three things:
1 Look beyond the transaction to identify the kind of systemic change their activities (eg due diligence) can spark.
2 Leverage local knowledge and resources.
3 Recognize that scaling market-based solutions to poverty is a messy process.
Shareholder reports tend to highlight elegant models that yield clear and favourable outcomes, but the reality is that overcoming poverty-related challenges is incredibly complex and fraught with information gaps and feedback lags. This complexity is usually too much for any one impact investor to fully comprehend, let alone overcome, so we believe a network approach will work best.
1 Look beyond the transaction
Backing a portfolio of companies
From a strategic perspective impact investors should perhaps be backing a portfolio or bundle of companies within a sector. This may mean investors should be routinely and deliberately working in groups: working ‘alone’ may be sub-optimal from the perspective of the ecosystem, and in the long run possibly from the perspective of the company.
We are obsessed with scale for the individual companies in which we see a potential return – though some, like Uli Grabenwarter, question whether such scale should be an end in itself. The selfish side of our brains will seek to open doors and see scale achieved for those in which we have a personal stake. If we really are, for example, committed to the dispersion of appropriately priced, sustainably produced sanitary napkins for women at the BoP, perhaps we should spend less energy examining the competitive market space around the one company we happen to have invested in and, instead, spread our bets in the name of impact, or invest in an intervention that serves more than one company. The likes of the GSM Association, the Gates Foundation or the Global Alliance for Clean Cookstoves are the rare breed of player that take a macro view on an entire market segment. Needless to say, it is hard to do this kind of work and make finance-first or even equal finance vs impact investments at the same time. There is a classic conflict here for those whose appraisal methodologies are not able to merge non-financial outcomes with the numbers.
When it comes to structure, it is not always immediately evident what the options are in a world of complicated instruments and a labyrinth of local regulations. It could be that a routine, cooperative approach to syndication that puts one investor as clear lead and the others as followers (on an alternating basis), with appropriate safeguards in place, may make life easier for everyone involved. In parallel, the emergence of instruments designed to enable investors to see incentives in working together would encourage such approaches.
Proportionate due diligence for small deals
Establishing appropriate and proportionate thresholds of effort and due diligence when looking at small deals could also benefit the whole market sector. Spending more in aggregate on due diligence than on the investment is unfortunately not a myth. One solution lies in the willingness of those ‘around the table’ in the investment process to consider sharing due diligence and streamlining efforts right through the investment process and possibly beyond and into post-investment oversight. As a trite example, the same trip to the field need not be undertaken several times.
If co-investors can build trust, the relative burdens of time and resource on those operating impact-oriented enterprises can be reduced. This is also a means of shrinking diligence timelines overall; many overlook the fact that a six-month due diligence on a small business urgently in need of working capital can mean its demise. While those coming from the private equity or venture capital worlds might deplore such methods, we suggest this is one way of looking beyond the transaction and generating considerable ripples for the greater good.
2 Incorporate local knowledge and resources in actual feedback loops
In most cases, the combined efforts of an impact investing network focused on a single region or country will not amount to a tenth of the power, reach and influence of local leaders and institutions. And yet, how much effort can the bandwidth of small, well-intentioned players afford to building relationships with such local entities?
The one element that may have been missed in Beyond the Pioneer is the incorporation of a formal feedback loop from the market we are trying to serve so that we can factor the opinions of the poor, often our core market, into our thinking. There is no doubt as to the difficulties of doing this: communications infrastructure, education levels and literacy, and mindsets are all a challenge. And yet, as we orchestrate the ecosystem level coordination required to plug information gaps and enable adjustment by key players, are we overlooking the more systematic and simple need to consider the people in our ‘market’?
It could be argued that at a firm level, the ability to design for the greater good is somewhat compromised by the fact that each is out to market and sell only their own product or service. This is arguably logical. Surely, each entrepreneur has done some market scoping and established the basis for a theory of change on the back of their efforts. Yet, for example, even after more than a decade of looking at small-scale renewable energy product distribution in India, how many donors and investors in market-based solutions know what the end customers really think of the 15 competing products on the Indian market? Despite the fact that many of these products are not directly competing in an organized way, market for market, state by state, most investors would only be able to speak to the traction of their own investees. (Pictured: typical low-income settlements in India. Right: new affordable housing units available to low income home buyers today. In 2006 Monitor Inclusive Markets began working with the National Housing Bank, FIRST Initiative and the World Bank to see how housing markets in India could better serve low-income households in urban areas.)
