Addressing the Global “Missing Middle”
This is a guest post from Will Poole, Co-Founder & Managing Partner of Capria.
The Problem: A Lack of Capital and Expertise
There has been enormous growth in both emerging market private equity and impact investing over the past five years. Global PE giants such as KKR have invested $200 million into sub-Saharan African enterprises and impact investors now manage over $50 billion in assets. However, despite these positive trends, there is still a financing gap for early stage opportunities described as the “missing middle”, “seed gap” or “pioneer gap”. The latest Global Impact Investing Network (GIIN) annual survey found that of the $60 billion managed by impact investors, less than 10% is invested in early stage companies. Additionally, venture capitalists globally are shifting their attention to later stage investments according to a report from Ernst and Young. The global lack of early stage capital results in fewer opportunities for later stage investors, one of the top challenges of the impact-investing field mentioned in the GIIN annual survey. Furthermore, early stage risk funding is only part of the problem. Mentoring and other forms of ecosystem support are also required to help companies develop from the proof-of-concept to scale. The combined funding and ecosystem support gap for the global missing middle casts doubt on J.P. Morgan’s prediction that impact investing will be a $1 trillion opportunity by 2020.
A Solution: More Professional Investing Firms
Fortunately, there are organizations that are viewing this global funding gap as an opportunity. Investisseurs and Partenaires (I&P), an organization based in Paris created by a co-founder of the BC Partners, focuses primarily on small and medium enterprises in Francophone Africa. Fledge, a global impact business accelerator, uses a revenue based financing structure to address the challenge of finding exits for global impact businesses. Finally, the Unitus Group, which helped incubate the $23 million Unitus Seed Fund that I co-founded, supported the creation of three funds that invest in early stage opportunities on multiple continents. These organizations are all bridging the “seed gap”, providing critical financing, guidance, and support needed to prepare a company to raise sufficient investment to enable it to scale.
Scaling the Solution
Contrary to what some entrepreneurs believe, early stage investing is not easy! Convincing your investors to trust you with their capital, becoming the partner of choice for high quality entrepreneurs, and helping companies grow quickly and within their means take skills and experience that are rarely found in one person. My first fund, the Unitus Seed Fund, became the leading impact venture seed fund in India in less than two years because my partners and I:
Received very early risk capital and support from Unitus Labs
Rapidly assembled an incredible local team in Bangalore
Established the trust of high net worth individuals and family foundations
With my new venture, Capria, my partners and I will apply our experience investing in early stage entrepreneurs in India and the USA to seed the next generation of impact venture capitalists. Capria will partner with local fund managers who are experts in their respective geographies to launch at least 10 new venture funds over the next five years. We will leverage our experience as first time fund managers, the collective expertise of the Unitus network and a wealth of seasoned advisors to reduce the time it takes from launching a new fund to making a first capital call. We know that others have tried and failed to scale venture funds globally and understand what will and won’t work through conversations with industry veterans and over a year of background research. We have a plan that our investors believe in and are excited to run our first cohort in January 2016.
Quantifying our Impact
We know that it will not be easy to address the global missing middle. However, we’ve spoken to enough talented fund managers around the world to see that it’s possible to start closing the seed gap by helping the entrepreneurs chart their paths to scale and profitability. The exciting thing for us is the leverage that the Capria network of seed funds will have. A simplified version of the math works like this:
Ten $10M seed funds invest in an average of 10 companies each, catalyzing additional capital support from other investors
The most successful of those 100 companies advance to Series A rounds and raise an average of $5M
Depending on what you use for a survival rate and how fast the companies grow, you can see a path to $500M in impact capital being raised and deployed. And that’s only with the first funds: the second and third funds raised by Capria Accelerator participants will be 2-3 times as large!This model, along with the support of I&P and a couple of others, could turn the missing middle a thing of the past.
About Will Poole
Will Poole is a serial entrepreneur and venture investor, focused on improving ecosystems that bring opportunity to low-income populations.
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