This is Part 1 of a two-part chat with Stuart Minnaar, co-founder of Fundie Ventures, a student-run impact investment firm. In Part 1, Stuart shares his story, how it led him to create Fundie Ventures, and the impact investment landscape across Europe and Africa.
What we invest in today will determine our planet’s future. In 2015, the United Nations adopted the Sustainable Development Goals (SDGs) that were created as a global call to action for positive change. The SDGs focus on ending poverty, protecting the planet, and ensuring prosperity for all. The UN estimates that developing countries alone face a $2.5 trillion gap in funding to meet these targets. Impact investing is opening up private capital to address social issues and has the potential to help fill the funding gap.
GINA: Today on No Ordinary Business, I have the privilege to speak with Stuart Minnaar, co-founder of Fundie Ventures, a student-run impact investment firm based in Madrid. Stuart, welcome to No Ordinary Business.
STUART: Thank you very much for having me, Gina.
GINA: Before we get into today’s topic, I’d like to spend a few minutes hearing about your story and how you became the co-founder of Fundie Ventures. You have an interesting background and have accomplished a lot in your youth. Can you tell us a little about your journey?
STUART: Sure. I’m from South Africa. I grew up in a small town of about 300,000 people just outside of Cape Town. If you like, I was born into the ‘right’ family, an average South African family but one that gave me access to opportunities throughout my life. I grabbed every opportunity that I could and made the most out of it. One of these opportunities was to go to Germany as an exchange student at the age of fifteen and it was the first time that I left my little town and opened up my eyes to what else exists. I always knew that I had to leave South Africa. For good or bad, there was always something that told me that I should explore. I studied engineering and I really hated it but I did it because I could and I was fortunate to get a scholarship.
I also always had a voice calling me to business in the back of my head. No one in my family has a business background so I had no idea where this voice came from, and I didn’t want to listen to it because it wasn’t aligned with my path of becoming an engineer. By my third year, I succumbed to the voice and decided to give it a go and see what would happen. Maybe this is something that entrepreneurs go through - fighting with that inner voice - but I thought that if it is so strong a voice, I should give it a go.
After studying engineering, I started my first start-up in Cape Town, where we built a mobile payment platform for university students. To give context, I didn’t know anything about mobile payments and I’m not a developer or a coder, but that’s where the market went and what I did. Long story short, I did that for five years and through that I became involved in many different entrepreneurial things because, for the first time, I felt tangibly the impact that a small business could have for myself, for the employees, for students, and I realised at that point that it is a really powerful vehicle if you do it right. At the same time, there is the opportunity to be a really powerful vehicle if you do not do it right. I was fortunate to raise two rounds of investment and eventually a bigger company offered to acquire it. That event was the impetus for me to move out of South Africa to Spain to study an MBA at IE Business School, one of the top-ranked business schools in Europe.
GINA: What made you decide to pursue the MBA?
STUART: Prior to starting the MBA I had a deep sense of guilt, if you like, you could replace that word with responsibility but for this conversation let’s call it guilt because that is what it was for me. The guilt was around my access to higher education at a private, elite institution in Europe that cost 70,000 - 80,000 Euros and I made a promise to myself that I wouldn’t go into debt or use my own money. Again I got lucky or maybe I was just prepared, whatever the version is, and I received a scholarship from Rotary International to complete my studies, which was uncommon because ordinarily, MBA students did not receive a full scholarship through Rotary.
I looked at the cost of tuition and I asked myself, “What does this mean? What does a normal human being in the world need to have access to in order to get 70,000-80,000 Euros for school? I realised that he or she needed to grow up in a stable family, have running water, flushing toilets, electricity and food. He or she needs to have gone to school. Needs to have higher education and a university degree. He or she also needs to have had a guardian or parent who can provide financial assistance, by paying for school or by acting as a surety or guarantor. He or she needed to get a job and save enough to cover tuition.
As I made the checklist I realised that possibly only three per cent of the population could satisfy the criteria to get a chance to do an MBA that costs that amount of money. That triggered guilt that hit hard prompting me to ask what did I do to deserve this? How can I make sure that other people who may be less fortunate than me can do the same thing? Then I used the Universal Currency Index, the Big Mac, and I started to calculate across different countries how many Big Macs would equate to 80,000 Euro? In South Africa, when you convert the currency, it was something like 55,000 Big Macs. That amount would feed a village for a year.
GINA: How did you deal with the guilt?
STUART: After wallowing for some time in it, the guilt became the impetus for me to do something proactive. I knew that I could do something, but I didn’t know what. I wanted to do something that was beyond me being a student. I wanted to create something that could exist without me being there. I always knew that social impact or social entrepreneurship offers the best way for society or for a community to prosper. That’s the bottom line.
