Why the World Bank’s venture capital arm is investing in Silicon Valley

Article posted on devex. 26 May, 2016

It might seem off mission for investors who say they want to drive prosperity in 7R38yLAmxJ1aGXpk3ZbEQh08ROPnttoyPQQxmSZLaj5OhmpWDNPRN0W3iLuSAqBhdz4PjGBThqqzeVVrM97XQRxKKbeEGhugd5VpmIeKMyJbO9K5sEE3msIZhHfqdOJNl2pF370zdeveloping countries to support entrepreneurs based in the city with the most concentrated venture capital in the world.

Most of the more than $100 million the venture arm of the World Bank’s International Finance Corp. will invest this fiscal year will go to the emerging markets, including tech hubs such as Nairobi, Kenya — dubbed the “Silicon Savannah”. But recently the IFC has also invested in Silicon Valley companies such as the cloud-based software company Ayla, the satellite company Planet Labs and the online education company Coursera.

The IFC’s $20 million investment in Planet Labs last year prompted some critics to point out the company was not lacking for funding opportunities from traditional venture capitalists such as Data Collective, Draper Fisher Jurvetson and Capricorn Investment Group, all of whom were part of the $118 million round the IFC joined.

“Capital will initially flock to the most mature ecosystem if given the choice, but IFC’s mandate shouldn’t be that,” Mbwana Alliy, founder of the Africa-focused venture capital group Savannah Fund, told Devex. “Companies like Planet Labs would have found other backers without IFC — This is not the same for Nairobi startups.”

The investment represents the way the IFC has taken a broader view of its role and shifted from financing private sector ventures in developing countries to investing in solutions for development wherever it can achieve the greatest impact.

“It’s not the location of the investment that is relevant,” said Frank Heemskerk, executive director at the board of the World Bank Group, who must approve every IFC investment. “It’s the impact their products and services have on developing countries. And in the end it should support our twin goals: ending extreme poverty and boosting shared prosperity.”

The IFC argues that Planet Labs is in fact having an immediate impact at the bottom of the pyramid by using its small satellites to gather unique data sets that offer critical insights, such as ways to improve crop management in response to the effects of drought.

“It’s not just that there’s a humanitarian benefit, but a huge commercial market,” Will Marshall, the CEO of Planet Labs, said of the IFC investment in his company. “There is solid overlap.”

Starting with the market leaders

The Emerging Markets Venture Forum, an invitation-only CEO forum in Napa, California, last week, gathered startup founders and representatives of some of the top venture capital firms and accelerators for panel discussions and fine wines. At first glance it might have looked like just another Silicon Valley venture capital summit, but the focus of this event was on the role that venture capital can play in emerging markets, whether through direct investment, technology transfer or supporting ecosystems for entrepreneurs.

“Fifteen years ago, the rule of thumb here was we don’t travel more than 45 minutes away from our home to look for businesses,” Nikunj Jinsi, the IFC’s global head of venture capital, told Devex. “And then eventually these investors got onto planes and traveled to China and India and found out there were ways to make money. And what we are here to say is that you can marry the goals of developmental impact and financial return in emerging markets.”

Jinsi said he sees technology not as an industry, but as a catalyst, because it can leapfrog business models and bring down the costs of products and services in areas like health, education and energy. The IFC model is to start at the global level, then work toward more local solutions, he said. For example with Planet Labs, the IFC is investing in a market leader in the field of satellite imagery and big data as a way to learn about the industry and its impact before zooming in and investing in, for example, a drone service operator from a developing country.

“Planet Labs could effectively become a platform on which you then build services,” Pascal Finette, who heads the startup program at Singularity University, said of the catalytic effect technologies can have. “Say I’m an entrepreneur in Nairobi and I want to build a crop yields prediction business. I can go to Planet Labs and just get the data from them and build services on top of that.”

What the IFC can bring to Planet Labs that other venture capitalists cannot is its global connections in emerging markets, as well as its patient capital, a term for financial investments that can pass up immediate financial returns in anticipation of more significant financial returns on a longer time horizon. He contrasted real working capital in the form of debt financing or equity financing with impact investing, a term that some question outright, saying it is not possible to maximize for financial and social returns.

“This is not about philanthropy,” Jinsi told Devex.“A lot of people with good hearts want to invest in these emerging markets, but in many cases, impact investors and family offices often actually screw up the alignment on the capital stack and that doesn’t lend itself to build sustainable businesses.”

The IFC has invested more than $1 billion over the past 15 years, and its global venture capital investment team is expanding to 28 people by the end of the year. But Jinsi emphasized that the IFC needs alignment with like minded partners. The Emerging Markets Venture Forum emerged from this realization that the IFC needs to go beyond making investments and move toward using its convening power to draw more attention to these markets.

Building the ecosystems for innovation

At the forum, the managing partner of Learn Capital, a venture capital fund that invests in education, and the CEO of Andela, a talent accelerator that trains developers and pairs them with employers, spoke on the topic “Bridging the Gap in Africa.”

A member of the audience raised her hand and asked what the presenters thought about the venture capitalists investing only in founders based in the same countries as their companies. This was in response to the co-founder of Andela basing out of New York even when the company has its main campus in Lagos, Nigeria. And his situation is part of a common trend of founders dividing and conquering between the places they work and the places they raise funds.

“The cycle of capital only going to foreign founders who have ideas for emerging markets needs to be broken, not turbo-charged, and IFC should lead the charge here,” Alliy said. “It’s worth investing in startups and fund managers closer to the target customer. It’s a long-term, patient investment that evens out the playing field.”

Since the first Emerging Markets Venture Forum 18 months ago, the IFC has done more to support ecosystems of innovation in areas where early stage funding is still scarce. Jinsi and his team have expanded beyond direct investments in ventures and done more to support the intermediaries, including fund managers, accelerators and seed programs.

“It’s not about venture capitalists flying in and out and being the first of their kind to make money, but it’s really fundamentally deploying resources, mentorship, training as well as funding toward building that ecosystem,” Jinsi said.

The lineup of speakers, which included the co-founders of SafeMotos, a Rwanda-based company that brands itself as a safe ride-sharing service for motorcycle taxis, gave investors in the room the impression that this train is moving and they should jump on board or be left behind.

But no matter the number of examples of investments that generate financial returns and sustainable development impact, not all venture capitalists have the patience for that, nor the risk tolerance to invest in early stage companies that lack the ecosystems they need to succeed. That is why the IFC is taking this dual approach of supporting funders who are closer to the companies they are backing while also drawing Silicon Valley investors to these investment opportunities in emerging markets.

“They will make it out there eventually. But even if they don’t, we are working on building the local ecosystems,” Jinsi said. “We don’t have to have the brains out of [Silicon Valley]. We can also work with local players.”