[Transcript] Accelerating Global Fintech Ecosystems — Maelis Carraro, Director of Catalyst Fund

Miguel Armaza is joined by Maelis Carraro, Director of Catalyst Fund and the Impact Ventures Practice at BFA Global. The Catalyst Fund is an inclusive fintech accelerator supporting early-stage inclusive startups with flexible capital, bespoke venture building support, and connections to investors and corporate innovators.

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Miguel Armaza 02:00

Welcome, Maelis and welcome to the Wharton FinTech podcast. Thank you so much for joining us. Can we start by you telling us a little bit about yourself and your personal background?

Maelis Carraro 02:18

Absolutely. And thank you for having me in the program. It’s so great to be chatting with you all and sharing more about my experience and the catalyst fund. My name is Maelis Carraro, I’m the director of the catalyst fund, run by BFA global. And a bit of my background, I started my career really working in the microfinance space and actually approaching the issues of micro-financing more from a policy perspective. I was working in the OECD initially and researching how microfinance schemes might help the most vulnerable adapt to climate change across South Asia, and then over time realized that what I really wanted to do is actually create the solutions myself. And so from there, I went into a very practical role, actually, at Grameen Bank, which is one of the first microfinance banks that you probably are familiar with in Bangladesh, and really got to understand how microloans and micro-lending schemes work for very low income underserved communities. And so armed with that knowledge, I then joined the IFC, where I spent about five years at the International Finance Corporation, which is the private investing arm of the World Bank Group. I was based in Turkey in Istanbul, in the glory days actually, of Istanbul, and worked across a number of projects, but my portfolio was global. So it was looking at investments and advisory projects for large banks, microfinance institutions, insurance companies, all the way from you know, Southeast Asia, to Africa and Latin America as well. And working on mechanisms that were basically emerging grants capital and also commercial investing to maximize the impact, particularly in fragile and conflict it states. And that was really incredible, you know, ride I learned a ton. And at some point figured out, though, that I kind of wanted to be, again, like driven by these needs to be in the action on the other side of the equation. So not necessarily in the investment advisory side, but actually, having, as you earlier said, a front-row seat into the innovations that entrepreneurs are creating, particularly in the FinTech space. And those were the early days of mobile banking solutions, the rising across several countries, in digital financial services becoming attractive propositions. And so that’s when I joined an MBA myself and I went to Columbia, did a double degree at SIPA and Columbia Business School. And during that time, actually launched my own venture, it was called Remit Mas. And it was essentially a remittance service for low-income Latino immigrants to send money back to their families in Latin America, but for savings, so it was really meant to be tailored money transfers in dedicated accounts for, say healthcare expenses or education or whether you’re saving for a house. And that was, you know, great in so many ways. And as they say, You’re having a real-life MBA when you actually build a company. And so much more than that, actually. But for many reasons, the solution we were creating didn’t work end up working out. And there were regulatory hurdles and value proposition design issues on both sides of the equation. They’re senders and receivers. I can tell you more about that. So when, you know, it was clear that we shouldn’t pursue that opportunity anymore. We closed and shut down the company. And at that point, I figured, well, what’s the best way to now give back is probably share learnings and lessons on failure with other entrepreneurs. And that’s when I joined BFA and started the Catalyst Fund. So Catalyst Fund is that an accelerator for early-stage inclusive FinTech companies that are pre-seed across emerging markets. And, we provide them with very flexible seed capital plus hands-on and bespoke venture building support. Because we really realized that I had this experience myself that capital is only one side of the equation, but the level of expertise and you know, technical know-how that you need when you’re starting off a venture is often the real barrier. So we really created something that was for entrepreneurs and designed to make early-stage companies creating those environments to succeed.

Miguel Armaza 06:53

That’s a very interesting background. So tell us a little bit more about the catalyst fund. So when you join BFA, the Catalyst Fund did not exist and you help spearhead its creation. How were those initial conversations? How did you get the initial investors? How did you develop your investment thesis?

