NB Financial Health

Thursday
August 20
2015

Bertil van Vugt / Mirko Zuerker

The Next Challenge for Impact Investing – Thinking Small to Think Big: Scaling up support to early-stage social enterprises

The growth and success of green and inclusive business models with high impact potential is central to the challenges many emerging economies are facing today. These enterprises not only spur development and market growth, they also ensure the preservation of the very base of our global economy – environmental and social resources. Indeed, these small and medium-sized enterprises (SMEs) may just be the backbone of tomorrow’s global economy.

The considerable political and economic momentum that has been built around social entrepreneurial activity is therefore not surprising. And yet, a lack of access to finance for SMEs – described as “one of the greater challenges” by the World Economic Forum – has not yet been sufficiently addressed.

This financing gap is particularly problematic for social enterprises, as they not only find themselves stuck in the “missing middle” gap of the post startup/pre scaleup phase with other SMEs, but also struggle to find an investor equally committed to their social mission.

Impact investing has become a hot topic and is increasingly being explored by the investor community. Numerous calls to action have spurred promising initiatives, but essential challenges remain. Firstly, high transaction costs prevent both investors and entrepreneurs from finding fruitful partnerships. Secondly, even promising new impact investing structures and vehicles still exclude a large group of investors and businesses focusing on early-stage ventures.

Investors often associate impact investing with high risk, unaware that a large number of social enterprises are profitable and have great potential. Moreover, research, due diligence and monitoring costs are high for a single investor. Even where venture capital could be mobilized, many still fear that financial exits will pose a problem, as potential buyers are hard to find – especially when investing in social enterprises.

Similarly, investors struggle to identify matching and promising ventures. In this emerging global market with very diverse actors, the likelihood of finding a mission and finance product match through one-on-one pitches is especially low. As a result huge potential is lost, making the “missing middle” gap and lack of low-scale, globally accessible impact investment structures a considerable drain for growth.

To tackle these issues, initiatives for impact investor and entrepreneurial networks are valuable progress. Forums such as the Global Impact Investing Network, the Aspen Network of Development Entrepreneurs, the Investors’ Circle and Toniic aggregate expertise, provide space to share knowledge, best practices and potential deals – mostly among investors – and offer valuable tools. The impact base online directory of investment vehicles and a global dealflow platform are two strong examples.

However, barriers to enter these organizations are high; be it in terms of financing targets, membership fees or levels or the formal nature of the funds that qualify. Financing targets of members exceed what many entrepreneurs can offer, despite their growth potential – a factor that reiterates the “missing middle” gap. On the supply side, small actors who are just starting to consider joining the impact investment space may find the costs of joining these groups too high. This is certainly the case for small business ventures.

Thus, existing structures are valuable, but not effective enough in facilitating much-needed partnerships at scale. Both small investors and businesses are especially in need of partner and mentorship services and yet left out of most impact investment networks. Although many financing and membership structures are building global networks and branching out to some extent, most remain largely centered in North America and Europe, leaving other potential geographic areas largely untapped.

Global networks that serve as a knowledge, best practice and deal flow platform, should focus especially on early-stage social enterprises and investors, which need the most support. And above all, a low-cost, easy entrance network including both small investors and social enterprises, is critical.

But there is some evidence things are changing. The emerging angel networks such as the Intellecap Impact Investment Network in India and the new African Business Angel Network (ABAN) to support the development of early-stage investor networks across the continent are examples of promising initiatives in this direction. With their knowledge of the local markets angel investors will be able to play a crucial role in the development of starting inclusive business entrepreneurs as they offer both hard and soft capital. The angel-funded startup companies that are able to scale up fast then become investment targets for the larger impact funds. It all creates an exit possibility for the first investors.

In addition, interaction between early-stage social enterprises and investors not only can spur co-investment, but also allows both sides to get to better understand the needs of potential partners. Even the development of new finance vehicles at small scale and common impact measurement standards – each currently a key topic in addressing the “missing middle” gap – could be spurred by such a forum. A small scale, better accessibility and a higher level of interaction are key. Innovatively addressing these needs may just be the decisive step in scaling up impact investment, unlocking the potential of tomorrow’s flourishing SMEs.

This is why SEED and the Inclusive Business Accelerator (IBA) joined forces to link selected social and environmental enterprises with both hard and soft capital that is required to scale their businesses. At the Nairobi Investor Forum on Sept. 9 selected SEED winners will pitch their enterprises. During a breakout session at the SEED Africa Symposium on Sept. 10, investors will showcase their impact investing products in a reverse pitching and reverse matchmaking format. Whether you’re an investor or an entrepreneur, we invite you to join us for these and future programs by contacting us at invest@seed.uno or clicking here.

 

This blog originally appeared on The Practitioner Hub for Inclusive Business site.

 

Bertil van Vugt is platform manager for the Inclusive Business Accelerator in Amsterdam.

Mirko Zuerker works as a senior project manager at adelphi where he focuses on social and environmental entrepreneurship and inclusive business models. 

Categories
Entrepreneurship
Tags
business development, impact investing, scale