The innovation we are talking about is not driven by traditional financial institutions. Innovative companies are reaching out to specialized investors, which are essential for enabling them to obtain the financial lifeblood they need to thrive and grow. They need capital that is prepared to take on the level of risk involved with companies that are startups, using innovative technologies, to serve segments at the base of the economic pyramid in frontier and emerging markets. Each of these attributes carries heightened risk and therefore necessitates specialized, risk-bearing sources of support. Impact investors like Accion’s Venture Lab and Quona are willing to provide the risk capital to get promising companies up to a level at which they can mature and scale.
In addition to capital, our investees need a wide range of support to meet the various challenges involved with building young businesses. Probably our most fundamental role in that regard is as coaches for the leadership of companies. We are in a position to have open conversations with them about confronting and overcoming challenges, including external – macroeconomic shocks, regulatory surprises – and internal challenges – personnel, systems, etc. We aim to help them problem solve in a very quick and agile way – in keeping with the necessity for rapid response that these young companies face.
Part of what we can bring to these companies is knowledge of what’s going on in similar companies in other parts of the world. Because we review hundreds of opportunities every year, we gain insight into a great cross-section of key sectors, something that is difficult for business builders to obtain, with their laser focus on shorter-term execution. We can make connections. For example, we recently connected two companies, each working in supply chain finance, on different continents. One was good at the finance end of the business, while the other was good at the logistics – each looking to learn from each other as they scaled their operations.
We urge our companies to move beyond executing to building. As startups that are beginning to scale, they often focus on short-term execution – making it all work and reaching the next set of targets. A slightly longer term perspective is needed if they are really going to scale – because they often need not just incremental growth but significant leaps.
Talent is another of the most important areas to support. The technical talent these companies need exists, but is often not available locally in emerging and frontier markets. We often encourage our portfolio companies to hire outside their familiar networks so that they can bring in diverse new ideas and knowledge. We assist them to explore the unknown in a disciplined way, neither staying in their comfort zone nor leaping into the dark.
Companies may need assistance to broker important relationships, such as those very important, but sometimes difficult, relationships with regulators. It is tempting for Fintech companies to “fly under the radar” so that regulators do not notice them until they are well established. But this is not smart: regulators need to be informed about how the market is evolving so that they can evolve their own regulations and avoid surprising companies later on. We can often make a difference by bringing experience from other countries into the dialogue. Recently in one country with a highly pro-incumbent regulator, we were able to discuss the rapid progress made in countries where regulators took a different view. Such conversations require nuance and political understanding, and it helps to have been through them in multiple contexts.
Similarly, companies may need assistance brokering relationships with mainstream institutions with which they seek partnerships. Partnering with existing financial institutions may be one way for companies to make the leaps we mentioned above, but they are not easy to establish. As brokers, we have worked to enable both parties in negotiations to see the mutual benefit that can come if they partner effectively.