3 Recognize that scaling market-based solutions to poverty is a messy process
Sharing information and experiences, the good and the bad
Complexity, feedback lags, information gaps and institutional biases, to name but a few, are all very real barriers to the development and validation of effective investment models. It’s time perhaps for the indirect costs associated with these to actively make their way into our budgeting processes. Moreover, the insertion of a market-based frame into the social realm carries with it a host of ethical questions (as highlighted by Martin Brookes) and a number of risks that we may be overlooking. The scaling process within a particular market can be accelerated if impact investors are willing to share information with one another pre- and post-investment. It is telling how few impact investors cite one another as important sources of knowledge and learning. Too often impact investors share their experience primarily through their investor reports, which tend to emphasize the positive while withholding valuable knowledge accumulated through painful trial and error.
Cooperation rather than competition?
Various analogies may be considered in explaining the dynamics of a wider ecosystem comprising multiple stakeholders often with competing interests. If we look at our diverse sector as a garden, some of us are clearly tending seeds, others existing plants, and still others (who can afford it) full-grown trees. It is hard work to plant a seed in the ground, to see it grow a root or two – and there’s a reason why few purveyors of capital engage in this work. The risks are high, the outcomes uncertain, and the solutions rarely movable and imitable. Those who tend the growing plants and full-grown trees may have a somewhat more predictable task, because they can see what they are tending and may know to whom they can sell their product.
And yet as each of us takes a single stake in a single sprout, are our collective goals not already subverted? Is it good that investors compete to invest in the enterprises that will be most competitive in their given market segment, or is what sets impact investors apart that we are willing to forgo the ‘competition imperative’ for the benefit of pioneers? Though few of us may choose to admit it, we tend to water just our own little patch of garden. Many of us as individual impact investors and donors are not able to look beyond our own investment portfolios, especially if they are growing fast. Do we know whether the investees we pick are better positioned for scale than their peers? Is there a mechanism, and more importantly an incentive, to coordinate?
There is no silver bullet or ‘fast forward’ button investors can press when considering the readiness of an impact-oriented small enterprise to accept investment capital, the more so in the case of equity investment. Execution is in and of itself a long and arduous process. As firms struggle to adapt to new demands, is it enough to accept that some will possess the resilience to survive in their given market while others will perish? When we are looking at the implications of a privately provided energy infrastructure in non-electrified areas, for example, should we be maintaining a Darwinist survival of the fittest approach – even if it is often unclear who is benefiting from what privately wielded subsidy or soft financing? Or does this call for a more collectivized approach in the exercise of financing where concentrations of much-needed activity in poor areas are more sparse and disconnected from any kind of viable ecosystem? Either way, this does not imply a less business-like approach; Álvaro Rodriguez’s article highlights the necessity of a business-like rigour very clearly.
Sharing the credit
A further point raised by the authors of Beyond the Pioneer rings true in parallel to the above: there is a tendency for individual investors to try to take credit for results, whereas in fact the multiplicity of factors (and indeed investments) contributing to the dissemination of a product or service should be actively celebrated, requiring a multi-agent approach in analysis that captures what dozens and dozens of us are achieving together, quarter by quarter, year on year. The tools to achieve this are as yet not widely adopted, although widespread efforts to aggregate and synthesize relevant data are well under way.
In a confusing, fragmented and weak business ecosystem, the positioning of push vs pull products often gets lost in the mechanics of origination, appraisal and execution – and the work of pioneers gets diluted in the noise we hear as hundreds of players try to make their mark in the space. We can think in broader terms about how well we allocate our limited bandwidth, what success will mean as impact capital achieves its aims (and gets absorbed into ‘mainstream’ markets, as per Vineet Rai), and the responsibility that this brings to practitioners. There are few markets in the world today in dire need of market-based interventions where a multiplicity of active market agents would not be seen as a good thing.
A network approach
The collaborative efforts of some contributors to this special feature, including GIIN, Michael & Susan Dell Foundation, Oak Foundation, Gatsby Charitable Foundation and the Wood Family Trust (who were facilitators long before the publication of this report) shed light on the great potential of network approaches. Networks by their nature are adaptable and iterative, and the most efficient means of disseminating information. The challenge is to move beyond the existing virtual development gateways into the harder work of cultivating the human relationships and connections that make good things happen.
Fortunately, a good number of such initiatives exist. A network of impact investors exchanging information on firms, markets and models is likely to identify effective solutions far sooner than any individual investor, no matter how well funded and technically capable they may be. Herein lies the value of the various networks that cater to both ends of the pioneer spectrum, from Unreasonable Institute, Echoing Green, New Ventures, Toniic, Ennovent’s Impact Circle and I3N to any number of other country-specific angel networks. This is also the thinking that drove the development of the Artha India Platform, which now hosts a network of over 80 investors who share their pipelines, deals, due diligence and in-country service provider contacts.
