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Webinar: What Does ‘Impact’ Mean to You?

Posted By Mia Haughton, Vera Solutions, Tuesday, April 17, 2018

Live Webinar on Thursday, May 3rd at 10am (BST)

Every nonprofit is working towards making a positive change in some way, be it in the lives of individuals, our communities, or the world we live in. But how do you measure the impact of the good work you do?

Nonprofits who want to increase their mission’s reach need to define what success looks like to them so that they can measure it more effectively. Join us for a live panel discussion where three nonprofit trailblazers from different ends of the spectrum, each with their own unique insights and real-world experience on the topic, will answer the question: what does ‘impact’ mean to you?

Speakers:

Zak Kaufman, Co-Founder & CEO at Vera Solutions
Joanne Trotter, Global Lead, Results and Learning at the Aga Khan Foundation
Amanda Feldman, Director at The Impact Management Project

Don’t miss out, save your seat today >>>

 

Tags:  impact measurement  innovation  Performance Measurement  salesforce  social impact  webinar 

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Social Enterprise Franchising Webinar

Posted By Stage Six, Friday, April 6, 2018
https://www.unh.edu/social-innovation/social-sector-franchising-initiative-webinar-1

Register for this webinar about using franchising to scale SGBs here:  https://www.unh.edu/social-innovation/social-sector-franchising-initiative-webinar-1?platform=hootsuite

 

Social Sector Franchising Initiative 2018 Webinar Series

 

Replication and Scaling for Impact: What are the options?
Does Social Franchising have a competitive advantage?  


 

Image of Family at a Supply Hope MarketWednesday, April 11, 2018 
10:00 a.m.  - 11:00 a.m. (-5 GMT)
Online 

 

 

 

 

In this first webinar of the Social Sector Franchise Initiative 2018 Webinar series we will explore a variety of issues and questions about scaling social enterprises. There is an urgent need to scale promising social enterprises that can meet vital human needs. But are we making headway in identifying the most effective pathways to scale? What do we know about the various options for scaling social enterprises, in terms of their relative abilities to reach significant numbers of customers while holding true to their social mission? Why do many social enterprises fail to scale?  What are the roles of industry facilitators and service providers in enabling scale? We often assume scaling equals replication—what are other routes to scale?

Reaching scale can be challenging and some research says fewer than 1 percent of startups scale. This is due to many factors including: the team and leadership’s ability to manage scale; the enterprise’s business model and technology readiness; fit in new territories; and access to or quality of funding and partnerships.  Organizations often use several strategies, depending on opportunities and geographic differences. Does this complicate scale, or does this help the enterprise adapt in new markets? 

What about social sector franchising as a potential gamechanger for scaling social enterprise? Franchising enables a business to grow exponentially while maintaining standards and achieving economies of scale. Franchising drives economic development by increasing opportunities for jobs and business ownership, and creating pipelines of social enterprises capable achieving higher returns for impact investors.  Franchising   has   an advantage when the business model, technology, and market changes little. It also helps with the uptake of business models by aspiring entrepreneurs. Yet, could there be challenges for franchising when scaling requires more changes?

Bill Maddocks our webinar moderator will explore these issues and more with our four guests who represent a wide range of experience in scaling and replicating social enterprises around the world.

 


 

Webinar Guests:
 

Image of EmmaEmma Colenbrander
Emma is the director of a new initiative at Practical Action that is coordinating a wide range of distribution models to coordinate learning and look for economies of scale. The Global Distributors Collective (GDC) is a partnership-based model that acts as a ‘one stop shop’ for last mile businesses, offering support, information and expertise to overcome the challenges of accessing life-changing technologies. It provides a collective voice for distributors to ensure their voice is heard; drives research and innovation across the sector; facilitates the exchange of information, insight and expertise; and helps pilot, test and scale innovative solutions.

Image of NeilNeal Harrison 
Neal A. Harrison is Associate Director of the Replication Initiative at Miller Center for Social Entrepreneurship. In this role, Neal is focused on scaling-out business models and technologies by developing sector-specific playbooks to spread best practices, as well as supporting entrepreneurs design their scaling strategy. He has over 10 years of experience building start-ups and leading innovation projects in Sub-Saharan Africa, North America, and Europe.

 

Image of DavidDavid Koch 
David Koch is a partner and co-founder of Plave Koch PLC, a boutique law firm focused on franchising, licensing, and branded distribution. He has over 25 years of experience with clients in foodservice, hotels, educational services, entertainment events, veterinary, staffing, car rental, homeowner services, retail, and other industries. His work involves structuring franchise and license programs, supply chain arrangements, private equity investments in franchising, corporate and commercial transactions, regulatory compliance, antitrust counseling, and cross-border expansion.

