The myths of impact in investing, tax policy in innovation and healthcare in emerging markets

The Myths of Impact in Investing

When I started at Omidyar Network a decade ago, we were early in both venture capital in emerging ecosystems and impact investing. Since then, both ecosystems have exploded. I appreciated this piece exploring the many myths about impact and investing. Three that I particularly resonated with: 1. “Gaps only occur in poorer, less economically developed parts of the world.” Investing in financial inclusion, I was blown away at the scale and scope of the challenge domestically in the U.S. Over 60 million Americans are unbanked or underbanked. Yes, that's smaller than in many emerging markets, but massive nonetheless. And that's why iconic companies have scaled to serve these markets, including portfolio companies like Chime for consumers and ZenBusiness for SMBs. I believe that often the best opportunities lie in investing in the largest TAMs, which is the middle market. These can scale downmarket over time too. These yield not just massive impact but also massive businesses. 2. “Gaps are pretty easy to spot—just look for the absence of capital on offer to potential investees.” Like everything in innovation, you don't know what will work until it’s obvious - in retrospect. The absence of capital doesn't mean it doesn't work or won't work. It equally doesn't mean the opposite. The best investors, impact or otherwise, are ultimately taking educated bets and partnering with great founders to realize the idea's potential. 3. “The gap faced by innovative solutions is greatest at the outset and gradually narrows as they scale.” Yes there are gaps at the earliest stages. But if anything, I have found that for the most impactful businesses in emerging ecosystems, the larger capital gap is at Series B & C (early growth) when there are no scaled players offering a solution. This has become even more acute in the last 12 months.

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Tax Policy as Innovation Deterrence?

In Out-Innovate, I wrote about the important role of regulation and policy in creating the right infrastructure for innovation. These don’t necessary lead to startup ecosystems, but without them, it is hard for them to flourish.

One topic not enough people are talking about in the U.S. are the new tax changes that have recently come into effect. Great piece summarizing Section 174 :

“Have you heard of a change in Section 174 of the US tax law that kicked in a few years ago? This change is making bootstrapped software businesses completely unsustainable.?Basically, all costs related to R&D cannot be expensed, including labor for software development. These costs have to be capitalized and amortized over 5 years – or 15 if labor is done outside of the US.”

As written, the change would not only affect bootstrapped founders, but also efficient camel startups even if they take venture funding. Imagine a company making $1m in ARR and for simplicity burning $1.5m, $1m of which is R&D software development. Steady state the business is losing $500k. But under the new law, the R&D (assuming domestic which is most favorable) portion that is deductible would only be $200k ($1m/5 years), so from the tax perspective, the startup would be profitable, and have a tax liability! Yes, over time it is a wash, but since most startups fail, this in practice is not practical.

The piece does a nice deep dive about how we arrived to where we are, and what’s in store. Thankfully there is starting to be some new guidance for startups . But it is a good example of unintended consequences and the importance of the long view.

Healthcare in emerging markets

Healthtech has been a huge area of innovation in the last decade. I read this controversial piece , focused on the Indian market - or more specifically its failing - writ large.

“Almost a decade ago, the idea that the internet could fix India's broken healthcare system was seeded, packaged and sold.The hypothesis was straightforward. Much like every other aspect of daily life - shopping, food, content, education and grocery -all of which were being disrupted by technology, it was time to apply tech and make healthcare convenient, accessible, affordable and speedy…These were the grand ideas that saw billions of dollars getting pumped into this loosely defined sector.” BUT: “In the age of internet startups, though, fewer endeavours have failed as spectacularly. Almost everyone operating in this segment has missed creating a viable, sustainable business so far.“

I am personally more sanguine on the sector from a global sense. We’ve seen the emergence of global categories across health insurance and more vertical care from diabetes to mental health. These are still emerging globally but are coming.

BUT: the combination of move fast and break things and blitzscaling is often a recipe for disaster in sectors where outcomes matter, care matter, and lives matter.

Kudos to 99%tech reader Sylvana Sinha for flagging the piece.

Interesting A.I. discussions

One of the areas I’m most excited about in artificial intelligence in emerging markets is driving access to care to the underserved. Great piece on the role of AI in the space . This will touch everything from drug discovery, to hospital operations to personalized care.

I often think of open source as democratizing access, and thus a net positive. Counter-intuitive piece arguing it is particularly dangerous. Systems like ChatGPT are “closed” since there are guardrails to their use. Other’s like Facebook’s Llama models are open. “The threat posed by unsecured AI systems lies in the ease of misuse. They are particularly dangerous in the hands of sophisticated threat actors, who could easily download the original versions of these AI systems and disable their safety features, then make their own custom versions and abuse them for a wide variety of tasks…These platforms cannot yet accurately detect AI-generated content at scale and can be used to distribute massive amounts of personalized misinformation and, of course, scams. This could have catastrophic effects on the information ecosystem, and on elections in particular…Unsecured AI also has the potential to facilitate production of dangerous materials, such as biological and chemical weapons.” What do you think?

Who will win the AI investment game? Convincing piece that it won’t be the VCs or the companies, but their corporate investors. Most VC investments have high upside, with a capped downside (yet in most cases for startups, reasonably likely). Yet, in AI, corporate investors, notably Microsoft, Amazon, Alphabet, and Nvidia (MANG) have figured out a unique winning recipe . Heads they win: if the company scales they will see a return on their investment. Tails they also win: because the investment is not cash but structured as credits to buy compute, they can book it as revenue (boosting their multiple). And since the gross margin is high, the actual cost of the investment is even lower. No wonder, valuations in startups led by MANG are skyrocketing. Because of the above dynamic, price sensitivity is way down.