How to engage investors focused on profit in solutions for the poor

Teri Dankovich (right), chief technology officer and chairwoman of Folia Water, created the company to bring her paper water filter invention out of the lab and into the field. Photo by: Catherine Cheney / Devex

SAN FRANCISCO — “Would you drink water with shit in it?” asked Jonathan Levine, co founder and chief executive officer of Folia Water, prompting laughter from investors gathered at the Computer Science History Museum in Mountain View, California.

The next line of his pitch silenced them. “1.8 billion people do every single day. And not just in refugee camps, but in cities around the world: Lagos, Mumbai, Mexico City, Bangkok,” he said.

Folia Water created the first water filter that costs pennies not dollars, said Levine, whose company tagline is “Paper for Pennies. Water for Billions.” Each silver nanoparticle-coated filter paper provides clean drinking water to a family for an entire week. In a pitch to Silicon Valley investors, he focused primarily on the financial returns, explaining how his product presents a cheaper alternative to bottled water for the 3 billion people who spend $20 billion per year on household water. Folia Water manufactures for 7 cents and retails for 50 cents, expecting to reach between $2 and $5 million in revenue by 2018 through sales in retail stores in developing countries.

The company is supported by 500 Startups, an early-stage venture fund and seed-stage accelerator that is based in Silicon Valley, but makes investments all over the world based on its mission to promote entrepreneurs from diverse backgrounds. Its 500 Seed Program brings startup founders together for four months, where they work on areas such as business strategy, user testing, and growth and metrics. At Demo Day, where they make their pitch to investors, those few startup founders who are focused on problems that face the poor have to make the case that there is money to be made.

Pitching profits as the priority

“It is very difficult for venture capitalists to invest in anybody targeting the bottom of the pyramid, because the math doesn’t work out,” said Rob Neivert, venture partner at 500 Startups.

The IFC wants venture capitalists to take a close look at these opportunities

The International Finance Corporation brought Silicon Valley venture capitalists together at an invitation-only forum in Napa, California, as part of efforts to crowd in the private sector. Devex takes a peak inside.

Venture capitalists, or “VCs” as they are commonly referred to, are looking for 100 times returns. If a third of companies die, a third of companies break even, and a third of companies do well, then venture capitalists want to fund the 3 percent of companies that will be big winners, he explained. While there is growing interest among Silicon Valley venture capitalists in emerging markets, their interest in developing countries typically extends only to those in the top 10 percent who can pay, with few exceptions.

“Let’s assume you have a breakthrough that is an order of magnitude cheaper,” Neivert explained. “If there is enough room for margin, then you can attack the bottom of the pyramid as a for-profit entity, and still be fundable — maybe not by all VCs but at least some. But the company has to portray itself as, ‘We’re not here for NGOs, we’re not here to help the world, it’s simply profitable,’” he said.

Startups have to go beyond saying how their products and services will improve lives, by articulating how much cheaper and how much better it is than what is out there already. This will help them make the case that they are high-margin businesses, he said.

“I thought that by becoming a for-profit we could really focus on a long-term goal, not just the end of the next grant,” said Noah Perin, CEO of ViaGlobalHealth, who was in the 20th batch of startups to go through the 500 Seed Program.

While working at PATH, the global health innovation organization based in Seattle, Washington, he saw how much money is invested into technologies that were not scaling like they should be. He wanted to develop a marketplace that would connect medical distributors with devices and supplies. But while his company’s mission is global health access and getting products into the hands of people who need them, his two-minute pitch to investors at Demo Day needed to emphasize the potential for profit.

“Since I had come from PATH, from a global development perspective, I wanted to talk about impact, lives saved, [and] then say, ‘Oh by the way, it is a $23 billion market that is growing super fast,’” he said. “That’s not what gets me up in the morning, which was a bit of a problem. But I had someone there saying, ‘Let’s focus on what’s important to the people in the audience, not what’s important to you.’”

Neivert encouraged Levine to pitch Folia Water like this: This is a business, and we have an invention. This happens to be our target market. We we have a very big margin and a high growth rate.

The challenges of emerging markets

On Demo Day, Levine stood before a simplified version of the income pyramid to demonstrate his intention to target the base, but not the bottom. The top of the pyramid was marked $$$, below that was $$. Then came the $20 billion market opportunity, the 3 billion people who make between $2 and $10 a day. At the very bottom, there was a thin strip labeled “humanitarian,” the segment of society that makes less than $2 a day — people who could not afford Folia Water filters and will continue to rely on NGOs and governments. Levine said he does not aim to sell to NGOs, because if they hand products out, it undercuts the market. Rather, Folia Water sells filters to consumer goods distributors in developing countries, who then sell directly to consumers.

Charlie Matlack, founder of PotaVida — a company that produces what it calls Smart Solar Purifiers — suggests it won’t be easy. Having previously pursued a profitable alternative to water bottles six years ago, before pivoting to focus on capturing accurate data on water usage for aid organizations, he says challenges include competing with large companies with established supply chains, who are able to more easily put water filters on shelves in developing countries.

The other challenge common to all companies selling household clean water solutions, he said, is getting people to change their behavior and purchase the filters. As anyone who has worked to take a product to market in a developing country knows, just because people can pay does not mean they will pay — nor that they will use the product properly, a reality that is often forgotten in Silicon Valley pitch competitions for products that are designed in the United States, and delivered to faraway places.