David holds an adjunct faculty appointment with the International Transactions Clinic at the University of Michigan Law School, his alma mater, and serves in a similar but informal capacity with the International Transactions Clinic at NYU School of Law. He has spoken at numerous franchise legal and business conferences, including programs in Japan, India, Guatemala, Poland, Romania, England and Canada, and he has authored or co-authored more than 40 published articles and conference papers. Before entering private practice, he was an Attorney-Advisor to the Chairman of the U.S. Federal Trade Commission.
 

Image of JulieJulie McBride
Julie is a thought leader in the field of social franchising and was recently named one of “Five Innovative Consultants that are changing the world” in Inc. Magazine.  Julie’s experience using the franchise model to scale social businesses spans 20 years, five continents, and several industries including healthcare, water, sanitation, agribusiness, clean energy, and education.  She was instrumental in designing and operating PSI’s pioneering reproductive health franchise in Pakistan (Green Star) and supported the expansion of social franchises into 27 additional countries.  As a franchise consultant at MSA Worldwide Julie helped social business owners and NGOs design and execute franchise systems.  In her most recent venture as founder and CEO of Stage Six LLC, Julie is building and supporting a portfolio of investment-ready social franchises across a range of sectors and geographies. Her efforts to inform and inspire potential actors in this field have included several high profile speaking engagements and publications.  Julie earned her Masters in Public Health from New York University and her Bachelor of Science from the University of Washington. 

Tags:  replication  scaling  Sector Trends  social enterprise  social entrepreneurship  social franchisingsocial entrepreneurship 

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Risky business: how to de-risk your fintech startup before it’s too late

Posted By Akansha Kasera, Bankable Frontier Associates, Friday, April 6, 2018
Updated: Friday, April 6, 2018

By Maelis Carraro and Elizabeth Davidson

If you’re a fintech entrepreneur, it’s probably not news to you that failure is more likely than success. After all, an estimated 70% of tech startups fail, typically within the first two years after their first round of financing.

Catalyst Fund has been working with inclusive fintech startups, a field that presents unique challenges for entrepreneurs, over the past two years. In many countries, it is a sector that presents more regulatory constraints, limitations as to how companies can handle information, and stringent operational and capital requirements.

Different startups, common risk challenges

Despite working with a wide variety of fintech startups across different geographies and sectors, we have seen some themes emerge on the most common risks that can pose a threat to the success of the business at the early stage. All startups mention they lack the financial and human capital they need to grow their businesses. “Finding funding is a huge burden. The average startup CEO spends 70% of his time fundraising, which remains the number one challenge faced by local startups,” says Yoann Berno of Flowigo.

Finding people with the right skill sets who are willing to give up more secure job alternatives is also big barrier, yet fundamental to raising capital and ensuring smooth execution. “The biggest challenge is getting the team with the right skill set at first, especially when you’re a young company and don’t have a system or protocol for hiring and then you start growing rapidly,” says Destacame’s Jorge Camus. “It then gets challenging to manage the team, train them and really build a culture that allows you to get to your goals.”

Over 70% of our fintech entrepreneurs also noted that not getting to product-market fit is a major challenge they face. They felt they did not have a full understanding of their customers needs to build strong value propositions. Additionally, 40% mentioned they faced technology risks, including lack of accessible data to refine their products, and 33% pointed to specific ecosystem dynamics that might threaten their business ability to scale.

Want to mitigate risks? Start early!
Early identification of key risks can help fintech startups invest in the business support they need early on before a risk takes down the business. These risks can scare off investors, who want to ensure that entrepreneurs understand the key challenges they face. Instead of waiting for entrepreneurs to identify key risks, early stage investors can work with startups to tackle these risks before or in conjunction with their investment.

Catalyst Fund has taken just this approach. By working with our entrepreneurs to identify risks, we can tailor technical assistance to solve these risks so that investors are more confident in the future success of the business.

Taking an honest look at their own key risks can be difficult for entrepreneurs, who may be too deep in the weeds to step back and look at the bigger picture. This is why the Catalyst Fund developed a risk diagnostic to help startup leaders get a better grasp on their challenges, and understand those within or outside of their control. The tool offers a checklist of possible mitigation strategies for the entrepreneur. Here are a few strategies we applied through our technical assistance engagements:

Understand your customer to offer strong value propositions
For Miguel Duhalt at Comunidad 4uno, that meant better understanding what his customers valued most about its product in order to focus on high value customers and tailor their offering. When we first met 4Uno, a financial services distribution platform offering insurance, health benefits and payments services for domestic workers in Mexico, they struggled with picking the right product offering for the right customer segment. After working with them on customer research, we helped them segment their customer base to refine their product offering and marketing strategy. Since then, they tailored product packages for insurance to specific client profiles and also offer salary payment services via an app, which resulted in a growth spurt.

