Following the ‘customer’ is religion at Elevar. Early on in our journey capitalizing entrepreneurial efforts to provide high value services to low income communities at scale in Asia and Latin America, we realized that many research reports that were considered ‘true’ in the social enterprise space made assertions about the realities of low income communities that were incomplete, incorrect or missed important nuances. Too often, researchers would paint an overly simplistic view of a sector and overstate its potential, being reliant on macro data that missed ground realities. They were also often ‘fly in, fly out’ individuals who did not understand local context and this resulted in several exaggerated narratives around a product or service’s market prospects. Assumptions about share of wallet and ability to spend in research reports were not based on ground reality, often because services on which the poor could spend were not available and thus there was very little data collection on usage among informal communities; often, we would hear the comment that the poor would not pay for ‘x’ or ‘y’ service.
Elevar team members had grown up and worked in the countries in which we were investing and having spent time among low income individuals through our early work in the microfinance space, we encountered real life examples that ran contrary to macro reports. We realized that in order to tackle the question of essential services for the poor and the business models and approaches required to scale solutions, we had to have a granular understanding of the spending patterns, service gaps, and demands of low income communities as opposed to the top down perspectives that were prevalent in our space. And so, at Elevar, a defining characteristic of our entire team (both on the investment side and on the administrative side), is that we love to be in the field. At the core, because we grew up in the markets in which we work, because we admire the grit and determination of the low income customers our companies serve, and because we are ‘social’ investors (no pun intended) we’d much rather be walking the city streets and rural villages and talking to people than sitting behind our desks reading reports. Because we are travelers and wanderers at heart, we find ourselves in conversations with farmers and rural women’s groups, rickshaw / taxi drivers and children and parents in low-income private schools.
We listen, take notes and calibrate our conversations with people in Asia and Latin America, in cities and in villages. We come to understand the gaps in service they experience, the vitality of their spending patterns and their desire for better quality (and willingness to pay for it). We try to quantify their transaction costs and comprehend the many pressures on their lives. With this bottom up information, we formulate hypotheses about the kinds of services that can be formalized to meet their needs and begin to prioritize based on the community’s expressed preferences. We imagine the innovation required to create business models that can effectively bring services and products to suit their needs and peel through the challenges of product design and delivery channels. The entrepreneurs we back MUST be aligned with this perspective, that only true conversation with the communities they serve can illuminate the opportunities and challenges inherent in delivering essential services to the underserved. An essential part of our due diligence process is ‘walking the streets’ with the entrepreneurs to get a sense of their ‘bottom up’ knowledge and ability to relate to their customer. Even once we have invested in a company, it is essential to us to see management teams in the field, talking to the customer, taking their cues from the communities. Through these customer interactions, we gain further insights that continue to inform how we can improve existing products and delivery channels and what new services might be offered.
For example, figures on home ownership (and the validity of land title) by low income individuals were skewed, leading many to believe that housing finance for informal workers or the urban poor would be unviable and if at all there was some demand – only developer led models focused on real estate projects located at the outskirts of cities would succeed. Our interaction with many microfinance customers within our portfolio in 2009 however revealed that nearly 40% of them had effective title to their homes and there was sufficient demand for affordable housing finance provided it pivoted around a customer centric approach. So, in 2010 we backed Shubham which ushered in a ‘customer first approach’ to housing finance and till date several developer led models have not been able to scale as fast.
Similarly, we stayed away from market segments like vocational training which was touted to be an effective intervention to address the employability gap. In our own field visits, we observed through customer interaction the limited motivation amongst rural youth to pursue employment outside of their immediate geographies. As it turns out, there has not been a single business which has successfully scaled up in this space yet.
It was also important not to assume that customer needs and aspirations were static or remained the same. For instance, between 2005-2008, post an initial phase of heightened activity in the microfinance space in India when we invested in several MFIs – the traditional view was that there were further opportunities available and more players to back but our time spent in the field with borrowers and community members led us to the conclusion that the sector was fast moving towards saturation with the winners having already been established. Consequently, in January 2009 we withdrew from fresh investments in the space in India and around 18 months later when the MFI crisis broke out, it was clear that in many states in India, there had indeed been a fair amount of saturation.
One unique piece of work that we found authentic was Portfolios of The Poor, published in 2009 and co-authored by Daryl Collins, Jonathan Morduch and Stuart Rutherford. The book summarizes the learnings from years of research on the money management habits of impoverished households in Bangladesh, India and South Africa, with painstaking tracking of financial transactions including informal borrowing, savings clubs, the use of microfinance and other means to manage unstable cash flows. Rather than take a top down approach using GDP data and demographic information with cuts of consumer spending to come up with theories about the lives of the poor, the researchers who wrote this book actually spent time with the households, understanding them from a bottom up perspective.
As should be obvious by now, at Elevar we take our cue from conversations with the target customers of our portfolio companies: the rural and urban, often informal, but economically active, low income individuals and households. During our early days consulting and lending to MFIs, we would spend time in the field and listen to the customers of MFIs ask for housing loans, education loans, medical services (for which they would pay), and more. We were lucky to work with multiple MFIs in Latin America, South and Southeast Asia, and Africa who served millions of clients. Through direct surveys of customers, conversations with community members and interactions with management teams of MFIs, came the observation that clients shared a common need for a variety of additional services beyond microcredit. Our MFI partners soon began piloting programs in various sectors, once again responding to customer demand for more services. The loan officers of MFIs collected data on economic activity and cashflows of the borrowers they served and with these data points and informational interviews, we began to see what was possible in terms of formalizing the provision of additional services to the communities served by MFIs. As a result, in 2009 when the populist view was that credit underwriting in the unorganized sector was unviable due to lack of data – we went the extra mile to discover through customer interaction that there were in fact numerous data points in livelihood clusters that could capture income patterns and hence backed players like Vistaar which pioneered a specialized underwriting approach towards low income ‘individual lending’.
“We realized that in order to tackle the question of essential services for the poor and the business models and approaches required to scale solutions, we had to have a granular understanding of the spending patterns, service gaps, and demands of low income communities as opposed to the top down perspectives that were prevalent in our space.”
When thinking of the relevance of a business model within a particular geography or context, we made unusual decisions or even took leaps of faith about informal markets that ran contrary to prevailing wisdom and research. For example, In India, while the market perception was that payments was a critical service for low income communities, our customers led us to believe that unless there was clear convenience, interoperability and trust – payment solutions will not work. So, while we scouted for businesses operating in the payments space in India, due to the lack of interoperability we shifted focus out of India for payments and instead invested in a company in Peru where the regulatory environment was different. Another example would be our investment in Glocal. Around 2010-11, the framework on investing in rural healthcare was centered solely on the provision of microinsurance services but we observed that rural customers were more concerned about the quality of healthcare than its affordability and hence backed Glocal in 2011 which developed a proprietary, low cost delivery model to rural healthcare. Similarly, in education, following the customer led us to a counter-intuitive strategy which focused on building distribution into educational institutions as opposed to the prevalent view that only education content / products could improve education outcomes. Hence we focused on backing players like Varthana (2013) and Finae (2014) for school infrastructure and student loans respectively thereby providing access to affordable schools/colleges and effectively focused on building distribution first.
One final thought: Of course, we still read the research reports, but we do so with some scepticism, and never take their pronouncements as truth until we’ve cross checked with the communities themselves.