Maelis Carraro 07:13

So we just to clarify, actually, we call it catalyst fund, but it’s really an accelerator funded by philanthropic capital. So we co-created the program, actually with the Gates Foundation and JPMorgan Chase foundation four years ago. And our goal was really to see the impactful solutions for low-income customers in emerging markets. And that’s why we needed this form of capital that could come in early could de-risk the businesses and make sure that they succeed and grow and get a full-on capital. So what we were seeing is that there there was actually a lot of investors in a room and they all were saying, well, there’s not really a pipeline problem. But the pipeline in emerging markets is perhaps not at the standards of quality, where we feel comfortable investing, especially the very, very early stage. And so there is a lack of capital that can go early and take that risk and also a lack of talent and skillsets to allow these companies to grow and get to a point where we have as investors enough proof points to make an investment in the company. And so they told us if there were a facility that could provide that, you know, small risky capital at the beginning of the journey of the entrepreneur, and then also give the support not in a generalized way, but in a way that truly focuses on the challenges and risks that the intrapreneur and the individual company is facing. That would, you know, provide us a lot more comfort, making the investment down the line. And it could be really catalytic in terms of creating businesses that are solving big challenges in emerging markets, so that was a bit of the background. And that’s where, you know, Catalyst Fund came in. And we see really the role of catalytic capital to be more patient, to take risk and be more flexible than conventional capital. And that’s our role in the impact investing continuum to play at this very early pre-seed stage.

Miguel Armaza 09:22

Curious to learn a little bit more, how did you secure those partnerships? Both with JPMorgan and the Bill and Melinda Gates Foundation?

09:34

Good question. Well, they, I guess, took a chance on us. I mean, BFA has a long history working with the likes of the Gates Foundation, and also JPMorgan Chase foundation actually was a new partner for us, but decided to come in because this was very aligned with both organization’s mission to expand the financial health and well being of low-income populations in emerging markets. So I think it was really a meeting of the minds across all actors. The donors or the funders as asset implementers. And then the investors and now sitting on investor Advisory Committee, they’re all experienced emerging market and FinTech investors, including Accion Venture lab, Quona Capital, 500 Startups, GrayGhost Ventures, and now Anthemis as well and Flourish (ex-Omidyar). And, so all of us, you know, we’re representing actors in the market that are needed for this kind of solution to work. So Gates Foundation and JP Morgan foundation really took a chance and saw the alignment in supporting this kind of facility to benefit the entire ecosystem.

Miguel Armaza 10:40

I’m smiling, as you mentioned because we’ve had some of the partners that have some of the names that you just mentioned on the podcast, so pretty glad to know that you work with them. Tell us a little bit more about your first investments. How did you find your initial class of companies? How did you decide what countries to look at?

Maelis Carraro 11:01

Absolutely. Before going there, let me just tell you a bit more about how Catalyst Fund works in general. So, like, the different components. Because we’re different from other typical accelerators in a number of ways. So, number one, we don’t source via an open call, for example, for applications, or, you know, other challenge type methodology to recruit the companies. But we source through what we call the investment advisory committee that has the 6 investors that I just mentioned, as board members, so to speak. And they are the ones in charge of actually going out there and source companies for the program. Why? Because that’s their full-time job. And also they spend, you know, a lot of time looking for companies and many of them are too early for them but have strong teams and so a lot of these ideas and very successful companies, would not have any investment if they didn’t have this mechanism to still refer them to us, go through the program, accelerate in six months down the line, there perhaps are more investment-ready for them to consider them. So they all have one slot per cohort. And they present us with a selection of companies. And together, we sort of analyze them and see if it fits our criteria, we have a number of criteria that we look at. And then once we picked the company that or the entire investor, advisor, committee reviews, and then we approve the nomination to the program. So in a way, it gives that stamp of approval, but it also, because it’s an investor, like pre-selecting, but it also builds investor intimacy. So we really kind of from the beginning and create the connection between the startup and the investor so that the startup’s chances of raising money after the program is potentially higher and we have seen that being the case with this setup. So that’s how we kind of source intellect. And initially, we were very broad in scope. We said, we want to Seed successful and high potential impact-focused businesses in FinTech across emerging markets, and we covered about 14 markets. But then we realized that we, in order for companies to succeed, you know, the acceleration itself, is not enough. Like you really have to work also in accelerating the environment in which the founders operate. And so we kind of shifted to also work on accelerating ecosystems. And for that you have to be a little bit more geographically focused, you have to have deep dives. And so we decided now to focus on five key markets, and that are Nigeria, Kenya, South Africa, India and Mexico. markets that have a lot of potential for FinTech. FinTech has been growing a lot and booming in the past few years. And yet, there’s still a big gap when we think about financial inclusion, pushing the boundaries of financial health as well, and filling some of that last mile gap. So, so that’s our five countries of focus now, but in the future, we might expand it again to more countries, as we try to test, you know our methodology even more.

Miguel Armaza 14:05

That’s very interesting. And there’s a lot there to unpack. Going back a little bit to the sourcing, typically, how many companies is each investor bringing? Is it a list of companies and you work together to narrow which one to invest in? Or do they typically bring the final candidate?

