Why Don’t We See More Impact Organizations Raising Angel Investments?
Since the inception of Bangladesh Angels Network (BAN) almost two years ago, we have been privileged to screen thousands of proposals, propositions and pitches. One of the trends we’ve seen is that a growing number have some sort of impact angle or mandate explicitly embedded in their operating structure, target customer base or other facets. They might be traditional development and social welfare organizations that are becoming or spinning off a social enterprise, especially as donor funds dry out or shift towards the private sector. They can come from long-time NGO executives trying their hand at entrepreneurship in relevant fields, or development sector consultants realizing the limitations of project-based models and pivoting to become a product company. It could be for-profit startups looking at impact investments, non-dilutive grants and B2B opportunities in the donor space. In addition, we have worked with many companies in sectors like edtech, that have impact at the forefront. There are many technical layers to defining an impact enterprise. For the sake of simplicity, in this article we will refer to them as “impact-focused” organizations.
As professionals who started their careers in development, we are excited by this convergence between the development sector and startups. As a non-profit company with stakeholders that include donors and impact investors, with a mandate to reinvest any revenues from membership dues and fundraising commissions to grow the company and serve the ecosystem, we share the same ethos as many of these organizations. But what are best practices and how can we best help them?
The Expectations of Angels
Before anyone pitches to us, it is important to understand who our angels are and where they are coming from. They are a combination of institutions — groups of companies, financial institutions — and individuals. Individuals include both non-residents and locals, as well as foreign nationals wanting to or who have exposure to the Bangladesh market. They are owners of businesses in a variety of fields — brokerage firms, asset management companies, manufacturing and garments, media, services, BPO and others. Some of them are successful executives at large corporates, in Bangladesh and elsewhere. A growing number of members and prospective members are coming from hubs like Sydney, Singapore, London, Chicago, Texas, Silicon Valley and Toronto.
They are looking to be part of the growth story of Digital Bangladesh. They have seen examples like Sheba and Pathao where early angels successfully exited in later rounds and through strategic buyouts, making multi-fold returns on their original investments. They are looking to diversify and learn about tech-enabled businesses, and for companies with interesting products, growing markets and exceptional founders whose vision they can literally buy into. They believe that their contribution to Bangladesh is by supporting — with capital and guidance — the next generation of entrepreneurs and disruptive companies with market leading potential that have the chance to create economic opportunities. And in that process, they want to maximize their returns on both their time and capital. This is how they think about “impact,” which is more along economic lines than social. And the compromise or trade-off isn’t between return maximization and the economic impact they want to see these companies have on the market. The trade-off is between upfront risk and work to make the company successful and when those returns potentially come.
The Wrong Way(s) to Pitch
Against this context, and at the risk of painting a broad brush, we want to first highlight where impact-focused organizations struggle in pitching to the Network and our Angels, at least from our limited experience.
Often, the same people running the NGO project want to become entrepreneurs, but they do not appreciate the differences in skills and mindset required to run a startup versus an NGO project. This includes taking an “ownership” approach that might include dramatic reductions in salaries and overheads in exchange for shares, putting customers at the forefront rather than donors’ expectations and continually iterating the product or service for them. There is often a tendency to talk about what users “should” be doing or what they’re doing wrong rather than what their aspirations are and the bottlenecks to realizing those aspirations, that the proposed business might solve. Sometimes, the NGO leader believes the quickest way to make the transition to a business is to delegate key business development functions to consultants or managers, when they themselves have to lead this and understand and internalize what is required. It’s a very difficult leap to make in terms of culture and mindset.