A call to action
It is fortuitous that Artha Networks Inc should be given the opportunity to comment on a report that is essentially focused on the importance of facilitation at an ecosystem level, for there is overwhelming synergy between the key recommendations of Beyond the Pioneer and the small contribution that we hope the Artha Platform can make to producing meaningful impact through better coordinated financing. As stated in the report, ‘… working alongside pioneer firms, facilitators can use a range of instruments and levers in their work: these include but are not limited to creating knowhow, brokering relationships, building capacity, providing capital, and influencing official institutions.’
This research is a compelling piece of work that should give pause for thought on what any one organization may do and what needs to be done collectively to help scale market-based solutions. We all need to be receptive to solutions that have been invented elsewhere and that may even run counter to our own models, strategies or beliefs. Ultimately, as a community we need to develop an ethic that rewards enquiry. The work of the report’s authors and the responses it has engendered should be applauded for advancing this objective.
The guest editors
Audrey Selian is founder and director of Artha Platform, an initiative of Rianta Capital Zurich, an investment advisory to the Singh Family Trusts. She is co-founder of Artha Networks Inc and adviser to Halloran Philanthropies. Email Audrey.Selian@riantacapital.ch
Ken Hynes is co-founder and CEO of Artha Networks Inc and former managing director of On The Frontier (OTF) Group. He has worked with thousands of entrepreneurs and SMEs in the Caribbean, Central America and East Africa. Email firstname.lastname@example.org
Beyond the Pioneer: Getting inclusive industries to scale
Growing interest in the role of market-based solutions in addressing the problems of poverty has led to the emergence of many new and promising business models. These inclusive businesses seek to tap into the potential of the global poor as customers and producers: bringing safe drinking water to slums, powering off-grid villages, connecting farmers to end-demand. Unfortunately, most models are not operating at scale: a 2011 analysis by Monitor Inclusive Markets (a unit of Monitor Deloitte) of 439 such firms in Africa showed that a mere 13 per cent had begun to scale significantly.
Why are market-based solutions not scaling as hoped? And how can the barriers to scaling be addressed? Over the past year, Monitor Inclusive Markets have been exploring this. They have studied cases in Asia and Africa where market-based solutions have scaled; they have conducted hundreds of interviews and dozens of site visits, and drawn on their own experience of scaling market-based solutions. Their new report, Beyond the Pioneer: Getting inclusive industries to scale, published in April 2014, sets out their findings and recommendations.
The answer emerging from the study is that scaling solutions requires not just strong firms but also supportive industry ecosystems. The report urges funders, impact investors and intermediaries to look ‘beyond the pioneer’, recognizing that many barriers to scaling lie not at the level of the firm but in the business ecosystem around it.
The report also makes the case for industry facilitators that can help resolve scaling barriers to the benefit of whole industries, not just single firms. Crucially, the industry facilitator is seen as a role and not a type of actor, and one that could be played by many: foundations, aid donors, mission-driven intermediaries, multilateral development agencies, state agencies, industry associations, even impact investors.
Beyond the Pioneer is available for download at http://www.beyondthepioneer.org
Artha Platform and due diligence
As the Beyond the Pioneer report outlines, there are many barriers that prevent even the most dynamic and dedicated entrepreneurs from achieving the scale required to effectively serve disadvantaged populations in emerging markets. Similarly, there is an array of obstacles that impede the ability of investors to help these entrepreneurs bring their businesses to scale. Among the most daunting challenges for investors and SMEs alike are the economics of ‘diligencing’ investment opportunities with a ticket size of less than US$500,000. For an investor based in London, New York or Zurich, the costs in time and money associated with vetting the firm, understanding its regulatory environment and navigating the national investment code can quickly exceed 10 per cent of the potential investment, thereby making it uneconomical. In 2010, therefore, Rianta Capital launched the Artha Platform in India to increase the flow of investment capital to social entrepreneurs and businesses in India by helping investors reduce their due diligence costs and helping entrepreneurs manage the due diligence demands of one or more investors.
It does so in three ways:
• by providing a range of due diligence templates to investors, which can be used to expand and/or deepen the due diligence effort;
• by serving as a repository for all due diligence performed by investors on an Artha-listed firm, thereby reducing needless duplication of effort;
• by supporting a micro-tender mechanism to help investors connect with and interact more effectively with local in-country service providers.
For more information