500 Startups is doing it. So is TPG Growth’s $2 billion Rise Fund. Even the Chinese tech conglomerate Tencent is getting in. Investors are clamoring to put money behind financial technology firms able to successfully serve the global poor and emerging middle class.
Earlier this month, Tencent, roughly the Chinese equivalent of Facebook, invested $180 million in Nubank, a Brazilian financial-services company. Nubank already claims at least four million credit card holders and projects it can reach tens of millions of Brazilians with savings, checking or credit accounts.
>>MEET UP: ‘Inclusive fintech’ investors are gathering Wednesday Oct 24, on the side of SOCAP in San Francisco.
TPG’s Rise Fund has made financial inclusion a major theme. The impact fund led the recent $47.5 million Series C financing for Nairobi-based Cellulant, one of Africa’s largest mobile money firms, which says it processes about 12% of the continent’s digital transactions.
The big checks for growth-stage fintech companies recognizes that annual spending by the world’s growing middle class could reach $70 trillion by 2030, double this year’s estimate.
LeapFrog Investments, a leading impact investor, has built a billion-dollar portfolio around fintech-powered companies in insurance, healthcare and financial services that now serve 140 million people in frontier markets in Asia and Africa. Of those, LeapFrog says 117 million live on less than $10 a day. One indication of increasing interest in such consumers: LeapFrog has realized exits through acquisition by India Allianz, Standard Chartered, Fidelity, Prudential PLC, Swiss Re and other big players.
>>SOCAP18 AGENDA: Check out ‘inclusive fintech’ workshops, pitch events and happy hours at SOCAP18.
The demand for later-stage investments is driving a new round of activity to stock the pipeline of earlier-stage companies as well.
Some of that activity has been, well, catalyzed by the Catalyst Fund, backed by the Bill & Melinda Gates Foundation and JPMorgan Chase Foundation. The accelerator has provided $2 million in non-dilutive capital (aka grants) and another million in tailored advisory services to 20 startups using technology to extend financial services to underserved customers in Africa, Latin America, India and Southeast Asia. A dozen companies that sought follow-on funding have raised an average of $1.5 million each.
Among its most recent cohort is Hover, which helps developers add in-app mobile payments quickly. Another portfolio company, Payagri, lets small Indian farmers access credit and funding. Banco Maré uses blockchain to facilitate banking transactions in one of Rio de Janeiro’s largest favelas.
Catalyst Fund is seeking to connect the multiple stages of the capital supply chain. In the inner circle are seed investors like Accion Venture Lab and 500 Startups. Venture-stage firms include Gray Ghost Ventures and Omidyar Network. Among the later stage investors are Brazil’s Quona Capital.
A broader network of 37 investors now includes LeapFrog and other private equity firms, including Elevar Equity (which shares dealflow with TPG’s Rise Fund). Family offices in the network include Blue Haven Initiative and Ceniarth. Such firms are outliers, of course: most legacy investors remain wary of frontier markets and especially of business-plans that target low-income customers.
Yet the chance to reach billions of potential new customers far from established financial hubs has investors scrambling to find companies that can successfully go down-market, where volumes may be high but margins are thin.
Firms that are successful in reaching low-income customers are simply “making something people want,” says Sheel Mohnot, who leads a $25 million fintech fund for 500 Startups, the San Francisco venture fund and accelerator that has invested in more than 2,000 companies. 500 Startups is one of Catalyst Fund’s earliest-stage investment partners; Mohnot says he’s invested in the three firms he has referred to the accelerator. Early funding from Catalyst Fund, he says, “is catalytic capital that gets other investors interested.”
Low-income customers want value, agrees Jane del Ser, who helps run Catalyst Fund. Products that gain traction, she says, are accessible, appropriate and affordable and tailor technology to meet the unique needs of the poor.
South African life insurer Mobilife, for example, says 40% of its first-time customers are women.
Sri Lankan consumer credit startup Rukula credits flexible payment options for its 95% repayment rate. In Chile, Destacame is leveraging alternative credit scoring and technology to push interest rates for first-time loans below that of microfinance institutions in the country.
“It’s Important to get to the point of the customer finding value,” says del Ser. “It’s not as simple as just having an offering. The best firms have a constant feedback loop with their customers.”
>>MEASURE BETTER: An ImpactAlpha series in partnership with Acumen features investment practitioners who are putting customers at the center of their impact strategies.
A new report from Accion Venture Lab, “The Tech Touch Balance,” warns that despite the uptake of digital technology in low- and middle-income countries, reaching customers remains a challenge. Many customers lack familiarity with, awareness of and trust in financial service products and providers. Many still prefer high-cost human interaction.
One Catalyst Fund graduate, Escala Educación, a Colombia-based startup that helps low- and middle-income workers automate education savings, develops trust with its customers by partnering with their employers to introduce the plans. Escala’s tech then automates savings deductions from customers’ paychecks. Accion Venture Labs backed Escala to help it find the right tech-touch balance, which the investor says “is critical to determining whether a company can successfully acquire and retain the customers it cares about and, ultimately, become profitable.”
Impact investors like LeapFrog Investments and many of those in Catalyst Fund’s network have been in emerging and frontier markets trying to drive private capital into solutions for the poor for decades. This gives them an edge in the race for the next billion financial customers.
Washington D.C.-based Quona Capital, a spinoff of Accion International, for example, has three funds investing in fintech for inclusion in sub-Saharan Africa, Latin America, and Asia. In 2017, the firm raised $141 million for the Accion Frontier Inclusion Fund. The venture capital firm recently had a first close of $88 million for its Accion Quona Inclusion Fund LP, reports Deal Street Asia. The fund launched in September with a target of $225 million.
The Accion Frontier Inclusion Fund has made eight investments including in Konfio, which analyzes e-invoices to underwrite working capital loans to small businesses in Mexico, and digital payments company Yoco in South Africa. Earlier this month Quona led a $5 million round for small business lender BizCapital in Brazil, which is similar to Konfio.
“You can’t get the type of returns we get in Western markets,” says Monica Brand Engel, a co-founder and partner at Quona. “We’re investing in enormous markets where the penetration is low.”
Catalyst Fund’s biggest value-add is in helping founders understand what a venture-ready company can be, Engel says. It’s not all innovation and new models. “It’s often new applications of existing tech,” she says.
The network also keeps her plugged into the evolution of fintech sectors in Kenya, Colombia and other regional hubs. “These markets are enormous,” she says. “There’s pent up demand.”