Maelis Carraro 14:27

It depends. There are some investors that like to review candidates among themselves as a team before maybe they look at like five, six, and then they bring to us the final nomination. But we know that behind the scenes, there has been that thought process and they typically tell us, and we ask, how many more companies have you considered for nomination, and they give us the names so we have a sense of those that were not deemed, you know, appropriate for that cohort. And others actually prefer to analyze every opportunity with us. So we kind of review together say five or six and then make the pick. But what’s driving the selection is really the clarity of the mandate and the criteria. And as long as that, you know, spelled out and analyze properly, they they bring us really already the handpicked best opportunities that they’ve seen out there and those that do merit, this catalytic capital and grants, and there’s an additionality there for them to reach their goals.

Miguel Armaza 15:23

Perfect. That makes sense. And so going back to these five markets that you are now focusing on, what are some examples of the initiatives you’re taking to help not just the companies but also the market?

Maelis Carraro 15:39

Great question. So we see that even after the acceleration, you know, there’s three main challenges at an ecosystem level. Actually, probably more than that, but we focus on three main challenges. The first is unlocking capital at the early stage. So they’re still across emerging markets, a lack of that early stage of funding that can actually de-risk companies when they’re at the start of their journey. And so we created what we call the circle of investors, which is, which is a group of investors globally and locally now there’s about 16 members that we introduced to our companies and form one on one relationships with a double opt-in, obviously, introduction, and make sure that those connections are made so that the companies can have those relationships set up. And obviously that increases their chances of raising follow on funding. In addition to that, there’s a lot of learning that happens like peer learning among investors. So we are also facilitating those conversations for our community, making sure that investors have a platform to exchange, learn from each other, learn from what’s going on in FinTech across different markets. And we’ve seen the power of that cross-learning for the community to actually really unlock potentially more and more investments. So that’s one. The second is pathways to scale. I’m sure you’re aware, but across Africa and many other markets, the lack of exits is a big issue. And opportunities for the companies to have a clear path to scaling from the early days is also challenging. There’s also not a lot of debt capital that can typically fuel the growth of companies. And so in order to facilitate that scaling or these pathways, well, where we thought we’d be helpful is actually facilitate connections with corporate partners, corporate innovators, whether it’s microfinance institutions or banks, or you know, insurance companies or retailers, that can be that distribution partner, and offer that scale-potential to our startups. And there’s a problem there typically. On the one hand, startups tend to be maybe not corporate ready, like for that partnership to really work and there’s a lot that you need to navigate. And for that b2b relationship to really be set up for success. And on the other hand, corporates also tend to be, you know, risk-averse, and maybe they don’t have an innovation department that knows how to interact with startups. Make it easy for them. And so we accompany them in that journey, make it a little bit less scary, so to speak on both sides. And again, like really with an eye to make it work for both the corporate partner and the startup. And the third area is still talent. So again, a company might go through our program, but after six months, even if we’re really at work, and embedding ourselves in the startup teams, because we work very deeply with the companies, there are still issues in finding the right talent and growing the team, typically when you’re growing and scaling that’s a big pain point. So what we’re trying to do now is connecting with local talent networks and local universities to make sure that the companies have access to a pipeline of good talent and you know, top high quality, but also to showcase to the youth in a lot of these markets that working in the startup is a viable job opportunity. It’s about a viable professional path and hoping that might lead as well to more interest in working at a young and early-stage company.

Miguel Armaza 19:07

Makes sense. And so within your portfolio and also looking forward, are there any particular verticals that you guys are more excited about? Or that you have been paying more attention to?

19:22

Yes, absolutely. So we have a broad mandate, you know, of supporting financial inclusion and in the financial health of low-income populations and small businesses in emerging markets. That said, we do look at FinTech as embedded across a number of sectors. We do believe in the concept of embedded finance. Now, FinTech is not necessarily vertical, it’s actually horizontal. So even among our portfolio, we have companies that have a FinTech proposition, but touch the healthcare sector or education or access to energy. So fundamentally, we have three investment theses. One is financial health and enabling the creation of what we call accessible, appropriate and affordable solutions for low-income populations and businesses. And then the other two now are access to essential services, or one might call, distributed utilities, you know, at the micro-level, as well as platforms for the gig economy. We’ve seen that those platforms with the rise of gig work in many emerging markets are becoming a vehicle to then deliver financial services and as well as portable benefits that can really make a difference for the worker who was otherwise very exposed and at risk with variable incomes and you know, their financial security and resilience is typically quite low. So that’s our third investment thesis, so to speak.

