Case Study: Investors for a social enterprise

The story
Movirtu is a British, early-stage start-up that has developed “Cloud Phone” software aimed at people too poor to own their own mobile phone. Currently, poor consumers often have to share or rent handsets and Sim cards, which is costly, inconvenient and lacks security when accessing services such as mobile banking.

Cloud Phone offers a cheaper, more convenient alternative because it gives individuals who cannot buy a handset their own phone numbers and mobile services.

A former senior telecoms executive, Nigel Waller set up Movirtu in 2008 with a view that “it was something that was going to do good, but it needed to be a business activity”.

The challenge
By 2010, as with any growth-oriented business, Mr Waller needed to achieve key milestones quickly, including raising funds to develop technology and establish partnerships. In doing this, he had to decide on the right mix of investors for a for-profit company targeting the world’s poorest market segment. This is the “base of the pyramid”, the 4bn or so individuals who have previously not been considered as viable customers or producers for companies used to serving more developed markets. Financial returns may take longer to achieve, but companies increasingly view the base of the pyramid as a key growth market.

Initially, the only backers interested in providing capital to Movirtu were “impact investors”, who expected the return on their money to include a measurable social good. But as Movirtu began to establish its reputation, more traditional venture capital investors expressed an interest.

Pros and cons
Movirtu had secured investment from two US-based seed-round impact investors – Gray Ghost Ventures and Grassroots Business Fund – totalling $1m in 2008-09. Such investors often offer capital for lower returns and are willing to wait longer to realise them. They also provide expertise and contacts. But they have expectations with regard to social returns.

Traditional VCs that approached Movirtu included TLcom, which had investments in telecoms, media and technology companies across Europe and Israel. TLcom would bring not only money but also networks, prestige and credibility: attributes that would be attractive to third parties such as the mobile service provider with which Movirtu wanted to develop partnerships.

But Mr Waller knew that traditional VC firms have different expectations in terms of financial and social performance. They also require a high level of due diligence, and the frequent scrutiny could be distracting to the management team.

The question for Movirtu was whether it could balance the expectations of both impact investors and traditional VCs.

What happened
Movirtu decided that the goals of these two investors were not mutually exclusive and pursued funding from TLcom. After looking at the financial numbers as well as Movirtu’s social goals, the firm advised Movirtu that it would need more money than it had thought, and raised $5.5m.

With this substantial capital injection, Movirtu has begun to scale up more quickly. In early 2011, the company was awarded its first official contract with Airtel Madagascar, the country’s biggest mobile operator. In August 2011, the programme was launched officially.

The lessons
A social start-up serving the base of the pyramid can take backing from both impact investors and venture capital. However, it must be transparent to all parties about its financial and social goals and show how these are complementary rather than requiring a trade-off: Movirtu and its investors believe they can enhance the financial bottom line by meeting customer needs, which includes helping alleviate poverty.

While there are challenges in combining the two types of investor, a traditional VC provides both significant cash and greater credibility in the market.
- Financial Times, 19 Mar 2012