Figuring out the right way to engage with customers is also a challenge for entrepreneurs in these markets and a big risk to the company’s ability to take off. How can a mobile-based startup communicate its value proposition clearly and consistently with a rural customer base when only 50% own phones and only 20% are literate? WorldCover, a platform providing insurance to low-income farmers around the world, used a marketing MVP, or minimal viable product, composed of simple and clear images to cater to the illiterate majority of potential customers. They tested various solutions, from SMS systems to a “microphone man” going to communities to play a recorded message and frequent community meetings. Community meetings, with 95% attendance rates, allowed WorldCover to maintain a human touch with customers. Farmers trusted WorldCover more after more face-to-face interactions because “an impostor wouldn’t show up at your house every week after taking our premium money,” said WorldCover’s CEO, Chris Sheehan.

Build a product vision and roadmap that meets your business needs
On the other hand, PayGo, a pay-as-you-go gas solution in Kenya, realized they were struggling with technology risks. They needed to integrate with a scalable payments solution, track key gas system indicators, and find tools to measure, monitor, and run their field sales team and customer service, yet they did not have the tech skills in the team build the necessary back-end software technology. We worked on designing their product architecture and built a new version of the app they are still using today. “The architecture we built with Catalyst still holds,” says Nick Quintong, PayGo’s CEO. “It was fundamental for a team that doesn’t have software expertise to bring someone in to show us how it can be done with off-the-shelf software modules.” Without these key technology investments early on, PayGo would not be poised for the growth it’s enjoying today.

In Colombia, we helped Escala, a savings fund for corporate employees and their children, with similar challenges. Initially, technology was holding Escala back and preventing them from reaching more clients who could benefit from their services. We worked with Escala to identify and integrate the right tech processes to match their stage and helped them avoid spending important resources on expensive and unnecessary CRM tools. 


“We believe ESCALA Educación’s story proves that a model like CF is very valuable to get a company investment-ready.” 

Escala used their new tech structure to more successfully manage their two sets of clients — companies and their employees — and to raise a seed round, which included members of Catalyst Fund’s Investors Committee such as Accion Venture Lab. “We believe ESCALA Educación’s story proves that a model like CF is very valuable to get a company investment-ready,” said Tahira Dosani, co-managing director of Accion Venture Lab, at the SOCAP conference this year. “ESCALA combines a strong management team and exciting customer acquisition and engagement strategies” says Vikas Raj, co-managing director of Accion Venture Lab.

Get the timing right
Unfortunately, not all risks can be mitigated. For Flowigo CEO Yoann Berno, “timing is everything.” Flowigo, a SaaS company seeking to enhance operations of pay-as-you-go product distributors in Africa, faced timing risks that ultimately backfired. Its markets lacked the client density necessary from them to scale, and key infrastructure issues like connectivity posed an ongoing challenge. SaaS companies like Flowigo need dense networks of businesses to flourish, but in Africa, industries that count more than a few dozen major players are rare. Scaling a SaaS business while addressing 10 to 15 customers is a hard sell. Ultimately, Flowigo succumbed to the timing risk, deciding to pivot and wind down this line of business.

Overall, while not all risks are avoidable, you can’t avoid the risks you don’t know about or aren’t focused on. So for fintech startups and investors alike, identifying and mitigating risks early is key to success. To get started on identifying your fintech startup’s key risks and think of your mitigation plan, check out Catalyst Fund’s new risk diagnostic.

You can also check out De-risking your Fintech startup webinar where we go over the toolkit and risk assessment for Catalyst Fund companies here

 Attached Thumbnails:

Tags:  Business  emerging markets  entrepreneurship  finance  impact investing  inclusive business  inclusive innovation  Incubation  Risk; Risk Assessment; ANDE Members  SGBs; Environment; accelerators; energy  social business  social enterprise  social entrepreneurship 

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MEDA’s Gender Equality Mainstreaming Framework garners industry support as the “go-to reference material for those seeking to create gender equitable social change through their investment process”

Posted By Devon Krainer, Mennonite Economic Development Associates, Thursday, April 5, 2018

For many organizations, pursuing business strategies that empower women can seem daunting. Often the most difficult part is to begin. In response to this challenge, MEDA launched the Gender Equality Mainstreaming (GEM) Framework, a practical manual and toolkit for transforming companies to be more gender equitable while supporting business growth and impact. Numerous industry leaders have announced their support for the toolkit. From gender lens investing pioneers like Jackie VanderBrug to private equity funds including Women’s World Banking, SEAF and Sarona Asset Management to government agencies like USAID, the framework is rapidly gaining traction with investors and capacity building organizations.

