The inspiration for this post was my Business at the Base of the Pyramid class at Harvard Business School and it’s something that I have been pondering as I consider being an early stage investor in East African technology businesses.
There are two main kinds of capital deployed to emerging markets to stimulate economic activity for small businesses:
- Social(Not for Profit) Capital – This kind of capital is usually issued by governments, charitable foundations or entities like the World Bank/IFC and makes up the majority of investment capital to small businesses from abroad
- For Profit Capital – Investors looking for returns which are as high as possible from emerging markets to compensate them for the high risk of their investments
I think the best model for emerging markets is a hybrid form of for profit capital from socially responsible investors. i.e. Investors who are looking to make a reasonable return on their investment without exploiting the recipients of their capital.
One of the key problems of investing in social (not for profit) enterprises is that it does not create the incentives for these businesses to scale into self-sustaining entities. If businesses are accountable to their investors to yield positive unit economics and positive returns they are less likely to operate in a lean and efficient manner. Commerical enterprises are just better designed to create long term value for their shareholders, employees and (hopefully) customers provided they are ethically run.
I think that initiatives such as Root Capital and the Grass Roots Business Fund are trying some extremely interesting innovative models and hopefully we’ll see some positive results from them.
Figuring out a more effective way to deploy capital to emerging markets is a huge problem and I really hope that such innovations make strides towards solving it.