In South Africa, what people have access to socially determines our success. This is true across the world, but particularly in South Africa. Unfortunately, race is the proxy for that and there were people that I grew up with who I knew didn’t have access to public transport, or to the school that I went to, or to good enough health care. I asked myself what can I do while I am studying and I asked what is the school offering? What my school offered around social impact didn’t hit the spot for me. It lacked the element of legacy and ironically it didn’t have the sustainable impact element attached to it. What that meant was while you’re a student an opportunity for social impact exists but not beyond. I asked myself: “What is the impact of my leaving this programme? Will the work we are doing continue?”
GINA: Can you illustrate with an example?
STUART: Sure. For example, there might be a programme offered where students go abroad somewhere like Peru and they do a six-month social impact project and work on a social enterprise. These programmes are available across the world by different schools and they are amazing, but I realised that the minute those students leave, a vacuum is created.
This is what happens when an organisation goes into a developing nation with good intentions and may do some good, but the minute they leave there is a vacuum caused by a lack of hand-over or value exchange. Because of this, I wanted to do something different. I looked at what the US business schools were doing.
GINA: Did you find that the US business schools operated similarly to the European MBA programmes or did they offer a different value proposition?
STUART: Generally, and I may be speaking from an African context but normally the perception is, “Look to the West to see what’s best”. To the extent that is true, most things start or grow in the United States then move across the Atlantic Ocean. I looked at some of the good US business schools and found that they all had some form of student engagement with social impact or impact investment.
GINA: To what extent is social impact embedded in today’s MBA programmes?
STUART: Sustainability and legacy are still lacking. I believe it is a vital time for these conversations to be had at business schools because in ten years time, the person sitting next to me in my MBA class will be in a company in a leadership position making decisions and if he or she is not aware of the unintended consequences of his or her business decisions and what they mean for society, we are going to repeat the same thing that has been happening for years, namely that business is at the expense of the planet or people.
GINA: Business has become too economically powerful to ignore the impact that it is having on the world. In my experience in the past, and to a lesser extent today, even philanthropists often have a perception that ‘doing well’ financially and ‘doing good’ for society are mutually exclusive. What we have observed historically is that the values and mission that people often apply to their philanthropy are not integrated into their business. Ironically, the good caused by the philanthropy can be negated by the unintended harm caused by business.
STUART: For me, the two cannot be mutually exclusive. You cannot operate a business without taking into account the impact you have on society, your staff, or the planet. If you consider that one small email from someone like Larry Fink, CEO of BlackRock, that small email has had more impact than all of the efforts of Greenpeace and all of the NGOs to shift the commas across zeros, which goes to show that the power lies in business. If the shift doesn’t happen top down it is going to take so much longer for the shift to happen in any other way. I’m not sure what the best approach is but from what I see if you want to shift the needle just one per cent, shift it from the business perspective.
GINA: When I read Larry Fink’s letter to CEOs this year, I did a little happy dance because he came out stronger than I had previously seen and stated point blank that businesses need to take a proactive role addressing the world’s social challenges.
I also came across some statistics a while ago that showed that in 2015, of the top 100 economies globally, 69 were companies. That was staggering to me, that only 31 countries made that list, and this further illustrates the extent of the impact that business is having around the world. I bet that the disparity is even wider today.
STUART: Wow! I wouldn’t be surprised if that number was closer to an 80/20 split today.
GINA: Agreed. When we consider who has the economic power to address the funding gap for the SDGs that I referred to earlier, it most certainly isn’t governments or philanthropy alone or even combined.
STUART: If you look at how we define economic growth, invariably you look at profit. So, the more profit you make, the wealthier you become. In order to generate more profit, you have to do one of two things: you have to provide a product or service at a lower cost which means that somewhere down the line someone or something else is being disadvantaged. Either you are using inferior materials, which means that likely the environment suffers, or you pay suppliers or employees less for the same product.
If those are the two indicators of how we measure economic growth, then the way we understand profit is wrong. While most humans can create profit, I think the challenge is: “Can we create profit with an additional purpose?” When we start to look at growth in those two streams, we ask: “What is the impact of the business on people and planet and what is the economic benefit?” When these two questions become interlinked they form the DNA of the company and are not mutually exclusive; you cannot extract them and one doesn’t exist at the expense of the other. At this point, we will create the shift in the right direction. If we just look at the profit side of things, unfortunately, something else suffers down the line.
GINA: This is a good point to segue into what you’re working on now. Tell us how you are going about tackling this problem and about Fundie Ventures?
