Kenyan shopkeepers, Chinese farmers and U.S. migrant workers are all vital parts of the global economy. The formal economy, though, has mostly left them behind.
According to the most recent edition of the World Bank’s Global Findex, 1.7 billion adults worldwide lack access to financial services. The Findex also found, however, that two-thirds of the same group had a cell phone. That gap between technology and financial services penetration is what the emerging inclusive fintech sector aims to close. Since 2010, investors have sunk $100 billion into fintech startups.
Still, such investment often doesn’t reach fintech founders in developing markets, Raj Vikas, Accion Venture Lab’s managing director, told Karma. “There is a set of startups using new tools [to] engage with and serve those who have been ignored by the financial system, but institutional investors are not investing in these companies,” he said.
Venture Lab, which is the investment arm of financial services non-profit Accion International, launched in 2012 with $10 million to address that gap.
Venture Lab announced a new fund last week to expand its portfolio and marked the first time it has taken on third-party investors. The fund, called Accion Venture Lab Limited Partnership, received a $23 million infusion from outside organizations, including the Ford Foundation and Visa Inc., and a separate $10 million from Accion. Venture Lab now has almost $43 million in assets under management.
“We know this fund will support a promising portfolio of innovative companies,” said Dennis White, president and CEO of MetLife Foundation, one of the investors in the new fund, in a statement to Karma. “It will enable lower-income people to thrive in uncertain times, improve their financial health, and strengthen their communities.”
Within financial inclusion funding, technology investment lags other areas. The 2017 edition of the CGAP funder survey reported $42 billion of capital in the sector overall, but of the over 2,800 projects that received funding, only 231 were focused on digital finance.
Vikas said that this is largely due to investor unfamiliarity with markets where Action operates. From an investor’s perspective, founders in low-income and developing communities present overwhelming risk: nascent companies in low-data areas where markets are erratically regulated and customer balances are too small to seem worth considering.
“Companies that are saying, `Hey, there’s a customer out there, a low-income consumer or a small business, that has been ignored by banks,’ and usually they’ve been ignored because they’re too expensive to acquire, understand, or potentially get repaid from,” Vikas said.
These companies, which Accion saw as having unique insights into untapped customer bases, couldn’t even get to the startup stage. Those that could still needed heavy support to stabilize and formalize their business models. Vikas said that Accion encountered other companies that “were doing bits and pieces, but there wasn’t an investor focused on global seed-stage financial inclusion investing.” Venture Lab was created to address that gap.
The fund focuses exclusively on seed-stage fintech startups in developing and low-income areas. Asia, Africa, and Latin America are the core geographic areas, with a smaller interest in companies serving poor Americans. Venture Lab nurtures these startups into companies that can attract later-stage capital from institutional investors whose wariness influenced the fund’s creation. “The money is nice, but it’s not sufficient,” Vikas said. “We need to be really involved in governance and post-investment operations so our companies can move to the next stage.”
Venture Lab’s portfolio now holds 36 companies. For every dollar invested, its companies have raised $13 in later-stage rounds. Participating at an early stage, said MetLife Foundation’s White, is a major draw for joining the Venture Lab fund. “If you can give a committed startup the funds to build market traction with their product or service, then they have the potential to prove the business case and attract the much larger VC capital that’s out there.”
Capitalizing on interest
As Venture Lab’s approach began to show results, Vikas said that large financial services companies took interest. “There was a set of partners that were trying to figure out what the heck was going on with developing markets and inclusion,” he said. “Large investors like Visa that are saying, ‘How do we start to think about what’s happening at the vanguard?’”
These firms, which include payment processors, insurance companies and impact investors, saw the companies Venture Lab works with as potential targets for acquisition and conduits for reaching new customers and sectors. Accion created its latest Venture Lab fund to involve these outside investors.
Venture Lab plans to use the new fund to expand its geographic reach, potentially into Indonesia, the Philippines, Colombia, Peru, and Nigeria. Vikas said they will also add insurance-focused services to their portfolio, which currently focuses on small business credit. After five-and-a-half years, he said, their approach is “starting to work in terms of portfolio performance.”