Silicon Valley and the Bay Area have more companies per capita that have launched and scaled new solutions than anywhere else in the world. As Gavin Newsome, California’s lieutenant governor, recently said, there is virtually no economic challenge California innovation has not solved or cannot solve.
So when will the answers to the world’s greatest economic development challenges come from the garage next door?
There’s an obvious confluence between the innovation California firms can offer and the solutions needed in developing countries, especially those involving scarce resources — water, food, information or energy. All of these challenges could benefit from the leapfrog technologies and innovative solutions in which California entrepreneurs excel.
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So why aren’t California companies solving these problems?
With some notable, high-profile exceptions (such as the recent launch of a fund by several California billionaires to accelerate progress on clean energy), California companies and entrepreneurs are still largely taking a pass on opportunities in high-growth, high-need markets. This is true despite much rhetoric in Silicon Valley around the need for disruption, risk-taking and social impact.
The opportunity for California innovation
It’s true countries needing development solutions have populations living on less than $5 a day. Finding the next best app for high-end markets, with hopes of high profit margins, is much more tempting.
But the truly visionary disruptors see the next generation of opportunities in high-need economies now (as well as the chance to change lives). Economic growth in these countries already exceeds world growth by 2 percent, and is well beyond projections in developed countries. Here there is a burgeoning consumer class, half of which will have mobile phones in 2020.
Of these countries, many in Africa are among the fastest growing, with the highest global return on investment. Private equity has more than doubled over the past eight years. Theirs is an entrepreneurial spirit that rivals any in the world, which can and will solve some of their own challenges.
But the opportunities are crying out for California innovation as well. Combining African and California entrepreneurship, technology and capital could lead to exponential advances in the quality of life in developing countries, while reaping huge financial returns.
Developing world challenges are obvious prospects for California entrepreneurs. Growth sectors include agribusiness, finance, information technology, infrastructure, and housing, all competitive arenas for California firms. An estimated 70 percent of the African continent is without reliable access to electricity. Yet there is a huge market for solar off-grid solutions.
Much of the arable land is drought-stricken. Yet there is a huge market for drip irrigation, post-harvest storage, animal and aquaculture productivity, farm management, climate mitigation, supply chain support, and trading.
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Pervasive adoption of mobile phones, even among the most vulnerable populations, are a market opportunity for mobile networks to leapfrog traditional brick and mortar commercial banking to provide marginalized populations ways to invest in education for their children, or start a new business. And mobile-enabled solutions to improve supply chain efficiency and increase farmers’ ability to make secure, timely payments and access other financial services is a market just being tapped.
A less obvious path
One reason California companies may not have warmed to these opportunities may be the imperatives of their funders. Most venture firms in Silicon Valley look for investments that fit a certain algorithm — five to 10 times return on investment, with an exit window of three to five years. Speed and scale are challenging in less-developed markets, as are exits themselves. Investment algorithms may mitigate the high failure rate of startups, but take off the table high-impact and potentially lucrative opportunities in emerging markets.
Admittedly, these opportunities come with the need to test uncharted territory, understand and negotiate emerging regulatory structures, and find new business models that meet the needs of these consumers. This all requires time and patience, neither of which describe Silicon Valley.
Consequently, few entrepreneurs funded in Silicon Valley have sought to apply technology solutions that can improve the lives of the world’s developing populations, regardless of the fact that the potential for commercial and social impact is huge.
The good news is that a handful of investment firms do include these opportunities in their portfolio. Impact investing — which looks to both financial and social returns — was born to fill this gap, and some of the savviest investors are on to this secret. But these investors can’t keep up with the potential demand from entrepreneurs for scalable solutions needed in the developing world.
Visionary companies in Silicon Valley and throughout the Central Coast have seen the long-term benefits of these programs. One example is Off-Grid Electric, based in San Francisco and in Arusha, Tanzania, has just launched a business model to enable small businesses and households, many living on as little as $1 a day, to access solar electricity for the first time, using mobile money. The U.S. Agency for International Development contributed $5 million to this first investment vehicle in distributed solar and battery storage, which has been able to catalyze an additional $45 million, helping to create a new asset class for impact investment.
The other good news is that venture capital is not the only resource available to scale innovative solutions in emerging markets. U.S. government and other international donor funding and development finance is on hand, in addition to venture capital, angel and some philanthropic resources to help buy down the risk of these investments, and provide the running room and wherewithal to test business models and gain customer traction.
These institutions are relying more heavily on private innovation to solve the world’s most pressing problems. They want to harness what California firms have to offer, and have an array of tools to help, like unrestricted grants, long-term debt financing, guarantees and capacity building.
These resources can be part of an entrepreneur’s toolbox that complements venture capital and mitigates the risk of these investments (without the board seats). Social impact metrics are required, but they can inform and often strengthen a company’s business model.
It’s true there is no economic challenge California innovation can’t solve. The firms and ingenuity are there. What’s missing is the same patience, resolve, spirit and long view that led the first California prospectors to gold when it was not the obvious path.
California firms can meet, conquer and prosper from some of the world’s greatest economic opportunities, while transforming the lives of millions. All it takes is a little disruption and a different perspective.
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