Miguel Armaza 20:50

Let’s talk a little bit about the world we live in right now. We’re obviously going through an unprecedented crisis. Every single country is being affected, but arguably emerging markets are being affected even more. Right? How are your portfolio companies responding to and coping with the situation? How are you helping them along the way? Curious to hear your thoughts on this COVID-19 crisis?

Maelis Carraro 21:17

Great and obviously timely question. So, you know, in a number of ways, and I think, at the beginning of the crisis, we first started by understanding the situation in each of our markets because the impact of COVID-19 has been quite different across the market. So understanding what were the dynamics that each startup was facing, and what lesson also we could draw from countries that maybe had experienced COVID-19 impact a little bit earlier, and that other startups could learn from and prepare in advance so that global remit that we have like the preview across 14 markets gave us an advantage. So we really brought our portfolio together and had conversations with all the founders, you know, how are you? How are you preparing for the crisis? How are you being affected right now? What are the trends that we’re seeing? And, you know, doing stress testing on their business models, and having all sort of those hard questions, asking their questions so that we can help them better prepare. And also, giving them a platform to share with each other. Because in this type of crisis, there’s a lot of unknown, especially at the beginning. And so that was very beneficial for them to really share and compare notes on what each company was doing. Then the second thing we did was actually trying to understand how the investment climate was changing. So we did speak with a lot of investors in our community to understand if they were hitting pause on their investments if they were, you know, deciding to double down on their own portfolios, and how, how should we then advise our companies in thinking about for example, reducing burn and having more sustainable financials, basically, to extend their runway. And so we did invite also investors to speak with them and advise them on those strategies and how to do better cash management to extend your runway. So all of that was, you know, essential and great whilst organizing risk management webinars, or, you know, techniques that were shared by several investors. And then having a one on one conversations was key for each company. And I will say that, you know, a lot of our companies maybe 60% or less that they would be in a cash-constrained situation, like six months from now, and those that were fundraising right now obviously had bigger issues and they really needed to kind of look at how and where they could cut down costs, and actually speaking with a lot more investors because to increase the odds of getting financing and perhaps even compromising on valuations and you know, things that they had expectations before COVID, and now, we’re just living in a different reality. So Thinking about different instruments potentially as well. But is that really for the majority of the portfolio, but I will say that what we’ve also noticed on the positive side is that a lot of the companies because they were digital because they were already nimble and operating, you know, as a startup, they were better prepared to respond, and that some of these FinTech products were also so essential in a crisis like this. So we have some companies that quickly pivoted know responded by adapting their product offering or by kind of anticipating some of the product features that were maybe in their roadmap or later to earlier on, to play a role in responding to the crisis. An example can be a company that we invested in called Sokowatch in Kenya. They’ve been phenomenal in setting up basically an e-voucher system that would be delivered to low-income households in Kibera, one of the slums in Nairobi and allow those households to get access to $15 of essential food and non-food items through their network of small merchants, their typical Ducasse in Kenya, and do that on a weekly basis. So seeing that they could do that the opportunity to digitally deliver a voucher for essential items in a moment of lockdown when your incomes are decreasing, was extremely valuable in a way that they could track. Also, the spend of those donations essentially was a solution that is very much needed in this crisis moments. So we kind of gave them additional capital to do that. And we’re actually testing that solution now with their network of merchants. And there’s only one, I actually there’s several others as a company called RACO, who immediately developed a hospital cash product to cover for cash for expenses related to COVID-19. And they were able to approve that with underwriters and put it in the market and form partnerships with other players to distribute it. So that was also fantastic. We have another company that has a SaaS platform for Sacco’s so you know this the cooperatives in it Kenya, that allows them to go more digital and in this rush to sort of digitize more of the infrastructure, they were able to offer that at a discount and you know, kind of positioned themselves again, as part of the solution. Smart identities, same thing that had a KYC solution that is critical as everything moves even more digitally, and offer that for free. And chipper cash, which is a p2p money transfer also made donations to specific COVID funds to NGOs and the frontline of the crisis. So you know, across the board, it’s been actually very inspiring for us to watch them quickly respond and the ability that they had to do that nimbly, has really kind of been beyond our expectations. Frankly.

Miguel Armaza 26:46

You kind of touched on this, but how can the ecosystem and players like you, help reduce the blow of VC investment in emerging markets, right? A lot of people fear, going forward, a lot of international VCs won’t be as keen to invest in places like Latin America, Africa, right? But the story is still there. And, in fact now more than ever, it’s actually becoming evident that these investments are needed and actually can turn into fantastic results. How are you working on this problem and then how can the ecosystem as a whole help?

