Originally posted on NextBillion.net
SANTA CLARA, Calif., Jan. 16, 2018 – Social enterprises, and small and growing businesses (SGBs) are run by a special breed of entrepreneur: Not only do they address some of the world’s most pressing (and challenging) issues, but they must do so while also running a sustainable business. Despite their many talents, these entrepreneurs can’t achieve these goals on their own, which raises a question: What’s the best way to support them and boost their businesses?
These questions often come up in global development circles, and there are no shortage of answers. At Santa Clara University’s Miller Center for Social Entrepreneurship, we believe two things are needed to improve the support that leads to enterprise scaling. The first is a higher-level, collective approach to funding and capacity development. The second is a renewed focus on the role of accelerators.
Two recent reports shed interesting light on the broader issue of how best to support entrepreneurial and social entrepreneurial endeavors. In its “Insights from USAID’s Support for Small and Growing Businesses” report, USAID’s Partnering to Accelerate Entrepreneurship (PACE) initiative identifies barriers preventing entrepreneurs from reaching their full potential, including “access to financing networks, market information, business development services and market infrastructure.” According to the report, “These entrepreneurs find themselves in the ‘pioneer gap’— too big for seed funding, but too risky for traditional investment.”
For its part, the Global Impact Investing Network (GIIN) uses its “Beyond Investment: The Power of Capacity-Building Support” report to propose that impact investors use “[c]apacity-building support, also known as technical assistance…to complement their investments and expand and deepen their impact.”
We see merit in many of the points made in both of these reports, including the conclusion that accelerators add value and that they need funding. But we’d like to push the discussion further to advocate for a more holistic perspective around how entrepreneurs and social entrepreneurs are funded and accelerated, including how best to address the specific needs of women-led enterprises.
COORDINATED DIVISION OF LABOR
If it takes a village to raise a child, then it takes an entire ecosystem to shepherd an entrepreneurial venture from inception through scaling. Unfortunately, too often the various actors in the ecosystem take a splintered approach to working with entrepreneurs. Two important categories of ecosystem actors are:
- Funding sources, such as grants from foundations, or equity investments from impact investors or traditional venture capitalists, which follow a number of different strategies that have different expectations for both who qualifies for the investment and how much return that investment should yield.
- Accelerators and other intermediaries, which provide technical support, business mentoring, and other ways to strengthen entrepreneurs’ ability to operate and grow their businesses.
In practice, there’s considerable overlap between what each of these two categories might provide to any given SGB or social enterprise. And we think that’s a problem because it can lead to either duplicated efforts or missing pieces in enterprises’ support systems.
For instance, while the GIIN report advocated for investors to expand their role in providing capacity development support for their investees, doing so threatens to cut into investors’ already small margins, and it moves them outside of their own core capacity. Investor-led capacity development also neglects the market need to support enterprises that are not yet “investment ready.”
Meanwhile, there is a growing trend for accelerators to make financial investments in their portfolio companies—either to offset a portion of their costs or to directly support an enterprise’s scaling.
Introducing investment possibilities into an acceleration program is potentially problematic because:
- It detracts from the accelerator’s ability to make unbiased recommendations about a course that aligns with the mission, vision and values of the enterprise;
- It narrows the investment perspective by evaluating financial returns only as they relate to the ultimate impact of the enterprise;
- It forces accelerators to dedicate resources to investment management processes that are rarely offset by potential returns;
- Perhaps most importantly, it hinders accelerators’ ability to work with organizations still at very early stages of development to fill the pipeline of investment-ready businesses.
What’s needed is a more collaborative approach that bridges the siloed perspectives of investors, accelerators or advisors, and provides a more holistic range of support – not through vertical integration, but through structured collaboration. As an example, Miller Center’s Global Social Benefit Institute (GSBI) programs offer in-depth, one-on-one mentorship with highly experienced, carefully selected Silicon Valley executives, and a curriculum that at least touches on the full range of what social entrepreneurs need to know to run a successful business. The accelerator programs work to get social entrepreneurs ready for investment, and they provide access to a network of peers, partners and potential investors who can help them along the way. These activities extend well beyond an entirely investment-focused approach.
