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A Vision of Grassroots Venture Capital
When I was a venture capitalist, I was often asked what it would take to create a venture capital industry in Mexico or Indonesia or just about anywhere outside of Silicon Valley. There were often many very good reasons why it couldn't or hadn't happen - deal flow, amount of money that needed to be invested, cost of managing a fund, a service provider ecosystem, etc.
One of the biggest obstacles was just scale. Scale turns out to be a big deal in venture - you need to put large amounts of money in to get your 10x-100x return. In many communities, the businesses are small to medium size enterprises (SMEs). They needed small amounts of money - 4 or 5 figure amounts, not 6 figures and certainly not millions. They're never going to go IPO. What capital market could they go to?
So, if you live in a small community in Mexico, say, and there's no capital market to foster the creation of small businesses, what do you do? You join the ranks of millions of transnational workers and you come to the U.S. to work. And, strangely enough, through your remittances, YOU become the source of capital for your country.
In 2004, Mexican immigrants sent more than $16 billion back to their communities of origin. The remittances were used to take care of basic services such as food, clothing, healthcare. What if the Mexican diaspora could tap into a portion of those assets to create funding for their businesses? They wouldn't need Wall Street and they wouldn't have to wait around for some large institution to take a leap of faith and provide capital for them. The community could do it themselves.
As it is, Mexican hometown associations in the United States have already begun to organize social remittances to build schools, pave roads and pay for other infrastrcture improvements in their hometowns. The Zacatecan federation of clubs have gone so far as to negotiate a 3-for-1 investment program with the Mexican government.
Imagine if these small groups of social investors transformed themselves into small angel groups for start up businesses. Imagine that they were able to tap into a microequity fund that they helped create?
This is the goal of Indigo Financiera, www.indigofinanciera.com, and the Indigo MicroEquity Fund. Hometown associations and other social groups can use the Indigo Scoot Mobile Money card to take care of basic banking needs. A portion of the profits from Indigo Financiera go into the Indigo MicroEquity Fund. The Fund then works with these bands of angels and co-invests in the businesses that they have sourced, evaluated, and support.
Indigo Financiera becomes a way for the diaspora to channel some of their funds into a capital market of their own. It's grass-roots venture capitalism.
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Margarita,
It's really nice to see how your work on this is coming together...and like Jose, I'd like to hear more.
My one thought though is that venture capital might be a misnomer for the kind of funding that you offer. Although it's sexy and might grab headlines, venture capital is meant for the kind of deals that require significant investments in the millions...and potentially have very large return, albeit also high risk.
There's no shame...and very sound economics...in investments of less money, with expectations of steady growth and returns.
I write with the hope that some of us in social entrepreneurship can think about investment in terms of angel investors, bank loans and even retained earnings...rather than so often looking to the VC world for our money and models.
Michael,
I agree. Technically what we're setting out to do isn't venture capital from a 10x/100x perspective. Unfortunately, there isn't a term for the kind of small scale equity investing that we're looking to create. The Village Enterprise Fund is probably closest - they provide equity in the form of grants to SMEs in Africa.
The choice of language on the part of Indigo is deliberate, however. Venture capital does evoke a type of risk taking, growth oriented money - which is what we're about. It's as much about having an equity mindset where we know we're going to have some number of failures and can bear those failures as well. A banking or loan mindset has very low tolerance for failure and isn't necessarily aligned with growth - typically bankers only care about earning interest and getting repaid.
Margarita Quihuis
Founder, www.indigofinanciera.com
Co-Founder, TechPlaza Ventures, www.techplaza.typepad.com
In my blog, I posted an article on the New Horizon Investment Club, http://www.typepad.com/t/trackback/3674815, which is basically a Honduran home town association that has come together to act as a band of angels. NHIC pools the remittances of Afro-Caribbean Honduran immigrants to make productive investments, initially in real estate in New York, and has begun to look at productive investments in Honduras as well.
The Indigo MicroEquity Fund would seek out groups such as NHIC to help leverage their investments. Similar to the Zacatecan 3 for 1 plan (http://www.californiaconnected.org/wp/archives/161), we could invest 3 dollars for every 1 dollar invested by an immigrant angel group.
Over time, Indigo could accelerate entrepreneurial capacity building, give these communities an opportunity to make larger investments than was possible before, and help build assets and wealth.
The key thing is that we don't want to do the work for them. It's important for the communities to learn, fail some, succeed some, and try again. They need to own the process. We're just the friendly capital source.
Margarita Quihuis
Founder, www.indigofinanciera.com
Co-Founder, TechPlaza Ventures, www.techplaza.typepad.com
We really looked to the company, Working Assets, for our model. Working Assets is a purpose driven for profit that found a way to support progressive causes. So, the founders came up with financial products they could sell, made alot of money, and earmarked a portion of their profits to donate to non-profits.
Indigo Financiera mimics this model. We make money from our basic financial services, earmark a portion of the profits to fund the company's foundation. The Foundation is then able to make investments. Unlike a traditional venture fund which has to go raise money from limited partners, Indigo's fund has one 'LP', the corporation itself. Since it's set up as a 501 c(3), it doesn't have to produce a return to the parent company.
The customers help to indirectly create this fund by purchasing Indigo's products and services. The customers have a longer term financial incentive to prefer Indigo over other competitors because Indigo is creating a pool of investment capital for them in the long run.
This is the model we've worked out so far. Of course, the devil's in the details and we'll see how it evolves as we work with our community partners.
Margarita Quihuis
Founder, www.indigofinanciera.com
Co-Founder, TechPlaza Ventures, www.techplaza.typepad.com
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