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Countdown to SOCAP: Beyond Innovation with William Foote of Root Capital

Cameron Campbell September 30, 2010

By Josh Cleveland

Editor´s note: This post is part of a series that will run this week and next, leading to and then covering the third Social Capital Markets Conference – SOCAP 10. NextBillion is a media partner to SOCAP.
Root Capital is pioneering a model for value chain finance and agricultural lending, mainly in the sustainable natural products space. Their bread-and-butter innovation discounts purchase orders and makes loans to agricultural producers based on future sales contracts with large buyers. This arrangement eliminates much of the risk involved in rural, agricultural lending. To date, Root Capital has made loans to some 282 small businesses reaching over 400,000 individuals. This year the organization will lend over $75 million to businesses previously considered unbankable.

Needless to say, this reach is impressive. The innovations in finance that the organization implements allow for lending in places that no one thought possible. (Check out more details on the model on the Root Capital site here.)

But as is the case with visionary organizations, Root Capital is not interested in resting on its laurels. Says founder and CEO William Foote: “The easiest thing to do is found an organization. It is much harder to grow it, to be disciplined about expansion, and build processes and systems to support scale.” This post details a conversation I had with William leading up to SOCAP 10 about how Root Capital can go “beyond the innovation” and prove the business model it has pioneered.

Moving Forward
On a fundamental level, Root Capital needs to scale their core business of lending in the sustainable natural products sector. In order to grow, the organization needs to move beyond the “hunt and peck strategy” of attracting capital and making loans. This is a challenge for any organization leaving the sexy atmosphere of an early-stage startup and entering the stage of systems investment and process streamlining.

Things have been going fairly well in this regard. They’re almost at a break-even point and getting close to a tipping point where their success will attract competition from the private sector. They’ve been intently focused on their core competencies and becoming the best in class for agricultural lending. In short, “we’ve stuck to the KISS principle: Keep It Simple Stupid,” says William. But the organization is now considering some paths forward that are not quite as simple.

William wants to move beyond Root Capital’s initial innovation. “We want to figure out how we can leverage our core competencies to move into adjacent markets such as agricultural processors, local currency lending etc.” These moves entail leaving the security of agreements forged between Root Capital and large companies like Starbucks and Whole Foods, the companies whose future sales contracts form the foundation of Root Capital’s loans. The organization’s models may be applicable in many other product areas, industries, and geographies but currently, there is a lot of risk out there. As part of the process of creating solid systems and processes for growth, Root Capital built a new three-part “lab” to explore these opportunities.

Root Lab

Root Lab’s first core function is R&D. It will provide market analysis and new product innovation support to help the organization push the frontiers of its current staple products. The innovations that come out of the R&D lab and show potential will be funded by Root Lab’s second component, an innovation fund. This fund will provide slightly softer debt money for higher risk bets on new products and services such as local currency lending and dealer financing as well as new industries and geographies such as fortified foods and agricultural processors. Finally, the third component of Root Labs deals with intellectual capital and will help disseminate the lessons learned from Root Labs to the broader international development community.

On the whole, this new arm of Root Capital will allow the organization to try new ideas, fund them, and tell the world about how they work or fail. It’s a huge step in the direction of going “beyond the original innovation” and one that should greatly benefit the development community at large. Both the learnings that come from the lab itself and the model of creating an internal innovation hub will provide deep insights for BoP organizations.

Getting to “Scale”

This is all part of what will take the organization to “scale,” an issue that many panelists will be discussing at next week’s SOCAP 10 Conference. And what does scale mean for Root Capital? “‘Scale’ for Root Capital means achieving a size and track record at which we are able to demonstrate to local financial institutions the profitable market opportunities in the countryside. We want private groups to see that what we are doing can make them money. And then we want them to help work us out of a job.” Don’t expect any dearth of news coming from William’s organization in the next few months. They’re making plenty of steps in the direction of scale. Recently Good Capital, the masterminds behind SOCAP announced a partnership with Root Capital that will fund marketing and branding developments that will help the organization take their impact even further. William also mentioned a corporate partnership that will be unfolding in the very near future, stay tuned for more info in that regard.

In its ten-year history, Root Capital has shown an ability to grow that few BoP development organizations can match. They’re now surmounting that most difficult peak of systems building and proving their model. If you’re interested in how to get things done, maintain a focus on core competencies, and grow in a smart, controlled fashion, keep paying attention to these guys. There are a lot of interesting developments to come in the next few years from their work.

And of course, if you’re joining us for SOCAP 10, be sure to check out William’s keynote on Tuesday morning.
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