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Venturing into Embedded Fintech

Amee Parbhoo is a Managing Partner at Accion Venture Lab (AVL), which is a part of Accion International. She has worked with AVL for almost 8 years. Accion International has been working in financial inclusion around the world for over 60 years, and believes that digital financial services are powerful tools to help reduce poverty and create economic opportunity. Edited excerpts from a free-flowing interview:

Venturing into Embedded Fintech

Manoj Agrawal; A brief about Accion Venture Lab please.

Amee Parbhoo: We focus on the 2 billion individuals around the world who are left out of, or poorly served, by the financial sector. We work toward that mission by investing in and supporting early stage fintech companies. We have been investing for over 10 years now and made over 60 investments in startups that operate in 39 countries, bringing innovative and responsible financial services to consumers and small businesses around the world.

Which countries/continents are you looking forward to getting into?

Our investments are fairly evenly split across South East Asia, Africa, Latin America, and a little bit in the United States. The markets that we invest in typically have a strong entrepreneurial ecosystem and a strong regulatory environment. The majority of our portfolio is spread across Indonesia, India, Kenya, Nigeria, Mexico, Brazil, and the United States. We are increasingly looking at other markets. We’ve made investments in Colombia, in Pakistan, in the Philippines and South Africa. These are the new markets we’re really excited to explore. We’ve been spending a lot of time over the last year understanding Bangladesh, what’s happening there, what the entrepreneurs are working on and are excited by the new innovations coming from there. We are also exploring a few companies in Vietnam for expansion. Similarly, in Pakistan, we’ve made a few investments and expect to do more there as well.

You mentioned that the focus is on fintechs. Now, fintechs are in a variety of spaces. Are you focused mainly on credit or other areas as well?

We’re open across the full range of financial services and have made a number of investments in insurtech, payments, savings, and credit is obviously a big part of our portfolio. We have direct lenders serving consumers and small businesses. SmartCoin in India is a consumer lender reaching blue collar employees around the country. Toffee is doing insurance for underserved consumers. I think credit is the biggest need and will always be a big part of our portfolio.

What is their modus operandi when you venture into a new country and how do you acquire knowhow about that region or country?

We are a global fund and have local teams. For each region we operate in, we have a principal and a lead who works in that region. Having that local presence is just as important to us as having the global knowledge and ability to share learnings from across regions. For example, Egypt is a market that we started exploring almost 4 years ago, getting to know a lot of players, spending time on the ground, understanding the regulatory environment, and not rushing into making investments, but rather ensuring we fully understand the dynamics and identify the right people are in the country.

So, whether it’s an angel or a local fund, we want to invest alongside someone who’s on the ground and has that knowledge complementing our global fintech expertise. Just flying into a country we know nothing about doesn’t help the company we invest in either.

What’s the typical gestation period before you actually start investing? How long does it take on an average take for you to be confident that you understand the markets and the ecosystem?

It can vary. It may come sooner based on the partners we know on the ground and the entrepreneurs that we meet. It won’t be overnight that we invest in a new market, but once we get to know, we can move fairly quickly. From the first time we meet a founder to investment, it can be 6-8 weeks to make a decision on an investment. One of the parameters we discuss is the governance in that country and how stable the government structure is, because we are seeing a few countries where there’s been a lot of political and economic instability.

Fintech is one of the most regulated spaces. So we have to have comfort around the stability of government regulation of policy. We have increasingly seen governments move toward very friendly digital banking, digital regulations, and that’s positive. But the macro environment is something we absolutely consider when we’re looking at a new market.

Apart from putting capital and funds into these fintechs, in what areas do you advise, such as business models, technologies, transformations, partnerships, etc?

We’re a really unique partner to our portfolio companies for multiple reasons. First of all, we are a global fund. So we have the ability to say to an Indian fintech company what we have seen in say Mexico or Indonesia with clear stats and analysis. We recently had our CEO forum where 50 CEOs came together and heard conversations about dealing with the similar challenges.

The other piece is the sector focus. We know fintechs, and we understand financial services and technology. We evaluate more than 600 companies in fintech every year and this is the space we know and can bring that sector expertise. Finally, our model is unique in that we don’t just provide capital to companies, but we have an in-house consulting team that works with our investees post investment. We actually provide all our global learnings and expertise, and our team spends a few weeks on the ground with our companies, helping them on very specific issues that might be dealing with – which might be a new product they’re developing or go-to-market for a certain customer segment or pricing. It is what we offer at no extra cost to our companies.

Is there some minimum percentage or maximum percentage that typically you prefer to invest in a fintech?

We want to be a substantial kind of minority investor in a company, with a minimum of 5% and an average around 10-12%.

