RADICAL REALIST

Our finance system is broken, functionally and morally. It does not fulfil its role of channelling financial resources where they are needed, and its practices are often exploitative and extractive – not by design, but by default. Its primary purpose is maximising financial return. Consequently, it serves the interests of capital owners and those representing them. Or, in other words: finance serves itself, not people and planet. To be clear, this also applies to ESG, responsible and sustainable investment, and impact investment.

It also means that finance is devoid of purpose. Generating financial return is not a purpose, it is a consequence – the result of creating value. Value only ever comes from solving problems: the more pressing the problem, the greater the value created. Today, it is possible to generate significant financial return without profitability, and the most profitable businesses are often extractive and exploitative.

This needn’t be. Finance is a tool, and its impact depends on what we use it for. Much like a blade can be a sword to take life, a scalpel to save life, or a vegetable peeler to prepare a meal, finance’s value depends on what we use it for, and how.

So, what can we do? Simple, but far from easy: we need to repurpose finance – literally. But how, where? There are few areas where the inadequacies of our current approach are more obvious than in the way we mobilise finance to address forced displacement. More than 110 million people affected, many of them women and children, the majority in neighbouring countries, most of them poor and capital-constrained themselves. Funding is mostly from humanitarian sources that treat the symptoms of a problem without sustainably empowering displaced people. There is astounding entrepreneurial talent and energy in refugee and host communities, and many businesses that are potentially viable, impactful, profitable, and scalable. But, there is no funding because our prevailing financial value paradigm results in mispriced risks and undervalued opportunities.

Relevant Ventures has set out to prove this paradigm wrong and repair the broken chain of value-profit-return. Since 2020, we have been investing in Ugandan businesses run by entrepreneurs from marginalised backgrounds, including refugees. Our Purpose Pool model is a collaborative funding platform to channel much-needed investment into marginalised communities and build a pathway to commercial finance. We combine several proven approaches – especially peer-to-peer investment decision-making and revenue-based finance – to slash transaction costs, take effective decisions, and assure risk-adjusted returns. We are about to close our eighth investment, and the performance of the existing portfolio is strong, projecting rapid capital recovery. What’s more, our calculations show that with a very limited critical mass of under $1mn in investment capital, the model can cover operating cost from returns, and from $2mn+ start paying returns to investors. This is about 10-20% of the required critical mass for a VC-type impact fund to be commercially viable.

We have secured a grant to codify our methodology and will make it available on an open-source basis, earning income from implementation and operating services when replicating other Purpose Pools with partners. We are also building a shared legal and financial fund infrastructure (FaaS, Fund-as-a-Service) to help reduce the administrative, regulatory, and compliance overhead of managing assets.

Our hope is that, together with our investees and funders, we can show that even the most vulnerable and marginalised communities have the creativity, energy, and tenacity to create sustainable livelihoods, if given a fair chance. We all have an interest in this, not just morally, but also pragmatically, as every system is only as resilient as its most vulnerable part. Humanity in the 21^st century is a global system – there is no us-and-them, there is no here-and-elsewhere. We are all in this together.

Nikolaus Hutter is Partner and Co-Founder at Relevant Ventures.

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