In the words of Joy Anderson, Founder and President of Criterion Institute:

“MEDA’s GEM Framework provides investors, donors, intermediaries and other stakeholders with an open source toolkit for assessing gender performance of companies, as well as guidance on how to improve gender outcomes within business policies and practices. It builds on the environmental, social and governance (ESG) standard to enable analysis and upgrading across ESG criteria – elevating gender to a cross-cutting theme. Too often gender is represented by a tick box buried in the appendix, this resource brings gender to the front end of analyzing business operations, both the opportunities and the risks…I predict this resource will be the go-to reference material for those seeking to create gender equitable social change through their investment process.”

The toolkit is applicable to a wide range of investors (e.g. foundations, asset managers, private equity funds, government donors) and capacity builders (e.g. accelerators, technical assistance providers, NGOs, business associations), and can be applied throughout the investment life cycle, from investment readiness and due diligence through to value creation and impact monitoring. Companies seeking a quick and simple way to assess their gender performance can complete an online GEM self-assessment in less than an hour. The self-assessment generates a score and tailored recommendations on areas to improve gender equality within each ESG component.

We hope the GEM Framework will be a useful resource for practitioners around the world, and will enable companies to contribute to sustainable and equitable growth for all. We would love to hear from you on how you are applying the framework and welcome opportunities to collaborate in the future.

Download File (PDF)

Tags:  impact investing; gender lens investing; gender; w 

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Yunus Social Business Launches Office in Kenya

Posted By Yunus Social Business, Wednesday, April 4, 2018
Professor Muhammad Yunus visited Kenya to officially launch Yunus Social Business Kenya, a new fund dedicated to harnessing the power of social business to end poverty.

Prof. Yunus and Co-founder Saskia Bruysten launched the new chapter along with three partners; Bharat Doshi, Nilesh Doshi and Vinay Sanghrajka have all been deeply invested in philanthropy in Kenya for many years, but inspired by the work of Prof. Yunus they are bringing the business community of Kenya together to tackle social problems with a business approach. The launch was marked with an event with an attendance of over 320 members of the business community of Nairobi, over $800,000 committed for the fund so far.


The goal of the fund in Kenya will be to support and invest in social businesses and social entrepreneurs. By 2020 Yunus Social Business Kenya aims to be funding 30 social businesses, creating over 30,000 jobs and impacting over 2 million people in Kenya. By turning donations into investments in sustainable social businesses.


Yunus Social Business Kenya is now hiring for an Investments Manager: http://www.yunussb.com/job/investment-manager-kenya/

See the full blog article here: http://www.yunussb.com/blog/yunus-social-business-launches-ysb-kenya/


Tags:  Kenya social entrepreneurship 

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SKOLL ECOSYSTEM EVENT - STREET BUSINESS SCHOOL

Posted By Amy Yanda-Lee, BeadforLife, Saturday, March 24, 2018

THE ART OF SOCIAL FRANCHISING * SKOLL WORLD FORUM - ECOSYSTEM EVENT

Thursday, April 12 - 4:00 PM @ The One Pub

There is growing interest in using social franchising in the global development sector as a means to scale:
• NGOs see franchising as a way to add proven program to their work without reinventing the wheel.
• Donors see franchising as a tool to reduce the costs of each group having to invent their own program.
• Groups/Organizations with a proven and scalable model use social franchising to develop an earned income stream to lessen their dependence on philanthropic funding.

Join us over a pint as we examine social franchising with a case study on how to scale impact of a program proven to alleviate poverty. Through aligned partnerships, Street Business School (SBS) shares how it has successfully scaled its proven model of entrepreneurial education for women living in poverty from Uganda to seven countries across East Africa within the past two years. This example of social franchising has operationalized through funder and NGO partnerships in which locally led organizations are joining a movement to achieve ambitious global impact.

Come with your questions, ideas and experience to this highly interactive session. We will rely on YOU, the audience, to ponder the challenges, surprises, and greatest opportunities that exist in social franchising. We will also hear from panelists who have experience using Street Business School’s franchise model to magnify their own impact. Panelists include:
• Segal Family Foundation CEO Andy Bryant who will share how Segal leverages the partnership with SBS to scale impact while supporting other Segal grantees and grassroots led organizations.
• Street Business School CEO Devin Hibbard who can speak to the strategy of social franchising and the execution of this specific case and these strategic partnerships.
• Dandelion Africa Executive Director Wendo Aszed who can speak to the franchise customization process as she is currently implementing SBS in Dandelion’s community as both a Segal grantee and an SBS Global Catalyst Partner (franchisee).
• Fourth panelist – to be announced at Skoll World Forum
• Moderator, Joahim Ewechu Street Business School Board member and Founder of Unreasonable Institute East Africa.