CASE IN POINT: SERVING ENTREPRENEURS USING A GENDER LENS
Taking a purely investment-focused perspective on building entrepreneurial capacity also fails to address the special challenges faced by women entrepreneurs. PACE reports that: “Women-led SGBs working with PACE intermediaries significantly outperform their peers, growing revenues 1.5 times faster and jobs twice as fast. Yet… women-led SGBs receive disproportionately less follow-on financing. Despite outperforming their peers in revenues and job growth, women-owned businesses struggle to receive investment.”
Accelerators can perform an important credentialing function—helping entrepreneurs who lack resources, business experience, contacts or access to financing to become trustworthy in the eyes of potential investors, customers and business partners. This credentialing function is especially important for women entrepreneurs, who historically have faced restricted admission to both the formal and informal systems that are prerequisites for business success.
At Miller Center, we have validated the effectiveness of accelerators in helping to level the playing field for women entrepreneurs. After completing a GSBI accelerator program, our women-led social enterprises are able to raise more investment than our male-led enterprises. Clearly, something about the accelerator programs enables this shift.
SOME GUIDELINES FOR ACTION
Returning to the original question, how can we best support the success of social enterprises and SGBs? Of course, this is a multi-faceted question requiring multi-faceted answers. But here are a few suggestions we could begin implementing now:
- Adopt a holistic, intention-based approach toward social enterprises and SGBs. It’s one thing to adopt best practices horizontally, such as within the accelerator, foundation or impact investment communities. But optimizing each actor’s role in an entrepreneur’s journey toward business success also requires working together vertically throughout the ecosystem. Beginning with the intention and desired outcomes for each social enterprise or SGB, all the various actors should coordinate their efforts toward these ultimate goals while focusing on what each does best.
It’s worth noting that we are far from the first actor to advocate for more vertical coordination, and we commend the efforts of Aspen Network of Development Entrepreneurs (ANDE), GIIN and others to create a more collaborative ecosystem. Still, the reality remains that very few investors and accelerators have formed or formalized effective pipeline partnerships. More candid conversations and successful examples are required to bridge this gap.
- Join forces for efficiency and alignment. Impact investors that team up with like-minded accelerators can work together to enhance the success of the entrepreneurs in their portfolios. Partnering with successful social enterprise incubators and accelerators not only promises increased efficiency for impact investors, but also enhances investors’ alignment with their portfolio companies’ business models, expectations for impact and growth, and future funding requirements.
- Start funding accelerators. Investment in accelerators — and other intermediaries between funders and recipients of funds — can have effects beyond jobs, revenue growth and investments made. Reaching marginalized customers at the base of the pyramid requires innovative and sustainable business models. Accelerators are ideally suited to deliver training and mentoring that lead to refinements in product design, distribution models and partnerships — so that companies addressing underserved communities are better positioned for success and growth.
- Increase the magnitude and type of funding available. Social enterprises and SGBs need more public funding, blended finance options and patient capital in general. Beyond that, they also need more options for early- and late-stage investing to bridge what Shell Foundation recently called the “growth-stage funding gap.” Bridge funding — characterized by flexibility in capital instruments, investment terms and return expectations — can be crucial for nurturing promising enterprises while providing commercial investors with greater incentive to become involved with social enterprises and SGBs.
Whether an entrepreneur is aiming to address poverty, ameliorate the effects of climate change, improve the health of a community or work toward greater economic empowerment of women, the intention for the enterprise should guide everything from the type of funding sought to the type of accelerator program chosen. It’s up to us as actors in the development ecosystem to find more creative and effective ways to work together to help more entrepreneurs bring their intention and vision to fruition.
Alex Pan is senior program manager, Global Social Benefit Institute (GSBI) at the Miller Center for Social Entrepreneurship.
Mark Correnti is the director of Impact Investing at the Miller Center for Social Entrepreneurship.