On Wednesday I started an examination of an investment strategy firm that specializes in microfinance, Minlam Asset Management. As I interviewed one of Minlam’s founders, Mike Hokenson, I noticed a reoccurring theme that I see with many innovative business thinkers: they often operate at the edge of categories, creating a new space of their own.
Minlam did that exact same thing. As Mike explains, “Microfinance has been misclassified.” Most people consider microfinance a form of philanthropy because it pursues a social objective.
Last year I interviewed Nobel Peace Prize winner Mohammad Yunus. Arguably the founder of microfinance, Yunus told me about how he designed the financial concept. He spoke passionately about the need to classify microfinance as something other than philanthropy.
For microfinance to achieve its true potential impact, it needs to be profitable.
Only when it is profitable will people begin investing and will organizations adopt it. Mike has placed Minlam at the edge of philanthropy and developing market debt.
Mike and his partner noticed that major asset managers were starting to be interested in emerging market debt. But these managers focused their investments almost exclusively on government-issued bonds or investments in major domestic firms.
Mike decided to position microfinance as an attractive alternative. He built the infrastructure of an institutional quality asset management firm, established internal investment vetting operations, and thereby converted investments in foreign microcredit organizations into assets that traditional financial firms could understand.
Major firms liked PIMCO or Morgan Stanley look for assets they can evaluate and measure its risks. By systemizing the process of identifying, vetting, and negotiating large investments in local microfinance organizations in key developing markets, Minlam was able to transform a philanthropic operation into a Wall Street asset.
This is not unlike Gatorade creating the new class called “sports drinks” or Barnes & Noble creating the “book superstore.” Innovators operate at the edge of categories and thereby create new categories out of nothing.
When a new category is created, innovators take advantage of that new niche’s competitive advantage. So, ask yourself these questions to see if you can find a new category that you can own.
1. What category does my business fit in?
2. Is there a way to blend two or more categories to offer something new?
3. Do I see a demand and a market that isn’t being served, and if so, how can I create a new category and get a competitive edge?