What is what is your learning about these fintech entrepreneurs in terms of having the right kind of agility, not too agile and not too slow?

It’s a tough balance. In a market like today, the temptation is there to just respond to what an investor wants and change the business to get the funding. The best entrepreneurs in our portfolio are the ones who start from a problem and a customer-first thinking. Companies at seed stage are still sort of figuring out what the business model is and what will scale, but as long as they keep that problem and that customer at the center, it will be incremental changes that still address the core of what you’re trying to do as a business. I think once you lose that focus, it becomes a little bit too much and too confusing. I think as companies scale and get to Series A in particular, we all want to see that they know the core, they know what’s working, there’s product market fit and how to scale that and grow it.

This whole fintech field is so dynamic and something truly innovative may be happening outside your own existing framework of understanding. How do you deal with that kind of innovation or uncertainty?

One thing we’re seeing is a lot of verticalization of fintech, i.e. solutions that fit within a specific sector. Whether it’s health and fintech or agriculture and fintech or education in fintech, we’re seeing really interesting and exciting ideas emerge. But that puts us in a position where we can’t just be fintech experts, we also need to understand a bit about health or education or agriculture. That is where we are doing the research to understand how to build an investment thesis in those spaces. We’re not going into it without our own formulated hypothesis of what we think matters and what will have a real impact. We also look for the right partners so as to co-invest with people who understand and compliment us in the skills that we bring.

In which of these allied sectors are you seeing a lot of traction?

We’re seeing a lot of incredible models in agriculture and have made a number of investments. In India, we invested in a company called AGRIM that has now raised significant capital. They provide a marketplace for inputs for agri retailers across India and get financing for it as well. It is a really powerful model that’s doing quite well. We again see a massive need for financial services in the in the entire agricultural value chain.

Another model in this space is AquaExchange. Also in India, it provides a technology platform, and soon financing, for shrimp farmers and fish farmers. Again, a really powerful model. We are not experts in aquaculture, but we know the financing models they are working on.

One of the things I read about you is you saying that you first realize your passion about solving real business problems for underserved communities. Can you tell us a little bit about how that happened and how did you drive it further?

My background has been entirely in financial inclusion and fintech, and it started in the early days in Bangladesh and India, working in microfinance and seeing the way in which we can help, help people get the financial tools and financial services they need is by figuring out scalable ways to actually reach them.

And that’s what led me down a path of working in consulting, working in McKinsey, in financial services and then working for a number of different fintech companies in Kenya and India, and finding ways in which to leverage business and the lessons of scaling quickly to reach underserved communities. It’s been a really powerful journey of seeing the impact and reaching that impact through business.

That sounds good. It’s the opposite of the earlier way of thinking of throwing money at the problem.

If we have to keep throwing billions of dollars at problems to try and solve them one-by-one, we’re not going to see the level of progress needed. But if we can find sustainable ways of putting capital into the hands of the entrepreneurs and fintechs that are solving these problems, ideally in a way that scales and reaches profitability, we’re all going to be better off solving these big, global challenges.

Many government organizations and government bodies all over the world are trying to attract fintechs. Do you work with government organizations in some way to expand your footprint?

Many governments have set up quasi-governmental funding vehicles or sandboxes for fintech companies, or they’re looking for ways in general to collaborate with investors to understand what’s going on in the market.

We support and mentor companies that are going through sandboxes and through accelerators operated by quasi-government entities or we’re just providing our guidance and our feedback on new regulation or on certain models where we’re seeing innovations in the market. We found that increasingly regulators are more and more proactive, more and more responsive about these things and looking for ways to encourage edge innovation in fintech, while maintaining the protections and the discipline that’s needed to make sure these are responsible financial products.

What is your position on valuation vs profit for fintechs?

When it comes to fintechs, there’s always a dilemma about valuations versus cash flow and profits. Some are more focused on growth and some on profits. This is on every venture investor’s mind these days. The sector has now come off of a few years of very high valuations, a lot of growth at all costs. While no one is expecting overnight profits in the tech space, having that clear roadmap of how a fintech will get to profitability and how it is emphasizing that in terms of unit economics, and driving toward that with clear goals – those are thing that the team at Accion Venture Lab spends a lot of time on. Over the last year or two, we have prioritized thinking about profitability and a drive towards sustainable growth rather than growth at all costs. I actually wrote a paper a few years ago around ways in which I see companies drive towards sustainable growth, not by just putting more and more money into acquiring new customers, which is expensive, but in ways to retain existing customers and grow with them.

Thank you Amee for sharing all these incredible insights with Banking Frontiers.
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