When going through their pitch, it almost reads like a project proposal. There’s a lot of talk about the market need and the landscape, which is a great start, but not enough about market and business opportunity, as evidenced by the use case and adoption of a particular product or service category, customer segments, the willingness to pay, potential unit economics and other elements. Instead, there’s emphasis on the reach and social impact. To optimize the business model, there may be a need to shift the target customer group to a higher-paying demographic, or to cross-subsidize between groups, but we don’t see enough thinking along these lines. Costs are bloated and far from being “lean.” There are budgets but not enough about the returns on those proposed budgets. There’s insufficient exploration about how technology allows for efficient supply chains and a better user experience. Talk about potential B2B “partnerships” such as corporations or government comes more from a CSR or subsidy angle rather than how such partners might be able to mutually help each other’s bottom lines and objectives. When asked about competition, there is a tendency to answer in superlatives or at the systemic level, rather than a direct answer to the question “What do you do best, that no one else is doing or capable of doing?”
A model heavily dependent on grants means a tendency to be stretched thin across too many projects without an immediate linkage/synergy, based on where and when grant funding was opportunistically available. Once again, the customers in this case are the donors and the users/beneficiaries are the products being offered. The strategy may be that over time, the grant revenues will help build organizational capacity and subsidize product development that can be commercialized through B2B and B2C channels. More often than not, the organization is unable to wean themselves off grants, being designed and built around them and the never ending reporting, compliance and proposal development process distract from the process of finding true, sustainable product/market fit.
This is our number one worry when commercially-focused startups start looking for grants as well, particularly if they are early in their product development journeys. We would strongly advise against it unless the grant opportunity fits within the pre-existing roadmap of the business and helps de-risk some of those activities. But most force the company to contort their model to fit within what the donor wants. As a result, they dilute founders’ attention and energy, which is the most important resource in an early stage venture.
The Models We Like to See
Don’t get us wrong. There are early-stage impact-focused startups led by entrepreneurial leaders with development backgrounds, who are creating growth opportunities in new market segments at the intersection of profit and impact. What all four of these entrepreneurs in the following case studies from Bangladesh have in common is that they have honed in on a specific target market, found and quantified the business opportunity, developed linkages with partners including corporates, have thought about where technology can help scale and are trying to build brands that their consumers can identify with. Notably, they are all business-first organizations, focused on sales and conversions. Their financing structure is a combination of impact capital such as grants, customer sales and commercial investment. Most importantly, they have a clear vision of what they want to achieve and believe it can only be done through business.
iFarmer
iFarmer is a full-stack agriculture company that creates access to finance, access to quality agri input and advisory and market linkage for the smallholder farmers. iFarmer allows people from the urban middle income segment and non-resident Bangladeshis to fund farms in Bangladesh. Farm Funders pay for a livestock or fisheries or crop financing bundle, with an average holding period of 6 months and receive a 15% to 20% return on their investment. iFarmer bundles quality agriculture input, advisory and farm capital, while wherever applicable creates market access for the farmers, through iFarmer’s B2B agri-supply chain model.
Since inception in 2018, iFarmer has facilitated a total of 10 Crore BDT (1.2 million USD) to the farmers, bundled as inputs and capital for farming. They have a network of 5,000 Farmers and aim to get 150,000 farmers in their network by 2024. They have been focusing on the Northern part of Bangladesh (Rangpur, Patgram, Lalmonirhat, Rajshahi, Pabna) and are extending to the Southern part of the country starting from Jessore .
iFarmer is a for-profit company with a deep focus on impact. The impact mandate is naturally in-built with the model as the beneficiary group they target are low-income farmers. Their constant innovation and product development has propelled them to become one of the most visible agro-tech ventures in Bangladesh and most successful in terms of fundraising. For example, originally starting with a web portal for investors, they’ve recently launched an app for investors to track their investment through iFarmer. In addition, they are building a credit scoring engine for farmers.
