What did we learn from running Catalyst Fund in the first year? 

 

Startup Lessons, 2016

Early stage startups face innumerable challenges in the first few years of their operations that must be carefully addressed for their business to scale. The digital financial services (DFS) industry in emerging markets, in particular, adds unique sets of challenges to overcome. While we are yet to finalize lessons learned with all the startups of Catalyst Fund, we have summarized key insights to date.

 

Startup challenges and technical assistance

100% of our startups identified building trust with customers as a critical skill they needed support with. Building trust with customers early on is fundamental, as trust is slowly built but easily destroyed. Catalyst Fund (CF) startups were particularly struggling with building trust at the activation and acquisition stages of the customer funnel.  BFA helped build a framework that looked at the customer acquisition funnel and a series of trust points, including competence, appearance, transparency, control, and consumer protection. All startups said the framework helped them think about critical steps in their customer journeys.


Interim CTO engagements deliver outstanding ROI for the startups

BFA has helped startups by playing an “interim CTO” role, helping prioritize and find lean tech solutions that are most appropriate for the early stages of the startups while positioning them for future growth. Prioritizing product architecture is not easy when a team feels overwhelmed by competing priorities and the pressure to jump ahead and build or purchase more complex modules than required.  It is critical for startups to get the right feedback and define their technical requirements at different growth stages accurately. There are many existing free/freemium tools available that startups can use to find out what works and what doesn’t very quickly.


Support with conducting user Research and ValProp validation has been more requested than we expected

We included a user research component in several projects: WorldCover to better understand farmers needs and ability to digitize; Escala to design the value proposition for all parties involved; PayGo to measure the level of comfort with smartphones and the trust in the product. This could indicate that startups are at an even earlier stage pre-product/market fit than we originally thought or that they lack important research skills among their teams. 


Preliminary: There is a lot of curiosity about machine learning but the teams don’t know where to start

Over the next few months, we will be working with five startups to create algorithms to determine business predictions. This ML for managers module will answer simple business questions like “where will I get more customers?” WorldCover wants to predict which communities will yield more policies and renewals, Destacame already improved its core credit scoring algorithm with ML, and PayGo wants to know which households will consume more fuel. We think there’s a big opportunity to bring ML tools in the hands of startup execs in easy to digest ways.  

Startup Journeys, 2016

 

Customer experience can be a key differentiator at this early stage

In particular, if a startup is trying to overcome big behavioral barriers, ensuring a great first impression and continued experience are a key differentiator and there are creative ways to do so. PayGo provided every household using their stoves with fire extinguishers, which was a safety measure that customers appreciated greatly. Escala in Colombia worked to reduce as much paperwork as possible when signing up for education savings accounts to improve their client experience, which became central to their entire value proposition.


The balance between costly but warm human interaction and cheap but cold digital interaction can be tricky

Boosting customer engagement is a carefully crafted art. Using solely digital communication interfaces can work in some instances but the human interaction is still warranted in most cases, particularly for the poorest illiterate clients. World Cover, for instance, visited its clients at least once a week and gained trust because of frequent visits. Clients said they knew they were not there to take advantage of them because they would come back frequently.


Support with conducting user Research and ValProp validation has been more requested than we expected

We included a user research component in several projects: WorldCover to better understand farmers needs and ability to digitize; Escala to design the value proposition for all parties involved; PayGo to measure the level of comfort with smartphones and the trust in the product. This could indicate that startups are at an even earlier stage pre-product/market fit than we originally thought or that they lack important research skills among their teams. 


You need a balance of both a ‘fin’ and a ‘tech’ expertise to gain traction with a fintech product

Escala had great finance expertise, but little tech, PayGo had a crew of hardware engineers but knew little about payment infrastructure, Destacame.cl had excellent data analytics expertise but struggled to sell to the banks. BFA complements the startup's relative skill sets and brings some more balance to the equation.


5 of 7 startups in Cohort I and II have B2B and B2B2C models and face enterprise sale cycles constraints

 Whether startups are partnering with banks, corporations or distributors along their respective value chains, they need to identify which asymmetries they can leverage to build their value proposition. Partnership models are increasingly attractive and mutually beneficial, if the bank and startup can each leverage its strengths to create an excellent experience for the client and bypass operational, legal, and technical hurdles.
 


The smartphone is here; it’s just not evenly distributed (yet!)

Smartphone adoption and readiness to adopt differs very much by country and socio-economic status. PayGo and WorldCover in Kenya and Ghana rejected our push to use smartphones for client engagement, while Escala and Destacame are already using smartphones for distribution and customers communications. Alternative solutions using feature phones are still more relevant to users, particularly in remote, rural and poor communities where smartphone access, data availability and literacy is very limited.
 