STUART: We are a student-run impact investment fund and our main function is to help startup companies when they are in a stage that is called the ‘valley of death’ when they are struggling to get to market. This happens because of lack of capacity and lack of access to capital. Our focus is exclusively on startups that are addressing one of the SDGs. That filters out any companies that are doing what they are doing purely for profit. We want to steer away from that because there is enough capital already available for profit-driven companies and it is not something that sits within our hearts to dedicate our time towards.
GINA: Are you regionally focused in your investment strategy?
STUART: We work with startups based in Europe or in Africa that are doing good and creating profit.
GINA: Tell us a little about your process with prospective investees.
STUART: Once we identify the startups, we put them through an analysis process led by our 46 analysts who, as a collective, spend between 15-20 hours over four weeks doing a deep dive analysis looking at the team, the product, the industry, the market, the social impact, and the finances. This process generates a report that shows how investment-ready is the startup.
Raising money as a founder is a full-time job. You need to talk the talk, know where to be, know how to answer questions and for some founders it is not something that comes naturally to them. So, what we are trying to do is get them closer to being investment-ready by showing them where the gaps are and give them guidance on how to fill them, which enables them to build capacity and makes them more attractive to investors. We know from our investor partners the kinds of things that they are looking for and the kinds of questions that they ask.
GINA: I’d like to explore a couple of things that came to mind while you were describing your process. Firstly, how do you source your deal flow?
STUART: Deal flow is an investor’s or VC’s (venture capitalist’s) problem, either you have too much or too little of it. We have a team of six students and their job is purely going out and finding the startups. We partner with quite a few accelerators that work with startups that have a social impact attached to it. Competitions, events, foundations, scouring the internet going through directories like Angel List or Crunchbase. Once we’ve identified the startups we reach out to the founders and inquire where they are at in the process and if they are looking to raise capital. Ninety per cent of the time startups are raising money or at least in the cycle of raising money. Then we ask them for a pitch deck or an investors deck and their finances and we make sure we sign a non-disclosure agreement so that the information is safe.
GINA: Can you elaborate on the criteria you apply to assess whether a startup is investment ready?
STUART: Our criteria for investment require that the companies are registered and that they’ve been operating for at least two years. When I had my startup, in my naïve understanding, I thought that it takes 1,000 days to be a real company. If you are still around after day 1,000, then you’re talking. Before day 1,000 you’re figuring out the model, you’re testing the customers, you’re validating, you’re figuring out how this could work. At Fundie, we use two-years as a benchmark. Typically, the startups have gone through the friends, family, and fools round or used up their own money just to get going to prove that they have the resilience to stick it through.
We look at whether the funder has hustled to get started. That hustle is the grit that you look for in founders. We also ask if they have traction. That could include: do you have any paying customers, can you prove that your business does what you claim it does? Do you have an intention to have a social impact and what does it look like? That last point is a bit vague because it depends on how you define social impact. This is a very philosophical question because it means different things to different people. There are social impact benchmarks out there: GIIN has a report, IRIS, McKenzie, there are various sources that we’ve pulled from and made our own. What we steer away from are startups that have social impact as an extra to their business model.
GINA: You mean when social impact is not core to the business model.
STUART: Correct. If it’s not part of your DNA, you’re not what we are looking for. If you cannot tangibly measure what your intention is at the end of your production line and the output goes to that intention, then it is not something we would be interested in. For us, the impact must be integrated into the business model; the one cannot exist without the other. So things like water, solar, energy, the conventional impact investments, are easy to show that you are generating profit because you are solving a social issue. That’s the sweet spot for us.
GINA: Do you also have a sector-specific focus? Are you finding that there is more investment ready deal flow in specific sectors?
STUART: I don’t know if I am being controversial in what I am about to say but typically, what we found with startups in Europe, the problems that they are solving, for me, feels more like an inconvenience. Conversely, when you look at what the companies in Africa are doing, those are more problems.
GINA: Would you illustrate that through an example?
STUART: I feel bad saying these things and perhaps it is because I am South African, but I will give context so that what I am saying makes sense. In Europe there is a foundation that has already been built for you, for citizens generally, such as a functioning transport system, most have easy access to WiFi, it’s safer, you can afford things, and while I am generalising, it is true across the continent. Whereas in Africa, you have to set up your own foundation. Access is a little more difficult. What I am saying is that things are a little bit easier in Europe because of that foundation, which removes basic problems that in African countries are general problems. Consequently, when you grow up in Europe, what you perceive as a problem, for someone in Africa would be an inconvenience.
For example, and this is a really great company that we helped out, there is a European company that built a belt that senior citizens wear that inflates if they are about to fall so that they don’t break their hip. It’s an amazing product! Or, another example in Europe, as part of a shared economy, where parking spaces are not being fully utilised, someone else can use the spot during these times and pay a few dollars. Its similar to Uber or Airbnb shared economy concept. These are examples of what is considered to be a ‘problem’ in European countries.