Fahad Ifaz, co-founder, started his career in development in organizations like Katalyst, Swisscontact and CARE, known for large-scale agri projects. Fahad says that when competing with for-profit startups who pitch to a limited group of investors, whether it’s for Bangladesh Angels, Accelerating Asia, or Seedstars, there will be tough competition. The storytelling and impact is important. But investors look into all key summary statistics of a respective company e.g. the growth, rate of return on investment, team, competitive advantage, market, and impact are all important factors. “Any startup should remember that they are not pitching to all the investors in a room. They are pitching to a handful or even one investor at a time and the startup should find out who those people are and make sure they pitch it accordingly. Pitching to investors just as a social enterprise or having just an impact story doesn’t probably work.” There should also be a feedback loop: “The more farmers we work with, the more value we generate [into our topline], which in turns creates value for us with investors.”
According to iFarmer, international accelerators like Accelerating Asia were the first to spot the market opportunity, helping the company to raise a $500,000 seed round earlier in 2020.
bhalo
bhalo is trying to break into a large underserved smallholder market segment, an industry valued as much as $10 billion, by offering best quality farming inputs, customized technical advisory and credit facilities for livestock, crops or fisheries farmers, for the first time in Bangladesh.
At the heart of their model is a planned cloud-based platform that would enable a network of exclusive agents, to provide farming inputs, advisory, credit, market access and financing options for farmers. They are essentially building an omni-channel marketplace, where a farmer could buy farming inputs or sell their produce, through bhalo app, call center, agents or by simply visiting bhalo retail outlets, used as a point of delivery or collection.
The goal is to increase farmer’s annual income by 30,000 BDT while also helping leading input suppliers multiplying their sales. According to Founder and CEO Subrata Kumar, “We contributed 10% of sales of ACI Godrej and Renata [two of the largest farming input suppliers in Bangladesh], by catering to less than 1% of farmers in markets where we operate. Among farmer clients, that’s 5X growth in terms of per farmer uptake of inputs.”
Subrata spent a bulk of his career moving up the ladder at Swisscontact managing an M4P (“Markets for Poor”) projects in agriculture, and saw the limitations of development models and the market opportunity in treating farmers as clients, rather than beneficiaries: “After working with leading agribusinesses and financial institutions trying to find solutions for smallholder farmers challenges for about a decade, I realised me and my colleagues were best placed to bring in the innovation that the market requires.”
Light of Hope
Light of Hope is a leading education company in Bangladesh that focuses on improving future skills of children e.g. creativity, problem-solving, emotional intelligence. They have also built Bangladesh’s largest online platform for teachers and parents for skill development, knowledge and awareness creation. Light of Hope has also launched a “solar-powered school in a backpack,” Sputnique. In the last 5 years+, Light of Hope and its products has served 250,000+ children and trained more than 10,000+ teachers/parents in 24 districts and 550+ schools. Although back in 2018, bulk of the revenue for LoH was coming from projects, by 2020 over 80% of the revenue is coming from its B2C segment from brands like goofi (an online content portal) and Kids Time (a network of after-school learning centers).
The CEO, Waliullah Bhuiyan, started his career at BRAC, the largest NGO in Bangladesh and the world. He adds: “The biggest mistake that social entrepreneurs make is develop a substandard product or service thinking that poor people can’t afford a high standard solution. They end up making a product that neither poor nor rich people want to take.”
Apon Wellbeing
Apon Wellbeing specializes in setting up low-cost grocery stores in garment factories. Through a membership-based model, they offer discounted goods and services to increase the living real wage of low-income households, typically a 10% off the normal retail price. These stores sell a range of 4,000 SKU’s from 38 different vendors. After exceeding a certain spending threshold, the shoppers are eligible to avail health insurance and credit of up to 30% of their salary. Apon currently operates thirteen stores in its network, and has experienced 15% month-over-month growth since inception with a relatively lean team of only 32 full-time employees. At the heart of its model is a card-based system that tracks the purchase of each and every customer, and links to the payrolls of Apon’s partner factories, so purchases can be deducted from the workers’ monthly salaries and no cash needs to be exchanged at the store.