With fintech products, customers often care more about the quality of service associated with the product, than the product itself

 The experience of customers with a service is fundamental and, if done right, the product itself does not have to be too complex or on a shiny new app.  WorldCover’s farmers cared more about the repeated show-ups, PayGo made sure to give product demos to each household in person and sent SMS messages with balance updates that clients loved, Destacame was always very transparent about how credit scores are computed and offered hot lines to explain the scores further, building credibility with users.
 


Social media campaigns can be an extremely affordable means to acquire users

In Chile, Destacame is acquiring leads at $0.05 through Facebook ads. That’s how they’ve grown their user base to 110K+ users to date. This is something we want to test further with other companies as well.
 


Not a single startup in seven cases leverages BlockChain technology

Despite the hype, none of the startups in CF ventured into the blockchain space. Maybe it still feels too sophisticated, legally obscure and difficult to implement in emerging markets, in spite of its potential value. 

Facility Lessons, 2016

 

Catalyst Fund program is a unique accelerator model, which makes it hard to evaluate against other accelerators in emerging markets

The hands-on, needs-base TA offered to startups is very different than traditional “startup 101” courses and mentorship programs that are part of incubators and accelerators worldwide. Similarly, the 100K seed funding in the form of a grant without asking for equity stakes makes a big difference in the trajectory of a startup at this stage. We have not been able to participate in the Global Entrepreneurship Learning Database by Emory University  because our model was too different from the mainstream


Our sourcing mechanism has produced more B2B startups than we expected (3 out 7)

Furthermore, two out the 7 were B2B2C (Destacame and Escala). We were initially expecting mostly B2C startups and built a Learning Agenda around that premise, but we had to add a B2B-focused bucket of questions on partnerships and ecosystem forces. It is evident that many more creative models are emerging, which leverage partnerships between incumbents and innovators and their respective strengths. 


The balance between costly but warm human interaction and cheap but cold digital interaction can be tricky

Boosting customer engagement is a carefully crafted art. Using solely digital communication interfaces can work in some instances but the human interaction is still warranted in most cases, particularly for the poorest illiterate clients. World Cover, for instance, visited its clients at least once a week and gained trust because of frequent visits. Clients said they knew they were not there to take advantage of them because they would come back frequently.


Support with conducting user Research and ValProp validation has been more requested than we expected

We included a user research component in several projects: WorldCover to better understand farmers needs and ability to digitize; Escala to design the value proposition for all parties involved; PayGo to measure the level of comfort with smartphones and the trust in the product. This could indicate that startups are at an even earlier stage pre-product/market fit than we originally thought or that they lack important research skills among their teams. 


We are more effective with companies that have started on the Product/Market Fit journey

The Catalyst Fund offering is best positioned to support startups who have already run experiments, piloted with at least one client, have data to analyze and draw lessons from. One of our startups, has been more difficult to work with because of lack of data and field evidence as they had not yet started piloting with clients. This makes the scoping effort for the TA more complex and potentially useless because it relies on a lot more assumptions. As a consequence, we are now turning away startup candidates for Cohort II that don’t have clients yet.


The impact investors in our Advisory Committee  (IAC) do not feel in competition in sourcing deals for the same fund

They all see the benefits of collaborating with each other and started to open up more to BFA as thought partners. Initially, there were discussions around potential frictions that may arise by bringing in more investors to the Committee but those concerns have been put aside. We recently added a fifth investor to the IAC, which was well received. 
 


A larger and diverse group of investors is interested in the Catalyst Fund model and the pipeline

We received enthusiastic responses from investors to our invitation to join the Circle of investors, a group of investors that get to watch the Catalyst Fund startups and be matched with those that fit their investment criteria. This shows promise that the Catalyst Model is beneficial to a large but also diverse group of investors since the Circle attracted both impact first (e.g. Goodwell) and more commercial investors (e.g. Index Ventures).
 


Preliminary: the Catalyst Fund grant (and the branding/support) has made a difference in the funding journeys of the startups

Catalyst Fund has helped some startups get funding, better terms on term sheets or introductions to useful investors. PayGo, for example, is about to close a round with a key investor in Kenya, and we helped during the due diligence process in reviewing terms and providing feedback to the investor. 


Preliminary: Philanthropic capital can play an important in de-risking investors at this early stage and give a chance to startups to validate the proof points before making big asks

Through Catalyst Fund, we want to be able to give investors the data points to be sure the risks the startup face are commensurate with the returns the startups may bring. Going through CF, we can help reducing value proposition risks, financing risks, product and technology risks.