Refreshment and gifts provided at 4:00. Come early for a drink and chance to network. The panel will begin at 4:15. Thank you to Segal Family Foundation, Moxie Foundation and Street Business School for their fiscal sponsorship of this event.

 

Tags:  social enterprise  Social entrepreneurship  social impact 

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Management Fees for Emerging Market VC Funds Should be Predictable

Posted By Dave Richards, Capria Ventures, Wednesday, March 21, 2018

The traditional PE-birthed model for management fees does not align interests for LPs and GPs for emerging market VC and early-growth PE funds that are under $100M


As a global emerging market fund investor, we evaluate more than 200 VC/PE fund proposals per year across Africa, Latin America, and South & Southeast Asia. We also talk every week with multiple fund investors (most call themselves “LPs” or limited partners) to get their feedback on funds that they are seeing and evaluating.


The Fees Tug of War

 
One of the most focused on and hotly discussed topics is fees. Fund managers (most call themselves “GPs” or general partners) are “defending” their need for the proposed management fees in order to have sufficient resources to professionally manage their investing strategy, with the largest item being the principals’ and staff’s compensation expenses and profit-sharing fees that give them upside if they can deliver profits (aka “carry”). The LPs are trying to understand why the GPs need to pay themselves such large salaries and question if there is sufficient “skin in the game” from the GP principals to align interests long-term. The LP’s concern is that GPs can be paid handsomely, or maybe even excessively, via management fees even if the GPs invest their money poorly and don’t deliver expected returns. The default ask by GPs in under $100m funds is “2 & 20” – 2 percent per year as management
fees and 20 percent of carry. These two items are generally the core “fee package”. I have previously shared about a better way to align LP/GP interests on carry, so here I’m going to focus on the management fee component.

I Approach the Management Fee Conversation from a Different Angle As a fund investor, I often ask the GP the following questions:

 What is the smallest annual operating budget you need to do a quality job of managing this fund? And what is your preferred budget? Explain both scenarios with trade-offs.
 You are proposing to increase your firm’s annual operating budget by 200% (or whatever it is) with additional fees generated by this new fund. Where will you be spending the incremental fees?

Why do I ask these type of questions? Because I really don’t care about what percent management fee they are asking for, what I care about is what size of operating budget they need and the logic behind that. E.g. how much is going to hire new staff, compensate current staff more, move into a fancy new office, upgrading to business class travel, paying for overpriced attorneys, and … drum roll please … going to pay principals.

What is the most common answer? Poor quality “hand waving” type answers. A remarkable number of managers, even experienced ones, have not really thought through how to address such a straightforward question. And they generally won’t admit it. They haven’t done the work to research and prepare a bottoms-up budget forecast. They just assume it is ok to ask for 2% or even 2.5% “because doing business is expensive in this place.” I think to myself, would they invest in a startup business where the CEO hadn’t done their homework on revenue forecasts and operating budgets? See my other post on why fund managers need to be entrepreneurs as well.


So, I send them back to prep a bottoms up operating budget forecast for the “minimal” and “preferred” scenarios and ask them to send to me before our next call. Most LPs Focus on Incentivizing Capital Deployment Beyond Investment Period. In the 2% management fee scenario, most old-school LPs are “ok” with the basis of the 2% fee to be “committed capital” during the investment period (usually 3-5 years for VC funds). Then LPs want the basis of the management fee to shift to something like “net invested assets” – that is, the amount that has been deployed to investee companies.

1 . The thinking is that this will motivate the GP to quickly deploy reserves which is somehow correlated to speeding up when they will be able to exit the investments. They also prefer to not pay management fees on management fees and fund expenses.

2 . The problem with this approach is that this results in a dramatic cliff on fees right after the investment period ends. For instance, VC funds often initially invest smaller amounts in many companies and then hold substantive reserves to double and triple down on the best companies that emerge. So, it is not uncommon at the end of the investment period for the fund to have deployed only 40-50% of the committed capital. This would mean a 50% drop in management fees right after the investment period.

Then It Gets Even More Complicated.

So, then often the discussion turns to the basis post investment period to being “net invested assets + something else”. Often the something else is some quantity of reserves, but then this gets really complicated to define. Here are the problems with this approach to post investment period management fees

thinking:

1 This is generally the cost basis of investments made by the fund, less the proportion of shares sold. So, if the fund invested $1m in a company, the value would initially be $1m. If the fund sold 50% of its shares in that company, then the value would be reduced to $500k.
2 If you have a $50m fund and the forecast is for $10m in fees & expenses over the 10 year duration of the fund, then the fund’s investable capital is $40m. When you pay management fees based on committed capital, you are paying it on the full $50m.

