As we searched for candidate fund managers to join our accelerator, we simultaneously conducted a study on the impact investment ecosystems in a subset of countries in Latin America, Southeast Asia, South Asia and Sub Saharan Africa. We noticed recurring global themes across the countries in the study, which we categorized into three sections: Investment Activity, Investment Ecosystem Readiness and Entrepreneurial Activity. This post will highlight the trends we saw with regards to entrepreneurial activity.
Smart entrepreneurs are recognizing that the growing global middle class, made up of rising lower-income consumers, are increasingly demanding an expanding range of services. In addition, migration to major metropolitan areas and electrification of rural areas help bolster demand previously not seen in this emerging consuming class. Another driver of this consuming class is university graduates who increasingly remain in (or return to) their home countries. McKinsey famously calls this the $30 Trillion Decathlon which is now being run by multinationals to micro-entrepreneurs in emerging economies. Of the countries in our study, Mexico, Brazil, the Philippines, Nigeria and India appear to have the most significant growth in their emerging middle class. Fund managers we surveyed found no shortage of startups looking for funding to serve these consumers. This information is supported by local market studies like the one by McKinsey Global Institute, which found that Nigeria is “developing a large consumer class who by 2030 are projected to number 160 million, and triple their discretionary spending to almost $1.4 trillion.” In addition to the countries with opportunities listed above, many of the people we spoke to see huge opportunities in Indonesia’s emerging consumer class. Examples of innovative ventures in Indonesia include PT Ruma, which offers SMS-based financial services, and Pandawa Putra, a fertilizer company for smallholder farmers, which targets a low-income, largely agricultural consumer base.
2) A diaspora of well-trained professionals returning and investing in their countries of origin leads to more investment-ready opportunities.
Whether this is through direct investments, or more targeted remittances, diaspora populations encourage entrepreneurial activity and build pipeline in their countries of origin. This trend is particularly pronounced in Vietnam, the Philippines, Ghana, and Indonesia. For example, many investors we spoke to in Southeast Asia, including representatives from Lotus Capital and Mekong Capital, cited the huge influx of Vietnamese diaspora returning as the primary driver of increasing investment. A Wall Street Journal article also noted that foreign direct investment to Vietnam rose nearly fivefold between 2005 and 2013. As global investors, we see early signs of a growing reverse diaspora as a strong signal to begin entering a market, and a lack thereof a red flag. If you’ve run across any formal tracking of reverse diaspora, please tell us!
3) Many compelling companies that address local problems may not have developed-market applicability.
We found a number of innovative and invention-intensive opportunities in mobile-enabled financial services, healthcare, education, employment services, clean energy, sanitation, and agricultural supply chain management. From our study, India, Kenya and Mexico appear to have the most invention-intensive ventures. A few examples of these include Barared in Mexico, which builds digital kiosks linking low-income populations to the formal economy, and Ojay Greene in Kenya, which provides support to rural smallholder farmers with distribution systems. However, despite success in their local geographies, none of these enterprises have been able to expand regionally, yet. And based on conversations with local ecosystem players, it is not clear if the models will be applicable in other locations. This may be just fine, given the aforementioned growing middle classes.
4) The respectability and viability of entrepreneurship as a profession is viewed very differently across countries.
The way different countries view entrepreneurship affects the entrepreneurial ecosystem as a whole, and more specifically, the pipeline of talented entrepreneurs and university programs cultivating entrepreneurship. Mexico, India, Indonesia and the Philippines were the countries in our study that see entrepreneurship as a strong and embedded cultural value. Our primary sources, including investors and ecosystem support professionals, believe that entrepreneurial culture is growing rapidly across Latin America. A 2013 report found that 14.8% of Mexico’s adult population ran their own businesses, compared to 12.7% in the US, 7.3% in the UK and 4.6% in France. Capitalizing on entrepreneurial growth in impact segments, SVX Mexico is a boutique consulting firm aiming to develop the impact investment ecosystem in Mexico by creating an informed network of investors and providing advisory services.
5) There is often a gap between perceived interest from impact-oriented investors and a track record of investments.
Plenty of talk, but where’s the money? The countries where this problematic question seems to be most pronounced were Rwanda, Vietnam, Brazil and Nigeria. Many of our primary sources, including for example Rwandan-based investors and support ecosystem professionals, believe that investors in neighboring countries rank Rwanda high on their target list of countries to deploy capital. Despite its small size, almost 10% of Capria’s Cohort 1 fund manager applicants included Rwanda as a target investment geography. However, actual investment activity is relatively small. Non-DFI impact investors have deployed less than $44 million in capital to date, one of the lowest amounts in East Africa.
Stay tuned for more insights into the global impact investment ecosystem from our report, and don’t forget to read parts one and two of this blog series on our website as well. Continue to check this page for the the most up-to-date ideas and perspectives on impact investing from Capria.
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