The Brief | March 25, 2024

The Brief: Smarter catalytic capital

ImpactAlpha
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ImpactAlpha

Greetings Agents of Impact!

In today’s Brief:

  • Confronting complexities of capital gaps and catalytic capital 
  • Addressing the social determinants of health care disparities
  • Crossing climate tech’s Series B “valley of death” 

Featured: Catalytic Capital

How smarter targeting of capital gaps can make catalytic capital more effective. Some capital gaps are transient and can be bridged with seeding or scaling catalytic capital. Other gaps are structural and require sustaining catalytic capital. And some gaps are layered together, even in the same market or sector. “For catalytic investors, the differences are important because we need to be clear on the capital gaps that we are targeting in order to deploy catalytic capital accurately and efficiently, with minimal waste and distortion to areas beyond those gaps,” Harvey Koh of the Catalytic Capital Consortium writes in a guest post (disclosure: the Catalytic Capital Consortium supports ImpactAlpha’s coverage of catalytic capital). Koh earlier debunked “five myths” hindering the flow of catalytic capital. In his new post, he digs deeper into the complexities of market failures. For example, common sense and research suggest that conversions to employee ownership in the US should become more investable over time. But Koh cautions that deal structures that prioritize worker-owners over outside investors “may clash with prevailing norms in mainstream finance and face a persistent structural capital gap.”

  • Hard to reach. Some healthcare enterprises in Africa may continue to struggle to attract capital, while others move up the ladder of investability. “We might expect these to be the ones that are larger, have more capable leadership, have more capital initially, or are in urban locations,” Koh says. Likewise, many global microfinance institutions now attract and rely on commercial capital. Those that target the most difficult geographies and hardest-to-reach poor and rural clients “typically require sustaining catalytic capital in the long term,” Koh says. 
  • ‘A’ for additionality. A hallmark of catalytic capital is the enabling of something that otherwise would not be achieved. Impact Frontiers, for example, highlights the need to compare impact investors’ contributions to tangible impact to what otherwise could have been achieved. To screen for such additionality, Prime Coalition brings potential investments to an advisory committee of conventional climate investors. The intent: to determine if there’s a bridge to follow-on investment, and to validate that some promising companies would struggle to find financial support without catalytic capital. Through its fund manager, Azolla Ventures, Prime has tracked the fortunes of ventures in which it did not invest (for background, see, “Bridging climate gaps with catalytic capital”). Four of five companies failed to raise within six months. Nearly two-thirds of companies deemed able to raise without Prime did so.
  • Efficient subsidies. The scarcity of catalytic capital makes it incumbent on providers to establish efficient levels of subsidy that spur but don’t distort markets. Aceli Africa, for example, seeks to boost lending to small agri-businesses by providing incentives to banks and other local lenders. After three years, Aceli has found that the percentage of new borrowers – a signal of additionality – decreased as the size of loans went up. “The obvious danger would be to maximize capital mobilization while compromising the intention to reach further and deeper into the capital gap and underserved needs,” Koh writes. 

Sponsored: Impact Ventures by J&J Foundation

Elevating outcomes beyond clinics: Investing in diverse-led startups to advance health equity in the US. To address persistent health disparities, focus is shifting upstream from healthcare facilities and services to social determinants like food, transportation, housing, education, social connection and safety. “A new wave of health innovation focused on improving non-medical social determinants of health is emerging,” write Village Capital’s Kelly Bryan and Elizabeth Nguyen. “The opportunity for investors to double down and amplify impact is here.” With the support of Impact Ventures by J&J Foundation, Village Capital has pioneered the Health Equity Initiative, a series of investment-readiness, health-focused accelerators. More than 30 companies have participated over four years; 84% were led by founders of color and more than half by female founders. 