 The GP is incentivized to increase net invested assets ASAP at or after the investment period whether this makes sense or not in order to earn higher management fees;
 The GP is incentivized to hold on to investments longer and write them down/off more slowly because that would reduce management fees post investment period;
 The GP will need to start fundraising for a successor fund earlier to reduce the period of lower management fees after the investment period – paying less attention to their current fund and its performance; and
 GPs are (understandably) going to ask for a higher management fee during the investment period due to the unpredictability of fees post investment period.

But the biggest problem with this typical approach is that it creates unpredictable management fees for both the GP and the LP. The net is that this is an over-engineered fee structure with a lot of perverse incentives that misaligns the LP and GP interests.


Predictable “Budgeted” Management Fees are a Better Solution

I believe there is a simpler and much more aligned approach to setting management fees – a pre-defined management fee budget for the entire fund duration. This approach defines a year-by- year budget which recognizes that there is some additional heavier lifting in the early years as the portfolio is being selected and then a predictable, graduated budget in the outer years. This enables the GP is focus on maximizing the fund’s results without having to think about how their buy/sell decisions are impacting their operating revenue, nor does it incentivize the GP to pre-maturely raise another fund.

Example: For a $50m fund, the agreed budget might be $1.25m for the first 2 years and $1m for the next 2 years of the investment period. Then reducing to $850k in years 5 & 6, $700k in years 7 & 8, etc. (Of course, you could convert this back into a percent of committed capital for each year.)

The discussion then can focus on what the right budget is based on the investment strategy. And you could even decide to have checkpoints along the way managed by the fund’s advisory council (often called LPAC, with members from the fund’s largest investors) to review the budget needs and have some authority to increase or decrease modestly. But be careful about making it too easy to change the budget as this could create unintended misalignments.


Summary: Pre-determined budgets for management fees for the duration of the fund are a
benefit to both fund managers and fund investors creating better long-term alignment.

This post has not been tagged.

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Management Fees for Emerging Market VC Funds Should be Predictable

Posted By Dave Richards, Capria Ventures, Wednesday, March 21, 2018

The traditional PE-birthed model for management fees does not align interests for LPs and GPs for emerging market VC and early-growth PE funds that are under $100M


As a global emerging market fund investor, we evaluate more than 200 VC/PE fund proposals per year across Africa, Latin America, and South & Southeast Asia. We also talk every week with multiple fund investors (most call themselves “LPs” or limited partners) to get their feedback on funds that they are seeing and evaluating.


The Fees Tug of War

 
One of the most focused on and hotly discussed topics is fees. Fund managers (most call themselves “GPs” or general partners) are “defending” their need for the proposed management fees in order to have sufficient resources to professionally manage their investing strategy, with the largest item being the principals’ and staff’s compensation expenses and profit-sharing fees that give them upside if they can deliver profits (aka “carry”). The LPs are trying to understand why the GPs need to pay themselves such large salaries and question if there is sufficient “skin in the game” from the GP principals to align interests long-term. The LP’s concern is that GPs can be paid handsomely, or maybe even excessively, via management fees even if the GPs invest their money poorly and don’t deliver expected returns. The default ask by GPs in under $100m funds is “2 & 20” – 2 percent per year as management
fees and 20 percent of carry. These two items are generally the core “fee package”. I have previously shared about a better way to align LP/GP interests on carry, so here I’m going to focus on the management fee component.

I Approach the Management Fee Conversation from a Different Angle As a fund investor, I often ask the GP the following questions:

 What is the smallest annual operating budget you need to do a quality job of managing this fund? And what is your preferred budget? Explain both scenarios with trade-offs.
 You are proposing to increase your firm’s annual operating budget by 200% (or whatever it is) with additional fees generated by this new fund. Where will you be spending the incremental fees?

Why do I ask these type of questions? Because I really don’t care about what percent management fee they are asking for, what I care about is what size of operating budget they need and the logic behind that. E.g. how much is going to hire new staff, compensate current staff more, move into a fancy new office, upgrading to business class travel, paying for overpriced attorneys, and … drum roll please … going to pay principals.

What is the most common answer? Poor quality “hand waving” type answers. A remarkable number of managers, even experienced ones, have not really thought through how to address such a straightforward question. And they generally won’t admit it. They haven’t done the work to research and prepare a bottoms-up budget forecast. They just assume it is ok to ask for 2% or even 2.5% “because doing business is expensive in this place.” I think to myself, would they invest in a startup business where the CEO hadn’t done their homework on revenue forecasts and operating budgets? See my other post on why fund managers need to be entrepreneurs as well.


