The perennial question in entrepreneurship seems to be one of scale. The African leapfrog in technology holds promises for scaling companies with products and services that improve millions of people’s lives. China Impact Ventures focus on energy innovations, and their portfolio has got interest from international impact investors because there is strong interest in China’s cutting edge innovations. As more and more social enterprises become tech-driven, and as more impact investors focus on investing in tech-driven impact businesses, this is a timely moment to reflect on what is needed to scale such businesses further.
This is also a moment of convergence with the aid community. The aid community is increasingly looking at how business and investment can achieve development aims. For instance, TSIC worked to create an Investor Toolkit for SPRING accelerator, a programme funded by bilateral donors such as DFID and USAID that focuses on improving lives of adolescent girls in East Africa and South Asia.
To deepen the conversation around tech-driven impact businesses in emerging markets, TSIC convened a roundtable of impact investors on this topic in July, with a special guest, Amanda Zheng, Co-Founder of China Impact Ventures (currently Founder and CEO of Impact Bread) to share the experiences of investing in energy ventures in emerging markets.
Our group represented a mix of investors and ecosystem builders, working predominantly in Asia and Africa. We discussed three main challenges and respective solutions.
1. Challenges around financing
- Currency risks present a challenge to attract foreign capital to invest in emerging markets. How can structures help mitigate this? China Impact Ventures set up a RMB-denominated fund to help raise capital within China.
- There is a need to activate local capital. In West Africa, there is a more visible role of diaspora providing capital; but in East Africa, it is mainly foreign capital. Local banks are not as involved in financing of start-ups and SMEs, and they also have limited understanding of tech startups specifically. This meant that African companies often need to raise in USD or GBP or EUR, but only a minority of entrepreneurs would have this access to set up such structures. Moreover, foreign funds also tend to have longer pre-investment process as the investment committees tend to be comprised of people with limited understanding of the target market – hence there are more questions back and forth, and large learning gaps to be overcome. The timeline for due diligence and decision making may not fit with the realities of local entrepreneurs.
- Fund structure for early stage investments is challenging as entrepreneurs need a lot of capacity building, which is currently subsidised by grants. To overcome this, Amanda said that “impact investors should transform ourselves into entrepreneurial investors.”
- Lack of access to working capital: investments are often available only as equity, lack of debt facilities such as asset financing, purchase order financing. For companies that have business with governments, this is compounded by the fact that some governments withhold payments for contracts.
2. Misaligned impact expectations
- As the field of impact investing grows, impact expectations become increasingly blurred – especially in emerging markets investing. There needs to be more honesty and transparency about impact expectations, and more investors, who have the risk appetite, should be encouraged to step in as first loss investors. The tensions could be described as “ESG vs. SDG” – ESG refers to Environmental, Social and Governance; SDG refers to the Sustainable Development Goals. Among early-stage impact investors, SDG is the main trend and they make use of the United Nations SDG framework to measure impact; whereas traditional investors are still using the ESG framework, which is mainly about compliance. Tech-driven impact businesses in emerging markets often have to turn to more traditional investors for funding, but the misalignment in impact expectations may cause these businesses to lose the ‘impact’ they set out to achieve.
3. Challenges around talent
- There is a specific challenge filling strategic positions in companies in finance and technology. Some impact investors felt that they often act as CFOs of their portfolio companies. Not only is attracting talent a challenge, retaining talent is also challenging. In China Impact Ventures’ experience, the management and founding team of businesses in their portfolio are often engineers. It is important for teams to strong on both the commercial and technical aspects, but since hiring commercial talent is usually more expensive, the founding team should demonstrate its strengths in commercial aspects.
We hope that this blog post has deepened the discussions in the social entrepreneurship and support ecosystem. If you are working in this area and would like to contribute to the conversation, please e-mail [email protected].