Apon serves a monthly customer base of 25,000, 75% of which is repeating customers. The total number of workers in its factory store network exceeds 60,000 — creating a large, captive market. Each customer spends around 1,000 BDT per month on average, with the cost of acquisition being relatively low — less than 100 BDT for initial onboarding.
The CEO, Saif Rashid, started his career in development, including building a social enterprise under the global NGO CARE that focused on rural distribution through a network of women sale agents. According to him, “the market opportunity for rural distribution of everyday commodities to the bottom-of-the-pyramid customers is shrinking over the years. But we saw pockets of concentration of huge potential customers in many of our target areas, which was garment factories. Ready-made garment workers, like everyone else, have aspirations to improve their quality of life. They want to purchase high-quality products and services, and their workplaces provide a unique point of distribution that allows companies to reach them at low cost if we transform this as a marketplace. There is a huge market opportunity being missed by the development sector when garment workers are treated solely as beneficiaries of interventions, and not as customers.” The next step for Apon is continued expansion of the network, but also moving into services like healthcare and finance.
Despite the successes of the company, Saif has found it difficult to raise commercial capital: “The challenge inherently lies with the purpose of the entrepreneur and the purpose of the enterprise. Most of the blended impact business model requires patient capital, where the initial investors would stay and grow with the enterprise, potentially over many years, whereas most of the angel investors look for buyouts/exit with high returns in a few years, which may be challenging to offer for companies like us.”
The Role of the Ecosystem, including Bangladesh Angels
We’ve talked a lot about what impact-focused organizations and startups should be doing. But what is the role of the ecosystem, including Bangladesh Angels Network?
We need to create linkage between these types of companies in Bangladesh and impact-focused institutional and angel investors outside Bangladesh, as shown by examples like MESolshare recently. Lean impact frameworks that embed within the business and customer journey would help communicate the value proposition to investors like these, who are choosing among impact models in different countries based on scalability and cost-effectiveness. This is something we are working on as part of Biniyog Bridhi’s train-the-trainer program to create a pool of impact management and invest readiness professionals within the ecosystem who can advise startups. The program is locally run by Lightcastle Partners, one of our members. But the catch is that these foreign investors would look for local support of these companies to get to a certain scale. And that is the biggest challenge and opportunity for Bangladesh Angels — to bridge the gap between Bangladeshi angels — local and non-resident — who may be skeptical of “impact-first” enterprises and view them as charities in new clothing. We need to show the market opportunity and growth of these businesses, as well as the valuation appreciation that is possible if these companies are able to raise larger funds in the future from impact investors. In that process, we have to work with local and international investors and stakeholders to create and propagate financing instruments more favorable to impact-focused startups, that is not just straight equity, going back to the point raised by Saif Rashid at Apon.
We are also keen advocates of more integration between impact startups, whether they are in education, health and agriculture, and government programs, allowing for greater scale and reach. Sure, “B2G” can become a new revenue opportunity, but more importantly it is a way to create barriers to entry and might be treated as a loss leader in order to build that. Lastly, we also need to move away from the donor-based models built on grants and get more donors interested in supporting social enterprises within their work and value chain through impact investment, potentially in partnership with intermediaries and transaction advisors like us.
Accelerate Bangladesh
We have to finish with a plug for our work. We are proud to collaborate with BetterStories Limited, a pioneer in incubation in Bangladesh, to launch Accelerate Bangladesh. Supported by partners like Bridge for Billions, who will be providing an online incubation module as as part of the Biniyog Bridhi project, we aim to work with 4–5 hand-picked, impact-oriented startups particularly in the health space over the coming three to four months to be able to help them become angel and impact investment-ready and raise pre-seed rounds of $50-$100K. To learn more, please apply through the website or reach out to us.
This post was co-written by Nirjhor Rahman, CEO, Bangladesh Angels Network, and Jawad Yusuf, Associate, Bangladesh Angels Network.
Huge thanks to the entrepreneurs profiled in this piece, for their time, support and inspiration.
