Venture Capital firms must invest in technology!

It’s time they invested in tech to benefit society using a blended finance model that includes a range of investors with varying risk-return profiles.

Johannesburg, 10 Jul 2019
Read time 3min 50sec

Technology is still a long way from practical application. However, initial results are promising. Edward Chang, a neurosurgeon at the University of California, San Francisco,  says: “For the first time, studies demonstrate that humans can generate entire spoken sentences based on brain activity. This is exhilarating proof that with existing technology, we should be able to build a device that is clinically viable in patients with speech loss.”

Technology impact investing is an emerging sub-asset class where technology is applied to global challenges to come up with innovative market-based solutions.

In emerging markets, technology impact investing typically occurs in the following challenging areas where government, corporations and civil society are constantly searching for solutions and better access:

  • Health
  • Education
  • Agriculture
  • Energy
  • Water
  • Finance

The higher penetration of smartphones and feature phones in rural and urban low-income areas means that people have better access to these areas from their mobile phones. Increasing Internet penetration also leads to higher e-commerce transactions, which can aid in economic development and job creation.

It is encouraging to see players emerge in this space. Located in Boston in the United States, Masschallenge is the world’s largest accelerator that supports innovators and entrepreneurs, who utilise technology to tackle poverty and other intractable issues. One of Masschallenge’s investments is in Resolute Marine Energy, a for-profit organisation which uses ocean wave energy to produce fresh water in areas where large-scale seawater desalination plants are too expensive and take too long to build.

In California, Data Collective, co-founded by Zach Bogue, is a deep tech venture capital fund set up to address the world’s most pressing challenges.

Women’s World Banking headquartered in New York, has an investment arm that includes fintech start-ups. In making investments span across emerging markets, Women’s World Banking helps to uplift poor women and set targets accordingly for its portfolio companies.

Moving over to Europe, Lumo Labs has a venture programme targeted at technology social impact start-ups. In the UK, Bethnal Green Ventures focuses on technology for good.

Finally, in South Africa, a global Internet and e-commerce firm, Naspers, has earmarked $100 million for early-stage South African technology start-ups that solve social problems.

All these sound noble, but it’s not easy to pool large amounts of capital, especially when corporations are stuck in a difficult situation when deciding whether to allocate capital in technology impact investing.

Typically, many corporations shy away from technology impact investing as their investors expect high returns. A large US technology company set up an in-house fund to invest in technology impacting investing. The company either does commercial and scalable venture capital in Silicon Valley or it provides money to foundations. Foundations, in turn, are governed by strict legislation to prevent tax abuse and ensure that their activities are not for profit.

As a result, foundations tend to invest in social initiatives that are not commercial, since there is no room to invest in technology impact investing which is profitable but requires more patient capital, as it tends to target new markets or non-consumption, with a longer investment horizon.

To get around this, firms can use a blended finance model that includes a range of investors with varying risk-return profiles. Investors can range from foundations taking the first loss and not requiring a return, to corporates having commercial return expectations.

If policymakers in Washington, DC can revisit and relax restrictions on foundations, this can free up capital for technology impact investing. There is a strong need to amass more capital for technology impact investing and boost this nascent asset class. As a solution, corporations can come together and pool their funds earmarked for corporate social investment.

Likewise, companies from a particular industry can collaborate and set up a technology impact investing fund. For example, healthcare companies can co-set up and co-invest in a health technology impact investing fund.

Policymakers and corporations should revisit their contribution to technology impact investing as a force for good, because when a company pursues not only a return in profit, but also creates a positive influence for people and the planet, that is when we’ll have truly ‘good’ technology.

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