Conversely, if you look at what startups are focusing on in African countries they are addressing issues like access to light and energy. Think of the impact of having or not having access to light and energy. That means, children can stay up a little later to study or families can spend more time together, people have safer forms of energy for cooking - the benefits of one solution are multiple. These are things we take for granted in more developed countries.
GINA: How does this impact your investment prioritisation, in other words, where are you driving investors’ capital?
STUART: Personally, I would like to dedicate more of Fundie’s time to the global south. That was the long-game intention. The short-term plan was to ‘get it right’ in Europe first because it is easier to access capital in Europe. Also, because the complexities are not the same in Europe we felt it would be prudent to prove the model in Europe first, get some traction, make a name, get a few wins that we can claim and all of this positions us better to do the same in the global south.
The currency stretches so much further in Africa than in Europe. For instance, 100,000 Euros would run a startup in Europe for one year; in an African country, that same amount of money could last three to four times the amount of time. And, if you are dealing with companies that are solving basic issues, the impact is exponentially bigger.
GINA: How does this contrast between the issues being tackled in Europe versus Africa translate into potential scalability? What comes to mind is that by solving challenges to access to basic needs such as light and energy in the developing world, the impact potential and the scalability of that solution are much greater. How does that translate into growth potential for a company?
STUART: Take mobile payments solutions in the United States versus an African country. I don’t know offhand how big the market is in the United States, but when the same app solution was introduced into Kenya, where at the time about 70 per cent of the population was unbanked, but all had mobile phones, it scaled so quickly in the first year because it was the easiest solution for the people to use and by the middle of the month they hit a billion dollars in transactions.
GINA: On the basis of the scalability that you are describing, from an investor perspective, aren’t investments in these markets more attractive?
STUART: For me, this is the way that traditional investments will eventually move toward. Once people gain a better understanding of African countries, it will make more sense that traditional investments go there as opposed to investing in a pension fund for example. For instance, in Nigeria, which I believe is the second most populous country in the world, the needs are very basic and the solutions very simple.
Further, if you gain traction in one African country, it becomes easier to scale into another country. In Europe, that is true too, but in reality, every 600 kilometres the language and the laws change, creating complications. In Africa, this is not always the case. The distances between countries are shorter, the languages do not vary that much, particularly when you look at Eastern African countries, the legalities are not much of a barrier.
I think that 20 years from now the amount of investment capital that will flow into the global south will be to such an extent that we will be saying to ourselves, “Why did it take so long?”
GINA: What’s your experience been working with these startups in terms of exiting?
STUART: Our sweet spot is between 250,000 and 1 million Euros. In the US, that is series A funding stage. Before we take on any further work with a startup, we look at the exit opportunities and consider whether the startup will be attractive to a bigger fund that takes on series B. We are pushing the startup down the production line, to go from series A to series B or to become sustainable on their own.
GINA: Which sectors are you finding most deal flow?
STUART: Across the African countries, the two big areas are energy and waste. Energy, combined with something else is common. For instance, there’s a company that uses solar energy to desalinise seawater into potable drinking water and then they sell the salt on the side.
What I like about waste is that it is very easy to build a business around it. The raw product is free and readily available and can be repurposed. It doesn’t solve the problem of waste creation, however, it does address the pollution problem. This is a common solution we find in African countries. Solar is also very common across Africa but the challenge there is a high upfront cost.
GINA: What about Europe? What’s the predominate the sector focus for startups there?
STUART: Good question. The startups come up with a solution that is invariably based on academic research that substantiates why they set up the company. For example, there’s a company that uses drones and satellite imagery for agriculture to determine what is happening to any part of the crop at any time. This solution was based on PhD research.
STUART: Also, what I am seeing more and more in Europe is bringing blockchain for good into their business.
GINA: Yes, that’s a very trendy topic right now.
STUART: What I’m finding is that founders are squeezing blockchain into their business, where it is unnecessary, because it is trendy and they think it will get them access to capital, but it creates absolutely no added value to the business.
GINA: Have you come across ways that blockchain actually has the potential to affect change? I believe that the United Nations is using it to create a digital identity for refugees using biometrics.
STUART: Yes, there is one startup I came across that is helping address the lack of identity documentation facing refugees coming into Europe. This company set up a system using blockchain to establish identification that was used to help the refugees get access to a bank account, which was amazing. There are a few other examples like this and in those cases it is good.
Stay tuned tomorrow for Part 2 of our two-part conversation with Stuart Minnaar, co-founder of Fundie Ventures. In Part 2, Stuart talks about what is needed to create sustainable change and the role of business.