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, according to a report released by Omidyar Network.
Founded by eBay founder Pierre Omidyar, Omidyar Network invests in emerging market entrepreneurs and startups with solutions promoting social advancement. Paga, Hotels.ng and Andela are among its most recent investments.
Its 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, highlighting opportunities available to investors and offering insight into which of those opportunities is best for particular portfolios.
According to Omidyar Network, the frontier capital opportunity focuses on companies developing products and services for people who earn between US$2 to US$8 per day. With these people falling between the very bottom of the economic pyramid, where many impact investors currently focus, and the existing middle class, they have an element of purchasing power but still greatly benefit from products and services that improve their lives.
“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.”
The report outlines three strategies for venture capital firms, impact investors, and individuals who want to align their investing with their social values – the Frontier, Frontier Plus, and Replicate and Adapt.
The Frontier strategy is effective with traditional VC financing tools and invests in businesses that directly target low- to lower-middle-income populations. According to the report, two factors in particular 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.
Frontier Plus, meanwhile, 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.
The Replicate and Adapt strategy reflects where the bulk of existing VC funding in emerging markets already flows, with Omidyar Network saying 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 US$2 and US$8 per day as they make impact investing a truly viable part of their portfolios.”