Microequity at Skoll World Forum on Social Entrepreneurship
April 15, 2010 · Print This Article
What Comes After Microloans?
As a technology entrepreneur and angel investor in both North Carolina and East Africa, I’ve been thinking about what comes next in microfinance? To me, it’s microequity.
I had a fascinating breakfast this morning here in Oxford on the topic of microequity. The field of microequity is nascent, but rapidly growing. To me microequity is investing small amounts in for-profit socially responsible companies, particularly those in the developing world. I’d consider the core of microequity investment ranges are between $5k and $100k in for-profit socially responsible companies in the developing world.
Microequity investing can fill a tremendous need for capital for SMEs that can help a small business grow when microloan maximums have been reached but an entrepreneur is not yet able to access banks and larger scale institutional investors.
Effectively, microequity can be seen as seed funding and angel funding for companies in the developing world–with the exception that investing $25,000 in an existing company in the developing world really is growth capital rather than seed capital as this amount of capital can go much further and in some cases get a company past cash flow positive.
A Model for Microequity
From my vantage there seems to be a profitable (and hence scalable for greatest social impact) model that is now being developed investing in these microequity capital ranges in many parts of the world and filling the gap that sometimes exists between microloans, banks, non-profit investing funds, and institutional capital while creating tremendous social impact through sustainable job creation and economic development.
Overhead costs, deal selection, accounting transparency, and methods of obtaining the return are perhaps the most challenging obstacles to achieving a market rate of return to the investment. We talked about how all of these challenges can be overcome. There is such a huge gap here that traditional finance has not yet solved and there so many high quality opportunities to invest in while making a tremendous impact.
One suggestion centered around taking a pre-agreed upon percentage of free cash flow (FCF, or effectively net profits) that is pre-agreed upon in advance. Another suggested revolved around tying returns to a revenue multiple since EBITDAs are easier to manipulate by non-audited smaller companies.
Personally, my interest is in helping small, high potential companies based in the developing world owned primarily by local entrepreneurs access the mentorship and financial resources they need to grow into the future leading companies in their respective countries and eventually take their firms public on regional stock exchanges when run. It will likely take a couple decades to bring together the educational (human capital), governmental, and infrastructural resources needed to help small companies run by smart ambitious local entrepreneurs thrive–but the trend toward local entrepreneurial-led (often ICT-related) economic growth is already happening in Kampala, Kigali, Dar es Salaam, and Nairobi and so many other emerging markets globally from what I’ve seen.
To me, small business growth is the key to sustainably growing an economy and effectively increasing per capita incomes (otherwise known as reducing the number of people in urban and rural areas in poverty) and I believe through the right local trust networks for deal flow and local entrepreneurial support and mentorship models it is quite possible to achieve very strong returns investing today in high-potential for-profit socially responsible companies in the developing world.
Not Replacing NGOs, Non-Profits, and Public Sector
Investing in for-profit socially responsible companies in the developing world does not replace the need for a strong effective transparent public sector and does not replace the need for investments from non-profit organizations and NGOs.
Rather, it is additive to creating sustainable bottom-up economic development that creates local constituent-based growth in a way that reduces inequality of opportunity–and it happens to be where I think I can add value with my background as a venture-backed technology entrepreneur at some point.
Creating a venture capital fund that puts social return equal to financial return is something I hope to focus on someday down the road and create a scalable model that provides market-rate returns (15-20% per annum) investing in high-growth entrepreneurial ventures in the developing world run by local entrepreneurs (likely in the energy, solar, water, agricultural, low-cost medical device, software, and Internet fields).
Microequity Breakfast This Morning at Skoll
The microequity breakfast attendees this morning were:
Forrest Metz, Dev Equity, based in Oxford
Ryan Allis, iContact, based in North Carolina USA
Allan Barkat, Dualis, based in Israel
Naoko Felder-Kuzu, Socential, based in Zurich
Ron Boehm, Boehm Gladen Foundation, based in California, USA
Rob Pettit, Sumaria, based in Dar es Salaam, Tanzania
We had a great discussion around the technical structure around how to achieve market-based returns investing in for-profit socially responsible companies in the developing world.
We also talked about networks of socially responsible investors including Social Venture Network, Aspen Network for Development Entrepreneurs, and the Global Impact Investing Network and marketplaces for entrepreneurs in the developing world raising capital like BidNetwork and NeXii.
Questions & Comments?
What questions are there on this topic of microequity and investing in companies that create social good while achieving market returns or above market returns? I’d love to discuss this more!