“People are drinking water they think is perfectly fine for them, and before you sell them something, you have to convince them the water they drink and their parents drink and their grandparents drink is a health hazard, and that’s not an easy thing to do,” Matlack said.

Levine said he has a plan to tackle the behavior change challenge, something routinely done by consumer goods distributors: Marketing.

“I think nonprofit and state actors have a critical role to play in teaching and behavior change for health and hygiene practices, in both clean water and other areas,” Matlack said. “The behavior change has to happen before there is a market demand for clean water solutions, at which point for-profit models are likely better suited to scaling and distribution. Nonprofits don’t scale well since success in the field typically requires a massive scaling of fundraising efforts in order to grow.”

While venture capitalists are not likely to see 100 times returns in household water solutions, impact investors and angel investors might be more likely to consider the opportunity, though their funding is generally not at the same scale. Matlack explained that both impact investing and grant capital have been critical for PotaVida. But he warned of the way in which large or renewable grants can remove the incentives for institutions to sell a profitable and scalable product to market, because they focus on whatever keeps the funding coming. The key is to profitably sell the end product once the grant runs out.

The problem with grants

Why this company is seeking venture capital and grant funding to finance its biomedical innovations

Vaxess Technologies has built a pipeline of 7 products worth more than $4 billion dollars through a combination of venture capital and grant funding. Devex speaks with co-founder Livio Valenti and others about the reasons for this trend of for-profit companies seeking out venture capital and grant capital in the global health space.

Last week, entrepreneurs in the 23rd batch of the 500 Seed Program went through a one-week growth bootcamp where they learned about “growth hacking,” a buzzword that roughly translates to exponentially growing their consumer base.

“One observation I have is that people here are not afraid to fail,” said Victoria Enwemadu, global head of projects at Fyodor Biotechnologies Ltd., a medical device company based in Lagos. “As Nigerians, we're very proud and confident people. Failure is not an option. So that's an interesting dynamic for me. I know failure is embraced here. But I’m all about succeeding.”

Fyodor is behind a urine malaria test, which is the first non-blood based rapid test to determine whether a fever is caused by malaria, but Enwemadu said this flagship product is part of a pipeline of noninvasive tests.

“We tell people that the market size it’s not just Nigeria, the market size is not just malaria, the market size is anyone with a fever in Nigeria, Kenya, Tanzania, India,” she said. “The numbers are there. The market opportunity is there. The feel good story is there. These are people who are dying from diseases where there is a cure, so why not invest in a product that can help them quickly diagnose what they have, and they can go get the medicine they need?”

After taking grants from groups including the National Science Foundation, Fyodor Biotechnologies Ltd. is now seeking investment.

Neivert said he warns companies about the negative impacts that grants can have on their chances of attracting venture capital investment. In global health research and development, government funding can provide a positive signal, because of a belief that the technology could become profitable. But when companies say they need grant money in order to deploy their product or service in a particular market, investors see this as a sign of weakness.

“It’s a difficult thing because grants generally aren’t that extensive,” he said. “And so what happens is the very portrayal of the weakness says, ‘Wow, it’s going to need more money’ and therefore it’s actually a negative sign. It traps them in the non-VC investment land.”

500 Startups encourages companies to present grants as a way of entering countries that might not be profitable at the outset, but could become so.

The appeal of Silicon Valley

Next week, Folia Water will take the stage again, at a pitch event for EQ Ventures, an accelerator that focuses on what it describes as impact entrepreneurs taking on critical environmental issues.

“We are very impressed with the simple fact that Folia Water has [its] product in market. Their technology is proving itself to be very reliable. The most impressive aspect of their approach is their price-point. If they can dial in their product-market fit, I think they can grow into new markets — established and emerging,” said Robert Suarez, who is behind EQ Ventures, and considering an investment in Folia Water.

For investors looking to emerging markets, there's no replacement for being there

500 Startups, a Silicon Valley-based venture capital seed fund and startup accelerator, just concluded its first Geeks on a Plane tour of sub-Saharan Africa. What are the benefits and limits of these trips?

500 Startups stands out for its interest in emerging markets, having partnered with the U.S. Agency for International Development earlier this year on one of its Geeks on a Plane tours to Africa. Levine told Devex that recent uncertainty regarding the availability of development finance for entrepreneurs has led him to focus more on Silicon Valley, where his team is relocating from Pittsburgh. As he continues to refine his pitch and prioritize the profits, not just the impact, he is finding that the audience is more receptive than he ever imagined.

“They understand what we do,” he said. “They see that, of course, there is a market. People need water. They will pay for that. Why wouldn’t they?”

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About the author

  • Cheney catherine%2520%25281%2529

    Catherine Cheney

    Catherine Cheney is a Senior Reporter for Devex. She covers the West Coast of the U.S., focusing on the role of technology and innovation in achieving the Sustainable Development Goals. And she frequently represents Devex as a speaker and moderator. Prior to joining Devex, Catherine earned her bachelor’s and master’s degrees from Yale University, worked as a web producer for POLITICO and reporter for World Politics Review, and helped to launch NationSwell. Catherine has reported from all over the world, and freelanced for outlets including the Atlantic and the Washington Post. She is also the West Coast ambassador for the Solutions Journalism Network, a nonprofit that trains and connects journalists to cover responses to problems.