Omidyar Network’s New Frontier Capital Report: A Call to Action for Investors

Low- and lower-middle-income (LMI) populations in emerging markets – those who make between $2 and $8 per day – collectively spend $3 trillion per year. What this surprising figure means for investors is an unprecedented opportunity to create both social impact and financial return. So concludes a new research report by Omidyar Network entitled Frontier Capital: Early Stage Investing for Financial Returns and Social Impact in Emerging Markets, announced at SOCAP 2015 in San Francisco (Oct. 6-9).

The Frontier Capital report is a follow-up to the 2013 report entitled Priming the Pump for Impact Investing, which argued for a sector-based approach to impact investing. Now, the Frontier Capital report presents a new model for how to segment the enormous impact investing opportunity in emerging markets.

I sat down with Paula Goldman, global lead for impact investing at Omidyar Network and co-author of the Frontier Capital report, to dig deeper.

Opportunities for frontier investors

A central idea of frontier investing is that mixed-income models – businesses that serve LMI populations and that are “asset light” – offer both economies of scale and economies of scope for investors. According to the report, such businesses target “significantly larger markets” and are “often able to utilize existing infrastructure to add lower-price products onto existing lines, thus increasing overall profits.”

The Omidyar report rigorously segments the frontier capital opportunity into three parts, in order from most familiar to most creative:

• Replicate and adapt proven business models


• Frontier: Unproven business models that serve both lower- and middle-income populations


• Frontier plus: Unproven models for pioneer investors willing to break new ground for potentially very large impact

Early stage risk capital, or frontier capital, is essential in order for businesses that serve LMI populations to succeed. Omidyar knows whereof it speaks. As of September 2015, it has invested around $850 million in early-stage social impact organizations, including $400 million in for-profit companies, mostly in early-stage businesses and emerging markets. Long-term thinking drives its investing decisions, with $450 million going to nonprofits to support work in infrastructure and ecosystem-building.

Call for creativity and leadership

The Frontier Capital report represents a new way of thinking about how to kickstart growth in emerging markets. “Where we see venture capitalists being most successful is where they are being most creative,” Goldman said in her new SOCAPtv segment. “Venture capital is the art of seeing a wave as it’s growing but before it crests.”

https://www.youtube.com/watch?v=l1Hz3sUzO3w

Omidyar Network would like to see the frontier capital movement take hold and shape the next wave of impact investing. Goldman will be watching for a shifted volume of deal flow, reflected in future EMPEA reports, as evidence of change. “I see this as the impact opportunity of a generation,” concluded Goldman as we wrapped up our conversation.

I agree. The time has never been better and the need has never been greater for long-term thinking, patient investing in infrastructure, and collective action to combat income inequality. Which VCs, impact investors, high-net-worth individuals, development finance institutions, governments and entrepreneurs will leverage these untapped opportunities to lead the way to a sustainable financial and social future?

Image credit: Used with permission of Omidyar Network