africa | March 13, 2017

Network Effects: Impact Seed Funds in Africa and Latin America Share Secrets and Struggles

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Early-stage investing in emerging markets is hard. A commitment to serve low-income customers makes it even more challenging. Scaling that up around the world? Next to impossible.

Capria Network thinks it has cracked the code. With its latest $2 million in investments in early-stage impact funds in west Africa, South Africa, Colombia and Brazil, the Seattle investment firm now has stakes in nine emerging market fund managers investing in businesses providing low and lower-middle income customers in emerging markets with life- and environment-enhancing products and services.

That makes Capria one of the largest venture fund networks in the world, and the largest with a social-impact mission. In the tech-centric VC world, the Draper Venture Network and 500 Startups also take stakes in many independent fund managers as a way to extend their reach and generate dealflow.

“We similarly leverage the network effects of a growing and interconnected group, committed to help one another and collaborate deeply,” says Capria’s Will Poole, a former Microsoft executive who cut his own impact investing teeth by launching Unitus Seed Fund, now first among Capria’s network. “It would be impossible to realize our ambitious goals if we were trying to do all this work ourselves.”

Post-Conflict Opportunity
Among the fund managers graduated last week from Capria’s four-week bootcamp was the team from Odiseo, based in Medellin, Colombia, which developed plans for a $20 million fund that capitalizes on the recent peace accord with rebels after a 50-year insurgency. Odiseo is looking for two dozen early-stage biotech, cleantech and fintech companies that need around $250,000 in first-round capital and perhaps $1 million in follow-on rounds.

Odiseo’s Harold Calderon said that the moment is auspicious “to invest in committed and passionate entrepreneurs leading scalable, innovative and impactful companies that generate more and better-qualified jobs, including for victims and former war soldiers, and that improve living conditions of the low-middle income population that accounts for at least 75 percent of Colombian citizens.”

“Medellin has become the most innovative city in the world and one the hubs for entrepreneurs in Latin America,” Calderon said via email. “All of this happened during civil war. Imagine the opportunities we have and how things will be without having to deal with such a problem.”

Brightmore Capital, based in Dakar, Senegal and Abidjan, Côte d’Ivoire, is raising its first fund to invest in agriculture, housing and health, as well as mobile applications more generally. “We’re already six months ahead of where we would have been without the engagement of Capria.” said Dmitry Fotiyev, a managing partner.

Edge Growth fund, based in Johannesburg and Cape Town, has targeted education and health ventures such as Pioneer Academies, which deploys technology to keep school costs low even with smaller class sizes than government schools. Edge, which already has $50 million under management, has plans for a $30 million fund to invest $1 to $3 million apiece in 10 to 15 small- and medium-sized businesses. “We are always looking for ways to improve and adopt global best practices,” said Edge’s Janice Johnston.

Performa Investimentos, based in Sao Paolo, already has $75 million under management and is raising its third fund. Still, said managing partner Eduaro Grytz, “We can clearly attest to the benefits to our firm of being a member of a global network of leading fund managers.”

Early Stakes
In general, Capria invests in the general partnerships of the funds, and in some cases stakes the managers to capital to “warehouse” investments even before the close their fundraising. That helps the managers create a portfolio they can take to investors to demonstrate both their investment thesis and their operational chops.

“We help accelerate the creation of funds that will deploy hundreds of millions of dollars and impact millions of individuals,” Poole said. At the same time, he added, “Our GP (general partnership) investments will enable us to participate economically across the entire corpus of funds” raised by the fund managers.

Poole calculates Capria’s first $5 million in investment may catalyze $500 million in value and touch five million lives. The math is rough at best, but is based on an expectation that 15 fund managers raise about $20 million each, multiplied by the additional capital raised by each fund’s portfolio companies, as well as the management team’s expected second funds. Capria Network managers generally invest in education, healthcare, low-income housing, cleantech, agriculture and agtech.

Unitus Seed Fund, for example, estimates the portfolio companies of the four-year-old fund have together positively impacted the lives of more than 800,000 low-income people in India.

“Nearly all of the managers we engage with are targeting a ‘missing middle’ finance opportunity,” Poole said. “In every market, there is a lack of funding in critical stages of entrepreneurial development, making it hard for even the best companies with great impact potential to scale.”

Photo: Medellin at night. Photo credit: Andy Shepard / 500px