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VC/PE view of investing in bottom of the pyramid
1. Investing in the Bottom of the Pyramid
Shyam Kamadolli
Entrepreneur, Venture
Capitalist and Private
Equity Investor
November 2010
2. 2
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
The โFortune at Bottom of the Pyramidโ is not easy for
investors to access
Donor/Charitable Programs
Not sustainable
Address basic human needs: health,
education, food programs
E.g. Bill and Melinda Gates
Foundation, Fidelity Charitable
Foundation
Socially responsible investing
Seeks some financial returns but
only to the extent of sustainability
โDouble/triple bottom lineโ just as
important
E.g. Acumen Fund, Unitus, Ennovent,
Catamaran
Venture Capital / Private Equity
Seek sustainable models for
profitability and financial gains
Sequoia, Accel, Matrix, Fidelity
3. 3
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
Venture Capital traditionally looks to maximise financial
returns; the BOP offers good opportunities
Only focus: generating financial returns for our investors
If investors want to be charitable or socially responsible they have other
vehicles to achieve their goals
VCs are looking for opportunities to generate excess of 35%+ IRRs
(generally speaking) for investors
The hurdle rate is the same for BOP and non-BOP investments
Private equity investors get in to these businesses at a later stage and
given the lower risk have slightly lower expected return expectations
(25%+)
4. 4
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
$$
Time
Seed Early Growth Mature / Expansion
Angels
VCs
Strategic Investors
Debt Investors
Revenues
Revenues
Expenses
Mezzanine
Bootstrap โ self financing
Financing lifecycle
Private Equity
5. 5
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
The BOP Opportunity
We are looking to back innovation: products/services/business
models. The big question:
Does the bottom of the pyramid need its own unique set of products and
services?
Or is it a matter of repackaging products and services that we would use?
Product innovation:
Solar lamps, Terracotta non-stick pans, Nano-tech water purifiers
Service innovation:
Banking services, Micro-insurance, Remittances
Business model innovation:
Microfinance
Successful IPOs to date in Microfinance: SKS and Banco Compartamos
in Mexico
Windfall gains for VC/PE investors in SKS
6. 6
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
Risks VCs take: unfavourable brand associations (1)
Banco Compartamos: first Microfinance IPO, 2007
38% ROE
7. 7
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
Risks VCs take: unfavourable brand association (2)
Farmer suicides reported as collection agencies get tough
8. 8
ยฉ 2010 Shyam Kamadolli. All opinions and views expressed here are my own and not those of my employers, investee companies or others
unless explicitly ascribed to them.
Risks VCs take: financial risks
Microfinance related risks have played out already
Regulators:
Vote-bank politics has led government regulators to arbitrarily cap returns in
Microfinance
District collectors have unilaterally โforgivenโ loans in some instances
Moral Hazard
Borrowers have taken loans from several lenders expecting that loans will be
forgiven
Leverage
For Microfinance like models to work for investors, cheap credit is a major
requirement.
ROE is the prime metric and without leverage these will make BOP investing
unviable.