Business Creation and Investing in Emerging Markets

IID

[Institute Founding member Robert Scharar was asked to speak at Rice University’s Innovation for Day One Conference which explored solutions through advanced treatments and technologies that can save babies and mothers at birth and during the first 48 hours postpartum where they face the highest risk of death. This year’s theme focused on making impact now and prioritizing innovation opportunities to end preventable newborn and maternal deaths in underserved settings and resource-limited countries across the world.

Maria Oden, co-director of Rice360 Institute, stated: “We need a holistic approach to health care innovation to ensure healthy outcomes for mothers and babies. Successful health care technologies are not only easy to use and low-cost but are part of a healthcare system that supports their sustained use and brings together engineers, health care workers, and policymakers to improve outcomes for the communities they serve. Rice360 is committed to this approach, and this conference brings together the right people who can move the needle towards improved health care systems.”

As President of Houston-based holistic, financial planning firm FCA Corp and President and Portfolio Manager of the Commonwealth Funds, Robert Scharar has decades of direct investments and mutual fund portfolio management experience in a wide range of frontier and emerging markets (e.g., New Zealand and the African continent). With a practical bottom-up lens on firm management and the business activity on the ground, he addressed Conference concerns on what actually happens to new ideas and business creation in emerging markets and how the right investments and business approaches can be a tool to drive positive change and innovation. We asked him to share his thoughts with us from his talk at the Rice University Innovation for Day One Conference by submitting this guest article on innovation, business creation, and investing in emerging markets.]

Capitalizing on Business Ideas in Emerging Markets by Robert Scharar, FCA Corp

I am a capitalist and as business oriented as you will ever find, but I also believe we have a role to play in investing. Emerging market companies need customers and if we want to have customers in our businesses, we need to help build a consumer class with resources to spend. This requires reinvesting in the local community and by helping to expand access to basic needs like health care, food supply, energy, and education – it helps those we serve and it helps us in the end.

So, as a part of the investing that we do for our clients, we started Africap, LLC which is an Africa-focused small-to-mid sized company private equity fund to share our passion for development and impact in Africa with other like-minded investors and leveraging local partners and other portfolio companies. In these companies, we have board seats, are very engaged with multiple aspects of the businesses, involved in training staff, and many of our investors like us are hands-on and have been there to help us – coming from a wide range of medical to finance backgrounds. Our investments include seed and early growth stage private companies as well as operating companies listed on local stock exchanges who we think have long term growth prospects and capable and knowledgeable management teams. These investments are generally between $100,000 and $5 million.

We also run the only Africa Mutual Fund in the U.S. to capture the unique investment opportunities in this second largest continent in the world with over 1.2 billion people that are benefiting from emerging economies and growing consumerism. The fund allows us to access diverse industries like financial products, healthcare initiatives, transportation, power generation facilities, sanitation, and industrial manufacturing.

The Africa Fund requires a dedicated on-the-ground research effort and analysis of various government regional inter-country alliances; separate marketplaces where companies are traded; the legal framework and governance overseeing company endeavors by country; and the financial systems employed to provide information for the investing public.

As to the Conference topic of trying to make impact now and prioritizing innovation opportunities in resource-constrained markets, my experience has demonstrated to me that you first have to be clear as to what are the obstacles that you face in emerging countries. The obstacles I have found to funding ideas and new solutions and pushing them to implementation include:

• Over-reliance on grants and government funding which are often detached from commercial reality
• Emerging market lenders are “fixed asset oriented” requiring collateral which these innovators do not have – lenders do not lend on knowledge
• High interest rates and lack of hard currency – 30% interest rates in Malawi with good credit
• Lack of early-stage, angel fund investment pools
• Regulatory and compliance costs are too high for new companies
• Too few mentors and new business founders need mentors and role models
• Lack of interdisciplinary collaborations – too many silos between organizations
• Everyone likes and needs your idea, but no one wants to pay for it

Ways we have found to try to overcome these obstacles include:

• Identify the stages of development, product commercialization path, and what resources are needed for the idea creator.
• Create mentoring teams involving academic and professional advisors, such as CPAs, attorneys, and industry advisers.
• Motivate academic, health institutions, government agencies, and private sector interaction.
• Create a “virtual” entity at the early stages to minimize overhead and paperwork to “incubate” ideas.
• Raise funds in a country (preferably a regional basis) to vet, fund, and monitor opportunities – ask people to step up to the plate.
• Include local financial institutions, pension plans, foundations, and government as funding sources.
• Advocate for more business training at the University and community level for those who choose to study the sciences, engineering, and social services as few receive any training on free enterprise, capitalization, or returns on investments.

We have found that to make things happen faster you have to develop a simple funding concept other than traditional loans, which entails the funder receiving a royalty, the loan being repaid as a percentage of each item sold, a new company is formed with equity ownership by the funders and inventor, the funder directs charitable gifts of the invented product, and part of the loan may be forgiven based on milestones achieved.

It is further needed to carefully monitor, provide strategic support, and encourage that funding should be tied to the borrower having a support team, require light but meaningful paperwork and reports, network with other borrowers, promote marketing, and build media support.

Our investment mission at FCA Corp and Commonwealth Funds through practical decades-long global experience has taught us how investment managers can be important hands-on partners with our portfolio companies in scaling up and commercializing innovation and to enact change in practices, policies, and infrastructure that can chart a path forward.

This article was originally published here and is republished on Wealthtender with permission.

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