Maelis Carraro 27:25

I think you really hit the nail on the head there. It’s you’re absolutely right that I think this is a moment in where we need this kind of catalytic capital and impact investments really more than ever. I think that the need to you know, fulfill in general, the need to fulfill the SDGs isn’t going anywhere, as you said, as these problems, if anything have been exacerbated by the crisis, but they were there before. So this is just the ripple effects are going to probably be felt even more by the lower-income, underserved, vulnerable populations and that’s where we shouldn’t hit the brake like we should actually double down on supporting and creating the vehicles that allow capital to flow to those markets. And some impact sectors, I think will be in the short term more in demand of that capital. What are we thinking about the health sector or, you know, telemedicine, for example, or edtech to enable efficient distant learning, or capital to make sure that small and medium enterprises can continue to operate. But more broadly, we will across the board, I think, continue to have the need for this type of capital and valuations actually, across the board might be more interesting for investors. So, I would see this more as an opportunity to actually continue to deploy capital and not take a step back. And perhaps those valuations that many investors have complained of being too high in certain markets, might suddenly feel more attractive from an investment point of view. And that will contribute to unlocking more funding as well. But I think you know, again, for us, what we have seen with this crisis is the level of interconnectedness and the fragility of our established global systems. And I think that this kind of problem probably can be equated to similar crises will face with say climate change, or others. So, I think there is an increased urgency for impact investing to become even more mainstream. We can’t discount the type of socio-economic effect that our investments have, particularly in these circumstances. So I really hope that we’ll see more and not less and I hope that we will see actually diversity of instruments like ourselves. We are philanthropically funded, but we could evolve into a blended finance structure within that creativity, and innovation in the type of instruments that are appropriate for emerging markets has to come now and it’s really upon us.

Miguel Armaza 29:53

That makes a lot of sense and I can only guess this sentiment is shared by all of your partners and your circle of investors, which becomes even more important at this time.

Maelis Carraro 30:07

Yes, you know, it’s a tricky one because obviously from an investor perspective, you also have to, at this stage, understand, you know, who are the winners in your portfolio and kind of doubling down on supporting them. So there is some triaging happening. But I would say that the general sentiment is certainly shared and some of the investors that have figured out how to continue to invest, they’re still deploying capital. They’re not pulling back.

Miguel Armaza 30:36

Do you have local teams in all the markets that you invest in?

Maelis Carraro 30:41

We do. We have country managers in all of our five markets. So India and Kenya, actually, BFA has an office there. BFA is, you know, the fund manager of catalyst fund. And then in South Africa, Nigeria, and New Mexico, we have a country manager as well. And that was critical definitely to maintain the connection with the companies on the ground and with the ecosystem, while also being a global program that deploys venture builders across the world and across a lot of markets.

Miguel Armaza 31:08

Well, Maelis, this has been fantastic, very, very interesting and enlightening. Before we go, we always like to ask our guests to tell us a little bit about your activities outside of work outside of the Catalyst Fund, perhaps some of your hobbies.

Maelis Carraro 31:28

Great. Do we have time these days for hobbies? I feel like work has really taken over. No, I’m joking. So yeah, of course, I do have hobbies. I obviously, you know, for my mental health, I actually do quite a bit of exercising and running and I play the guitar. I’ve been trained to play the classical guitar when I was a kid and continue now to play leisurely, but it’s always a great moment to you know, come together around music. I love that. And then you know as a true extrovert and a French-Italian, I also love food and connecting with people. You can take me away from my glass of wine with friends and cooking with my husband and just like enjoying those pleasures in life. So maybe not so much a hobby, but a modus operandi for lifestyle.

Miguel Armaza 32:23

Sounds like you have your right hobbies in place.

Maelis Carraro 32:27

Exactly. I’m sure they’re shared. That’s what makes them fun.

Miguel Armaza 32:30

Well, thank you so much. Again, this has been a treat. And you know, you’re always welcome to visit us on campus once things get better.

Maelis Carraro 32:39

I’d love that for sure. As soon as we can all get on a plane again.

Miguel Armaza 32:44

Have a good one.

Maelis Carraro 32:45

Great, bye Miguel!

Written by

Co-President & Podcast Host of @WhartonFintech. MBA /MA Candidate at @Wharton / @LauderInstitute. Fintech investor and advisor. Previously @Citi & @MUFGAmericas

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