In a time defined in many ways by the economic effects of the COVID-19 pandemic, financial inclusion startups face a two-sided challenge: raising capital from wary impact investors while meeting the demands of consumers who need their tools more than ever before.
“The need for the solutions of companies in this space couldn’t be more acute,” says Village Capital CEO Allie Burns.
Village Capital is a nonprofit that uses a novel peer-selection model to facilitate seed-stage impact investments. Finance Forward, a coalition with MetLife Foundation and PayPal, launched just before the pandemic with the goal of supporting financial health startups alongside local partners in target regions around the world.
Financial Inclusion and Financial Health
Financial health is a holistic next step from financial inclusion, Burns says. “It’s not just about gaining access to the financial system but being able to use it to lead a healthier and happier life. If someone has a bank account but can’t use it, what’s the point?”
As Burns observes, COVID-19 has meant an “exposure and exacerbation” of systemic inequalities. One infamous example is the Paycheck Protection Program, of which only 1.9% of loans went to Black-owned businesses. However, the trends embodied by financial inclusion startups have not shifted. Rather, they have become more critical and more in need of impact investing to stay afloat or expand. These trends include:
- Higher education financing: As classes have moved to Zoom and campus life has been turned upside down, emergency loans from companies like Edquity and MPOWER Financing are meeting new demands from their users.
- Payroll technology: “Most employers have antiquated systems that only allow payments to be made at certain intervals,” Burns explains. This makes it difficult for businesses to offer employees salary advances or emergency funds. Calgary-based ZayZoon is among the payroll tech startups offering tools like wages on demand and new banking options.
- Supporting seniors: The aging baby boomer population lacks significant savings and may need additional support to manage their income. Solutions like Golden allow children and other caregivers to provide members of this generation with virtual money management.
- Community wealth-building: Informal mutual aid networks have sprung up around the United States to support neighbors hit especially hard by the virus. Burns points to startups taking that framework a step further. Some help expand equity crowdfunding options while others like Worthy Financial allow people to support local businesses by purchasing a bond with a 5% rate of return. “Tools like this also help community members diversify their assets,” Burns notes.
Who Is Investing in Financial Health?
Where is seed-stage and growth-stage impact investing coming from during the pandemic? “It’s a mixed bag,” says Burns. Some investors are holding off until the markets settle while others are doubling down on resourcing startups working directly or indirectly on the economic recovery from the virus.
That is where matchmaking between entrepreneurs and impact investors becomes especially important. Village Capital launched its Abaca platform in 2019 to help match entrepreneurs with the investors best suited to support them. “It helps to simplify what it means to be investment-ready and what milestones investors are looking at,” explains Burns. For financial inclusion startups in particular, that matchmaking can help bring in more diverse voices; only 17% of fintech CEOs are women, and less than 2% of tech executives are Black.
When COVID-19 hit, the Abaca platform’s matchmaking ability became a useful tool for pairing startups working on the recovery with the impact investors prepared to move capital. In fact, many of them were already connecting with industry coalitions led by the World Economic Forum and the Global Impact Investing Network. “How do we use those other groups to identify who is ready to write a check to build out the investor side and then market to companies responding to the crisis—in telemedicine, PPE, online education, or financial health?” says Burns. Village Capital partnered with the Sorenson Impact Foundation to bring together more than 60 investors and 350 companies on Abaca to start the matching process. The urgency of the virus may have the most lasting impact on what the sector views as possible.
“We hope investors will realize they do not have to be down the street from a company to invest in it,” says Burns. “You can diligence a lot without physically going somewhere.”
That opens up the door for impact investing in more entrepreneurs from marginalized communities. “You will see more capital flowing to founders of color leading these organizations, many with lived experience,” Burns predicts. “We have to put more money into companies that are solving problems and helping people live healthier lives.”