So, I send them back to prep a bottoms up operating budget forecast for the “minimal” and “preferred” scenarios and ask them to send to me before our next call. Most LPs Focus on Incentivizing Capital Deployment Beyond Investment Period. In the 2% management fee scenario, most old-school LPs are “ok” with the basis of the 2% fee to be “committed capital” during the investment period (usually 3-5 years for VC funds). Then LPs want the basis of the management fee to shift to something like “net invested assets” – that is, the amount that has been deployed to investee companies.

1 . The thinking is that this will motivate the GP to quickly deploy reserves which is somehow correlated to speeding up when they will be able to exit the investments. They also prefer to not pay management fees on management fees and fund expenses.

2 . The problem with this approach is that this results in a dramatic cliff on fees right after the investment period ends. For instance, VC funds often initially invest smaller amounts in many companies and then hold substantive reserves to double and triple down on the best companies that emerge. So, it is not uncommon at the end of the investment period for the fund to have deployed only 40-50% of the committed capital. This would mean a 50% drop in management fees right after the investment period.

Then It Gets Even More Complicated.

So, then often the discussion turns to the basis post investment period to being “net invested assets + something else”. Often the something else is some quantity of reserves, but then this gets really complicated to define. Here are the problems with this approach to post investment period management fees

thinking:

1 This is generally the cost basis of investments made by the fund, less the proportion of shares sold. So, if the fund invested $1m in a company, the value would initially be $1m. If the fund sold 50% of its shares in that company, then the value would be reduced to $500k.
2 If you have a $50m fund and the forecast is for $10m in fees & expenses over the 10 year duration of the fund, then the fund’s investable capital is $40m. When you pay management fees based on committed capital, you are paying it on the full $50m.

 The GP is incentivized to increase net invested assets ASAP at or after the investment period whether this makes sense or not in order to earn higher management fees;
 The GP is incentivized to hold on to investments longer and write them down/off more slowly because that would reduce management fees post investment period;
 The GP will need to start fundraising for a successor fund earlier to reduce the period of lower management fees after the investment period – paying less attention to their current fund and its performance; and
 GPs are (understandably) going to ask for a higher management fee during the investment period due to the unpredictability of fees post investment period.

But the biggest problem with this typical approach is that it creates unpredictable management fees for both the GP and the LP. The net is that this is an over-engineered fee structure with a lot of perverse incentives that misaligns the LP and GP interests.


Predictable “Budgeted” Management Fees are a Better Solution

I believe there is a simpler and much more aligned approach to setting management fees – a pre-defined management fee budget for the entire fund duration. This approach defines a year-by- year budget which recognizes that there is some additional heavier lifting in the early years as the portfolio is being selected and then a predictable, graduated budget in the outer years. This enables the GP is focus on maximizing the fund’s results without having to think about how their buy/sell decisions are impacting their operating revenue, nor does it incentivize the GP to pre-maturely raise another fund.

Example: For a $50m fund, the agreed budget might be $1.25m for the first 2 years and $1m for the next 2 years of the investment period. Then reducing to $850k in years 5 & 6, $700k in years 7 & 8, etc. (Of course, you could convert this back into a percent of committed capital for each year.)

The discussion then can focus on what the right budget is based on the investment strategy. And you could even decide to have checkpoints along the way managed by the fund’s advisory council (often called LPAC, with members from the fund’s largest investors) to review the budget needs and have some authority to increase or decrease modestly. But be careful about making it too easy to change the budget as this could create unintended misalignments.


Summary: Pre-determined budgets for management fees for the duration of the fund are a
benefit to both fund managers and fund investors creating better long-term alignment.

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MDIF closes $6-million media impact fund

Posted By Peter Whitehead, Media Development Investment Fund, Tuesday, March 20, 2018
New York, March 19, 2018: Media Development Investment Fund (MDIF) today announced final close of MDIF Media Finance I, a $6-million impact fund investing in independent news media in select emerging and frontier markets.

“We are delighted to have closed MMF I and ramp up financing for companies that provide the news, information and debate that people need to build open societies,” said Harlan Mandel, MDIF Chief Executive Officer. “MMF I loans will help build companies that expose corruption, hold governments to account and provide balanced coverage of elections.”

MMF I provides affordable debt to independent news companies in a range of countries where access to free and independent media is under threat. The fund will invest in companies in countries such as India, Ukraine, Bolivia and Lesotho.

MMF I notes pay 4% annual interest and, under a pioneering agreement with the Swedish International Development Cooperation Agency (Sida), MDIF and Sida provide investors with 55% first-loss protection. Sida also provides technical assistance grants to fund investees to build their management capacity.

MMF I investors include the Open Society Foundations (Soros Economic Development Fund), Dreilinden, a Dutch family office and Antonis Schwarz.