  • Diverse leadership. Dallas-based Yumlish provides low-cost, culturally-affirming nutrition programs. Chicago-based CareAdvisors automates social care services for vulnerable patient populations. “The power to close the equity gap is in our hands,” write Bryan and Nguyen. “It’s time for the investor community to come together to drive system-level change by supporting diverse, early stage startups building innovative solutions addressing critical social determinants of health.”

Dealflow: Climate Tech

World Fund raises €300 million venture fund for European climate tech. The three-year-old, Berlin-based VC firm invests in Europe’s early and growth-stage climate startups. It crossed the €300 million ($325 million) mark for its first fund with backing from the European Investment Fund, BPI France, PwC Germany, Wiltshire Pension Fund, the UK Environment Agency Pension Fund and other investors. KfW Capital and Lithuanian utility Ignitis Group announced commitments in September. World Fund, which had targeted €350 million, acknowledged the difficult fundraising environment. World Fund’s Danijel Višević said the firm had brought in “numerous institutional investors who haven’t ever invested in VC or a first-time fund before.”

  • Valleys of death. The firm expects to make 25 to 30 investments in companies at what it calls the “Series B valley of death,” when startups struggle to raise growth capital to commercialize new products and services. It has so far backed 15 companies, including UK-based Mission Zero’s modular direct air capture systems. Germany’s CustomCells makes customized lithium-ion batteries. Slovenia’s Juicy Marbles is making “premium” plant-based meat products like filet mignon.
  • Check it out. 

Optimo Loans secures $10 million to offer credit to rural India’s micro businesses. Just one-quarter of India’s micro and small businesses have access to formal financial services; an estimated 53 million businesses are unbanked. Bangalore-based Optimo Loans, launched last year, complements digital underwriting and loan disbursement technology with field agents that appraise businesses in person. The fintech venture offers working capital, equipment financing, merchant cash advances, invoice financing and business expansion loans. It says it can disburse loans within several days. Its $10 million pre-seed round was led by Blume Ventures and Omnivore.

  • Deal uptick. India’s Impact Investors Council reports rebounding impact investing deals since late last year. The number of impact deals inked each month has climbed back into the mid-30s, after averaging about 20 deals per month in the second half of 2023, the council reported. Climate tech was last month’s favored sector, with 14 deals totaling $130 million, or more than half of all invested impact capital. In January, ventures targeting financial inclusion notched 10 deals and raised 60% of impact capital that month. 
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Dealflow overflow. Investment news crossing our desks:

  • Fintech startup Altro (formerly Perch) secured $4 million from celebrity backers, including NBA star Chris Paul and rapper Quavo, to help customers with credit building and financial literacy. (AfroTech)
  • Singapore-based Fullerton Fund Management raised $75 million for a private equity fund addressing decarbonization in Southeast Asia’s manufacturing, industrial, energy and mobility sectors. (PE Insights)
  • Mexico’s Savia Ventures made its fifth investment, backing Chile’s Done Properly, a fermentation-based alt-protein producer that uses upcycled food. (Savia Ventures) 

Agents of Impact: Follow the Talent

Don’t miss these upcoming ImpactAlpha partner events:

Cliff Prior will step down from the helm of the Global Steering Group for Impact Investment by the end of September… JPMorgan seeks an impact investing portfolio manager in New York… New York State Insurance Fund is looking for an ESG and sustainable investments senior lead. 

The Netherlands Advisory Board on Impact Investing is hiring an impact investing intern… Global Innovation Fund is on the hunt for an impact senior managing director in London… LGT Venture Philanthropy is recruiting an impact fellow in Mumbai… Enabling Qapital has an opening for an investment officer in Nairobi. 

The UN Research Institute for Social Development is hosting a webinar tomorrow, March 26, debuting an online platform for its sustainable development performance indicators… The International Finance Corp. is launching its 2024 impact investing challenge for students in member countries around the theme Climate + Gender. 

👉 View (or post) impact investing jobs on ImpactAlpha’s Career Hub.

Thank you for your impact!

– Mach 25, 2024