By Kusi Hornberger and Omer Imtiazuddin

Kusi Hornberger is lead for the Finance & Investment practice for Dalberg Advisors based in their Washington, DC office. Omer Imtiazuddin is Managing Director of FINCA Ventures based in Washington, DC.

The global community has committed to an ambitious set of 17 Sustainable Development Goals (SDGs) through 2030—including SDG3—“to ensure healthy lives and promote well-being for all at all ages.” The goal’s targets include drastic reductions to maternal mortality, ending preventable deaths of newborns and children under age five, and eradicating the epidemics of AIDs, TB, malaria, and neglected tropical diseases.

Yet, multiple sources suggest that we are not on track to reach those targets—even if we massively scale up coverage of existing interventions including medicines, vaccines, bed nets, and medical devices. The COVID-19 pandemic has only exacerbated these needs.

We need significantly more innovation—and financing to support that innovation—if we are to successfully achieve our global health aspirations. Estimates from the WHO suggest achieving the SDG health targets will require new investments increasing over time from an initial US$ 134 billion annually to $371 billion by 2030. In an environment of declining “Official Development Assistance” (ODA), new and innovative sources of private financing will be critical to fill the gap.

Currently private capital isn’t being invested at nearly the level needed, particularly to global health products and services focused on serving base of the pyramid populations in emerging markets. According to the most recent Global Impact Investing Network (GIIN) Annual Survey, a total of 124 emerging market focused impact investors collectively allocated just $3.2 billion to healthcare in 2019: a drop of more than 40 percent from 2018. However there has been a considerable uptick in investment in 2020 to respond to the COVID-19 crisis it still isn’t enough. So, why isn’t more private capital flowing if there is such a big need?

Here are two key findings from USAID's Center for Impact and Innovation's report Unleashing Private Capital for Global Health Innovation, which provide insight into the innovator challenges in successfully attracting private capital to scale their solutions and investor challenges to deploying more private capital.

An insufficient number of innovators cross “the valley of death” and reach minimum commercially viable scale

“Many innovators but few entrepreneurs” – Healthcare impact investor in India

Innovators from medtech to digital health to service delivery face the challenge of reaching a point of minimum commercial viability—the point at which they might be considered ‘investable’ by commercial (and even many impact) investors. This is for many reasons:

• Innovations developed by technical founders often have a narrow focus on product and technology and insufficient focus on economics and the path to commercialisation.
• Others may start operations with grant funding and struggle to make the transition to long term commercially sustainable sources of capital.
• Further, there is a mismatch between the types of capital available in terms of return expectations and duration, and what is needed and appropriate to support innovators’ efforts from seed to early stages to growth and then to maturity.
• Finally, working in base of the pyramid markets may result in higher transaction costs and additional risks, which lowers the willingness of investors to provide innovator-entrepreneurs with appropriate financing.

Insufficient capital of the right type and duration from “smart,” health-focused investors

“Healthcare is incredibly complicated, so the threshold of knowledge to be able to invest is high.” – Foundation programme-related investments team

On the other side of the equation, not enough capital is flowing from investors who struggle to invest in health social enterprises, despite increasing demand and mandate for them to do so. The challenges for investors are diverse:

• From the beginning, investors can face challenges fundraising and finding interested partners to invest in healthcare companies with higher perceived risk.
• Next, they can often face difficulty in finding a vetted pipeline of health innovation companies in the markets in which they operate.
• Further, they face challenges in identifying investment talent that understands healthcare innovations and base of the pyramid markets.
• Finally—and most importantly—most investors are reluctant to invest, simply because they do not feel smart enough to do so. On the equity side, their teams may not know the technical specifies of the product or market well enough to be sound managers. On the debt side, they don’t even pretend to begin to understand the repayment or business model risks due to lack of familiarity with these types of businesses.

A path forward

These challenges can be overcome. Here are two ways global health innovators and investors can “open the spigot” of capital over the next decade. Both ideas have garnered interest from stakeholders and are gradually being implemented.

Support facility (a fancy finance term for a financial assistance programme) focused on helping global health innovators successfully navigate “valley of death.”

Experts and advisors with targeted experience and knowledge could provide “hands on” technical assistance and on-going support and mentorship to innovators across the spectrum of stages and types. In addition, an innovator support facility could also offer access to networks of investors and local partners, who can serve as resources for innovators to tap into for funding and strategic partnerships. In tandem, the facility can provide grants and concessionary “patient” capital to early-stage innovators to support them through longer start up periods.

A community of investors that seek to work together to ensure that private and public capital is deployed to achieve impact and to help build out inclusive healthcare systems in Emerging Markets

This sort of community brings together leading investors across the return’s spectrum and healthcare value chains to share intelligence and deals about what is and is not working in emerging market healthcare investing. It can also provide forum for responding to questions around what the right role of private capital in those markets is and how they can best help health entrepreneurs and businesses to succeed.

Both ideas have garnered interest from a wide range of stakeholders and are advancing in implementation. The innovator support facility is being designed by a collaboration between Pfizer Foundation, USAID’s Center for Innovation and Impact (CII) and the Global Development Incubator (GDI). Meanwhile, the investor community of practice called ‘Investors for Health’ has been formed and started operation lead by CDC Group, Dalberg, the International Finance Corporate and Quadria Capital. If you are interested in being part of either of these journeys, please get in touch with us.

Additional Resources:

USAID Report: Unleashing Private Capital for Global Health Innovation