Omidyar Network released a report laying out how frontier capital, or early stage risk capital in emerging markets, can be an effective tool for investors to achieve financial returns and social impact in Africa. The report surfaces existing opportunities available to investors today, and offers insight into which of those opportunities is best for particular portfolios.
The frontier capital opportunity focuses on companies developing products and services for people who earn roughly $2 to $8 per day. These people fall between the very bottom of the economic pyramid-where many impact investors currently focus-and the existing middle class. This means they have greater purchasing power and a steadier income, but still greatly benefit from products and services that improve their lives.
The report, “Frontier Capital: Early Stage Investing for Financial Returns and Social Impact in Emerging Markets,” draws from extensive interviews with leading investors, data analysis, and a meta-analysis of existing research.
“Frontier capital sits at the convergence of venture capital and impact investing,” said Matt Bannick, managing partner at Omidyar Network. “The report offers investors guidance for how to approach early stage investments in emerging markets, identifying key considerations that will help better align funders with opportunities. By studying entrepreneurs who are targeting low- and lower-middle-income populations, this report identifies a major market opportunity that can also improve the lives of hundreds of millions of people.”
With a goal of matching segments of the landscape with the right types of investors, the report outlines three strategies for venture capital firms, impact investors, and individuals who want to align their investing with their social values.
1. The Frontier. The Frontier strategy is effective with traditional VC financing tools and invests in businesses that directly target low- to lower-middle-income populations. The report uncovered two factors in particular that are strongly correlated with scaling quickly and profitably: a “mixed-income” model that allows the company to serve both middle- and lower-income populations and an asset light business model. The most prominent sectors in this category are financial technology (fintech), education technology (edtech), and consumer, Internet and mobile. Siyavula, a South African education technology company, is an example highlighted in the report.
2. Frontier Plus. The Frontier Plus strategy is for investors with more patience and risk tolerance because companies in this category are more asset intensive, target only poorer income segments, or operate in countries with less-developed capital markets. Frontier Plus companies such as Rangsutra (consumer crafts), Servals Automation (sustainable rural energy products), Shree Kamdhenu Electronics (electronic milk collection services), and RuralShores (rural business process outsourcing) produced 5x or greater returns to investors. MEDEEM, an early stage company that has developed an affordable, accessible land rights documentation process that is currently deployed in Ghana is another example highlighted in the report.
3. Replicate and Adapt. This strategy reflects where the bulk of existing VC funding in emerging markets already flows and yet there are opportunities to do even more. It focuses on companies replicating business models that have been proven elsewhere and adapting them to an emerging market context.
“Our experience after 11 years in impact investing in emerging markets, including many throughout Africa, is that one can get strong returns and make a tremendous difference in people’s lives by focusing on people who are not the poorest of the poor but still have significant needs,” said Paula Goldman, Omidyar Network’s global lead for impact investing and a lead author of the report. “There are a range of investing strategies investors can explore directed at those earning between $2 and $8 per day as they make impact investing a truly viable part of their portfolios.”