The terms ‘sustainability’ and ‘impact’ are increasing their mindshare among investors today.
From launching sustainability funds to adopting an “impact-first investment approach”, investors are increasingly applying these non-financial factors to their evaluation process, ensuring they support businesses that bring about a positive impact to the world we live in.
Despite all the buzz about impact investing, what exactly does it mean?
According to the Global Impact Investing Network (GIIN), impact investments are investments made with the intention to generate a positive, measurable social and environmental impact alongside a financial return.
Ganesh Rengaswamy of Quona Capital, a VC firm that invests in growth-stage fintech companies promoting financial inclusion within emerging markets, certainly knows a thing about the field. As Managing Partner, he oversees Quona’s investments in India and Southeast Asia.
Rengaswamy’s portfolio companies include Bukukas, an Indonesia-based bookkeeping management platform for micro, small and medium-sized enterprises (MSMEs), and Ula, a B2B commerce and fintech marketplace. Previous investees include coins.ph (sold to gojek) and IndiaMART (IPO).
e27 sat down with him to learn more about how Quona measures impact in its investments, the extent to which impact metrics affect an investment decision and his hopes for financial inclusion within Southeast Asia.
Below are edited excerpts of the interview.
Could you run through the process of how Quona evaluates a startup?
We are focused on fintech and financial inclusion and like to invest in companies that leverage financial and digital innovation to deliver solutions that fulfil the needs of unserved or underserved segments of society. Therefore, we use our investment mandate as the first filter to identify startups we invest in.
After that, the key factors we look for are founder quality (in terms of expertise and vision), real market opportunity and moats against incumbents, potential to create an impact on low and middle-income segments, sustainability of the business model, and stage fit and overall investor syndicate.
We also study business-specific KPIs, which depends on the fintech vertical. For example, in a lending company, the non-performing assets (NPA) is a very important metric, whereas for a payments company the net margins on transaction volume are critical.
Given our focus on financial inclusion, we always pay attention to the impact on underserved segments, which we quantify through assessing the outreach and accessibility of the platform, product quality and overall market development.
Do you see a correlation between social impact and profitability (i.e. a company with a strong social impact will likely generate sustainable financial returns)?
We believe the social and financial impact of our investment in a company and the broader community are intertwined. Hence, we look for opportunities where social and financial drivers and returns are mutually reinforcing, rather than accepting a trade-off between the two.
We aim for risk-adjusted market returns while backing companies that are making the world a better place.
How do you measure the social impact for your potential investees and your portfolio companies?
All portfolio companies are measured and assessed against our “Access, Quality, Markets” financial inclusion impact framework, which was developed in partnership with industry leaders and is harmonized with the Impact Management Project (a forum for building global consensus on measuring, managing and reporting impacts on sustainability).
The framework is applicable across the fintech verticals we invest in, with some metrics being common across all our portfolio companies and some specific to a given vertical or company.
Also Read: Sustainability: the new business reality
This enables us to measure financial inclusion at the company level and to aggregate a set of core impact metrics across the portfolio and assess progress towards financial inclusion at a firm level.
We also measure and monitor impact throughout our investment process. The business objectives of the portfolio companies are expected to be aligned with our social mandate.
To what extent do you factor in impact returns when evaluating the performance of your portfolio companies? Were there instances where impact returns underperformed?
The KPIs established during the investment process are inclusive of impact, operational and financial metrics and indicators. Our investees report to us on a quarterly basis, with revisits conducted on an as-needed basis as business models scale and evolve.
Leveraging these insights and KPIs, we evaluate and reports on performance – inclusive of impact – on a quarterly basis. We also have internal deep dives, where we assess the overall performance of our portfolio.
Thus far we only had a rare occurrence where the impact returns were below what we expected. We believe that as our companies grow and scale up or add new products and geographies, their impact should amplify.
With over 290 million unbanked in Southeast Asia, what are some challenges you foresee in driving financial inclusion for them?
Southeast Asia is lagging behind in the growth of insurtech, financial advisory, embedded finance to address daily life needs through financial innovations, and holistic digital banking.
I hope the ecosystem and regulators can evolve and adapt to solving these issues. Progressive regulators play an important role in managing the digital infrastructure to ensure it can benefit both the supply and demand sides of the equation.
Do you think these challenges will be solved with time? Or do you think it is a larger and more complicated systemic issue?
Yes, I think so. I see many governments in the region, such as Indonesia, lifting regulation and investing in financial digital infrastructure. Large banks, insurers, and telco companies are now willing to partner with fintechs to harness the power of customer data and co-create solutions.
We also expect digital-only banks to emerge through the issuance of new licenses, or permitting fintechs to buy regional banks in other countries. Covid-19 has been a significant wakeup call for the regulatory, ecosystem and incumbents, and is likely to lead to promising evolution of digital infrastructure.
What are some trends you are optimistic about within the fintech space in Southeast Asia?
Broadly speaking, we see growth in open banking platforms, embedded finance in different value chains like retail, digital banks, insurtech, and relationship-based, digitally-driven banking and financial services. I’m probably most optimistic about embedded finance.
Image Credit: Quona Capital