“MMF I will finance investments in software, equipment, content production, workspace, as well as working capital and short-term cash-flow needs – all vital for company growth,” said Mr. Mandel. “With the successful close of MMF I, we are now looking forward to launching MMF II later this year.”

About MDIF

MDIF is a New York-based not-for-profit investment fund for independent media in countries where independent media are under threat. It has 22 years’ experience of helping build quality news and information companies – print, digital and broadcast – in emerging markets. It has:

  • invested more than $166 million in 114 media companies
  • worked in 39 countries on 5 continents
  • a current portfolio of more than $60 million invested in over 50 media organizations

For more information, contact Peter Whitehead, MDIF Director of Communications, peterawhitehead@mdif.org, +44 7793050670.

Tags:  emerging markets  impact investing  impact investment  social business  social impact 

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Shortlist and Spire: Building Africa’s First Full-Stack Talent Platform

Posted By Administration, Tuesday, February 27, 2018

Shortlist and Spire: Building Africa’s First Full-Stack Talent Platform
By Grace Horwitz 


Last November, Spire Education, one of Blue Haven’s portfolio companies, merged with Shortlist, a talent sourcing and screening business operating across India and Kenya. The merger was a first for the Blue Haven portfolio, but also for the broader human capital industry in East Africa. With complementary offerings, the combined Shortlist-Spire team is now capable of supporting clients across the talent spectrum. As Shortlist CEO, Paul Breloff, put it in his November announcement, “This is a match made in heaven…Shortlist can help companies build their teams, and Spire can help make sure those teams are equipped with the skills needed to succeed.” As we celebrate the three-month anniversary of the Shortlist-Spire union in Nairobi this week with Paul, Jenn (former Spire CEO and now MD of Africa for Shortlist and Spire) and the rest of the Shortlist-Spire team, here’s why we’re excited to have them in the Blue Haven family.

Last year, Lauren and I discussed why human capital is important to us as investors. While our website is littered with the logos of portfolio companies, a more accurate depiction of what we’re betting on might be a photo collage of the teams behind them. Companies are only as good as the people that run them, and that means hiring, training and retaining the best talent. Regardless of the industry, most executives cite people as their most important asset. However, in their quest to retain more “A-players,” very few feel as though they’ve cracked the code to maximize potential across roles, levels, and functional areas.

This problem is particularly challenging for quickly-growing small and medium sized businesses that lack dedicated resources and the staff time to focus on talent. As part of a small organization, I’m familiar with this tension. It took my boss, Lauren, over a year to hire her first Associate (me) because she was juggling days that looked like this. We just hired our second Associate, Sarah, and I’m positive I’ve underdelivered in the onboarding and training category in more ways than one (sorry Sarah!). This makes for a vicious cycle — small and medium sized businesses are painfully constrained for time and resources, making it difficult to invest in hiring, upskilling, and retaining employees, which in turns puts even more pressure on an already overworked team — a so-called talent hamster wheel.

The reality is, sometimes we need help from the outside. But when it comes to hiring and developing your employees, it can be hard to find the right partner. The traditional mode of outsourcing HR activities tends to be of the transactional, hit-and-run nature — hire a head hunter to track down a bunch of CVs ASAP, and they do it, but without understanding culture, the business itself, or what soft skills a candidate will require. Or management brings someone in to conduct a half-day training for junior staff, and while you may feel pretty good after a couple of trust falls, three months down the road you realize that the exercise had no real impact on your employees’ performance. And when these talent service providers are all separate companies, you spend a lot of time re-explaining exactly what you’re looking for in an ideal team member — wouldn’t it be nice if the same people who hired your new sales team were the ones who trained them too?

Point solutions that claim to offer “just-in-time” support are not always the best approach, especially in the context of building an effective team that is capable of achieving its full potential over time — weeks, months and years. Most firms (unless you’re Google) don’t have the privileges of skimming the best candidates from the top of a stagnant talent pool. That means employers have to start taking a more integrated and proactive approach across the talent life cycle to truly optimize investment in talent. They will need to leverage a combination of technology and human touch to test the competencies of candidates rather than taking resumes at face value and spend time with employees to teach the soft skills and attitudes that drive success in management roles.

Having seen our portfolio companies struggle with talent issues of all flavors and varieties, we are pumped about what Shortlist-Spire is bringing to market in Kenya. Spire and Shortlist focus on different pieces of the talent value chain, but long-term results will be mutually dependent. While Shortlist screens candidates on the basis of competency (not just CV and connections!), Spire helps those candidates reach their full potential through end-to-end talent development and training. In an ideal world, this makes for a seamless bump-set-spike model of maximizing human potential. Though I think both Paul and Jenn would agree that there is still lots to figure out, the Blue Haven Team is excited to be along for the ride!

Originally published on Medium.

Tags:  East Africa  talent 

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