Registration is now open for Canada’s only week-long, intensive executive-learning Academy focused on Social Finance and Impact Investing, jointly designed and hosted by the Queen’s School of Business (QSB) Centre for Social Impact and the MaRS Centre for Impact Investing.Read More ›
Proving Capital and the Pioneer Gap: Why Philanthropy Matters in Impact Investing
Note: This post was co-authored by Shawn Smith.
Over the past 10 years we’ve seen the emergence of impact investing as a tool to help improve access to beneficial goods, services and livelihood opportunities for Base of the Pyramid (BoP) households. However, despite much promise and significant steps forward, investors seeking high impact companies with market-like financial returns face a shortage of quality investment opportunities. At the same time, promising entrepreneurs in emerging economies still struggle to find support at the early stages of development, when they need it most.
A recent Monitor Institute report, in collaboration with Acumen Fund, identifies a “Pioneer Gap”: a deficiency of funding available at the higher risk, earlier stages of venture development, as compared to later stage ventures with proven models and markets. This article suggests that risk tolerant philanthropic funding will be key to bridging this gap.
Over the last 18 months, we have been piloting a model we call “Proving Capital” at the Catalyst Initiative, funding high potential ventures in East Africa to test and validate their models, strengthen operations, and connect with impact investors. To date we’ve described this as “Pilot to Proof of Concept” funding, and we couldn’t agree more with the analysis put forward by Monitor.
Where impact investment is needed:
The report from Monitor and Acumen is called From Blueprint to Scale: The Case for Philanthropy in Impact Investing, and an executive summary can be found here, with the full report here.
The authors describe “pioneers”, entrepreneurs developing new business models that positively impact global poverty, as going through four stages:
1) “Blueprint” Stage – Research is conducted and a business model blueprint is drawn up. The product or service is prototyped with an aim to test technical feasibility.
2) “Validation” Stage – The idea is piloted in the market. Assumptions on the business model are tested. The venture begins to understand what customers will pay for, whether the business model is profitable, and what adjustments may need to be made.
3) “Preparation” Stage – Having proven out their core concept, the firm begins to prepare conditions for growth in the intended market. Activities include market education, filling HR gaps, ensuring supply chains, etc.
4) “Scale” Stage– expanding business operations to sustainably reach a large amount of BoP customers.
The report takes special care to describe how impact oriented ventures face multiple barriers at all of these stages, often facing not only limited infrastructure and slim profit margins, but also new markets unfamiliar with their product and fractured or non-existent supply chains and sales channels.
The report also outlines how the majority of impact investing has been focused on the Scale stage. As it describes, this is entirely rational – given the above challenges, it is incredibly difficult for early stage social ventures to offer risk-adjusted financial returns to encourage investment. Ideas are plentiful but remain “too early” for the majority of the market, and capital stays locked away.
Why Philanthropic “Proving Capital” Matters:
The Monitor report suggests an answer to this problem is strategic philanthropic capital to help emerging ventures build a solid plan, test their model, and prepare themselves and their market for growth, so they can pursue scale through investment. As in all early-stage entrepreneurial activity, many of these ventures will fail – not a word many traditional foundations and charities have actively embraced in the past. Additionally, philanthropic organizations looking to support early-stage social ventures may not have the network, knowledge base, or experience to support these ventures as they prove their model.
There is a need for philanthropic funders with the mindset of angel investors. We at the Catalyst Initiative have been doing a lot of thinking on that in the last 18 months.
The Catalyst Initiative model
There are a growing number of impact investors interested in helping proven ventures scale. But we see very little of the support necessary for the early stage entrepreneurs to fill that pipeline, and address poverty at the scale demanded. Our organization is focused in East Africa, and primarily works with what the Monitor report would term ‘Validation Stage’ ventures. We offer “Proving Capital” to help test assumptions, break things, iterate, and eventually prove a business model with real potential for scale, before introducing said ventures to later stage investors with growth capital.
We’ve begun this work with a few exceptional ventures, two in each of Uganda and Kenya. We encourage you to take a look at the up and coming pioneers: