By Tasha Seitz and Elizabeth Coston
As active impact investors, we’ve had the privilege of meeting hundreds of entrepreneurs doing incredible work across each of our four areas of focus: education, health, economic empowerment and resource efficiency. We’ve learned a lot about what opportunities exist to leverage technology for good and how various companies are solving these problems. As we approach our five year anniversary, we thought it would be valuable to share some of our observations with the broader impact investing field. This overview of what we’ve seen in economic empowerment is the first of what will be a four-part monthly series where we will cover each of our focus areas in turn.
We have identified five broad themes in economic empowerment.
Access to Jobs
One of the biggest issues we’ve noticed is a gap in the middle skills labor market, which requires education beyond high school but not a four-year degree. Candidates are being left behind, while some companies struggle to fill positions due to a mismatch of need and talent. Millions of Americans struggle to find jobs that meet their skill sets and only 25% of high school graduates feel they have the skills needed in the workplace. 98% of CEOs identify the skills gap as an urgent concern to business. In a market where $72B is spent on recruiting, $55B is spent on continuing education, $475B is spent on higher education, and $164B is funneled into corporate training, there is a huge opportunity for startups to address the skills gap.
We’ve seen many startups using technology to identify core competencies for job roles, to test candidates, and to provide learning modules for both job candidates and employees to improve their skills. The business models vary: we’ve seen businesses charging employers a percentage of salary as a placement fee, as well as SaaS subscription fees for testing and training in the education and corporate environments.
One of our portfolio companies, Skill Scout, is directly working to address the skills gap through collecting hands-on work samples for experiential hiring based on the belief that resumes don’t capture a candidate’s true capabilities. Skill Scout is able to attract and engage talent in a more effective way that adds value to companies and applicants, reduces hiring time and increases retention. In fact, 60% of companies who have hired employees using Skill Scout said they evaluated and hired candidates who they otherwise wouldn’t have considered.
Viridis, another company in our portfolio, aims to connect community colleges, their students and graduates, and employers. By closing the loop with employers, Viridis enables community colleges to tailor their course offerings to the local market for job opportunities and share pathways to employment with students. As students pursue these pathways, their progress is kept in an online “Skills Passport” that is visible to the students, college advisors and potential employers. Students can take their Skills Passport with them throughout their career and build upon their validated set of credentials as they gain new skills and certifications. Ultimately, Viridis improves job opportunities for community college graduates, who are disproportionately lower income and minority and often have non-traditional backgrounds (veterans, part time students, mid-career switchers).
Access to Credit
In the US, many individuals are unable to access credit through traditional credit-scoring methods because they have poor credit or no prior credit history. In fact, census tract data showed that nearly 30 percent of consumers in low-income neighborhoods don’t have a credit score. Even when individuals are declined for credit, they have limited insights as to how to improve their credit score. Additionally, credit is perceived as a confusing market: there are three credit bureaus, 40 types of credit scores, thousands of creditors with different practices, and no clear path to resolve credit issues. These problems are only compounded in emerging markets, where information on borrowers is scarce and a large portion of the lending process is manual and time consuming. We’ve seen many companies stepping in to help individuals and institutions navigate the process of getting access to and providing credit. Business models typically do not charge the consumer, but instead charge finance and lending institutions as a lead generation or productivity tool.
In our portfolio, First Access (FA) provides a credit scoring algorithm for microfinance institutions that identifies patterns indicating a prospective borrower’s credit risk. We invested in First Access this spring, alongside The Social Entrepreneur’s Fund (TSEF) and Acumen. FA’s algorithms save microfinance institutions from going through an expensive, time intensive and manual credit screening process by using the institution’s past financial loan performance data to generate a credit score. This enables those without a personal financial history to receive an instant credit score based on their similarities to other borrowers. The solution reduces the costs of underwriting loans, enabling greater access to financing at lower interest rates for the 2.5 billion borrowers who are currently outside the financial system.
Access to Affordable Financial Services
Many mainstream financial institutions and products charge fees that are unaffordable for low-income populations. In particular, short term liquidity that doesn’t come at the expense of long term financial health is a massive need. 47% of Americans would not be able to cover a $400 emergency expense without having to borrow money or sell some of their belongings. The Center for Financial Services Innovation in collaboration with NYU recently published the US Financial Diaries, describing this liquidity challenge based on research with 235 low- and moderate-income families over the course of a year. This is an area where we are actively looking for opportunities.
We’ve seen many startups leveraging technology to bring low-cost financial services to lower-income populations, creating alternatives to traditional banks and alternative lenders. One of our companies, Pangea Money Transfer, is a mobile-first remittance platform that allows users to send money internationally in less than 30 seconds with lower fees and more attractive currency exchange rates than alternatives. Receivers in Mexico, Colombia, Guatemala, El Salvador, Dominican Republic and other Latin American countries can receive funds at a cash pickup location or directly into any bank account. Instead of spending money on high fees, users can instead save more or increase the net funds they send to their families.
The average American doesn’t have the information or knowledge to best use their federal, state and/or insurance benefits. Each year, $80B in social support benefits go unclaimed and $120B is spent as a result of medical billing errors. Companies have built software that automatically reviews bills, determines benefit eligibility and makes consuming benefits more user-friendly. We’ve seen startups in this space partner with nonprofits providing healthcare services and retailers who accept food stamps in order to help them maximize benefits for their users. But in order to achieve scale, companies need to find large, consistent channels to market.
Americans are crippled by significant amounts of debt. College tuition costs have risen 12 times over the past 30 years, and are expected to double again over the next ten years. Education loans now represent $1.3 trillion, with the average student in the class of 2016 having over $37,000 in student loan debt. With an overwhelming array of federal and private options, it is easy for students to end up in vehicles with onerous terms and rates as high as 18%. In addition to the rising burden of education costs, credit card debt is again at all time highs, with the average family owing $8300. Given that wages remain stagnant, managing an ever-growing debt burden has become a reality for most people.
To meet these needs, entrepreneurs have created platforms that make automatic loan payments through intelligently allocating funds where they are most impactful. For emergency funding or even just cash flow management, companies are providing affordable alternatives to the traditional payday lenders. And some companies are selling debt or savings management tools to employers, who increasingly recognize that their employees’ financial health is as important as their physical health. While we believe debt management presents a large opportunity, there are many companies offering these products, which we have found makes it hard to differentiate.
We are excited to see the landscape of fintech and economic empowerment continue to evolve, and we welcome your thoughts on our observations: what did we miss? Where do you disagree with us? Join us next month for part two of the four-part Impact Tech Opportunity series.
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