Editor's Choice, December 2015: Enterprise Solutions for 2030
This month’s Editor’s Choice tackles the question of scale head on. It explores what step change will be needed to eradicate problems associated with energy poverty, urban mobility and job creation in the next 15 years.
In the last 15 years, Shell Foundation have deployed $207 million towards the creation of social enterprises and market-enablers, aiming to deliver development solutions that can scale and sustain. Their new report, Enterprise Solutions for 2030, reports on what has changed, what is happening, and how much more is needed to achieve scale. The report marks a shift in focus from inclusive enterprises to inclusive markets: for the enterprises themselves to scale, Shell Foundation argue that the market ecosystem and particularly the financing system must mature substantially.
There are four main reasons I like this report:
(1) it shares useful data on the performance of the current investees, and draws out clear lessons on what drives or limits scale from their experience;
(2) it asks the right question: where should grant capital be most usefully deployed to create long term value and what are the roles for different type of finance, including debt and impact investment;
(3) it does not overly promote Shell Foundation’s approach but shows how partnerships can tackle challenges
(4) it focuses heavily on scale, which is a question not yet cracked, so should be a question top of mind for us all.
The report on portfolio performance contains useful data, including trend lines showing how subsidy per unit is declining as business volumes rise. For d.light subsidy of around $1 per light in 2014 is projected to fall to 0.5 per light in 2018. For Envirofit, subsidy per stove has slumped to $22 in 2014, estimated to fall to $6 in 2018. These kind of estimates, no doubt rough and ready, are essentially for thinking about sustainability and scale. Shouldn't any business owner, challenge funder or impact investor be tracking these?
The framework for scale, and much of the report is structured around 4 key determinants of scale:
- Growing the supply of social impact products and services (i.e. growing successful businesses that serve the BoP)
- Building demand for social impact products and services (ensuring adoption)
- Ensuring access to appropriate finance for those business to scale
- Institutional support and infrastructure, necessary for inclusive markets to flourish.
For example, on growing supply of businesses, Shell Foundation note that:
‘to identify a game changer, the skills and competence of the management team tell you farm more than the product, service or business model. Conversely, the single largest cause of failure is inability to execute.’
There are many considerations on the time, financing and runway that businesses need to be successful. The report argues it can take 6 to 10 years and anywhere between $5mn and $10mn for a pioneer to understand the wants and needs of their target audience, design a range of high performance products and services, adopt their business models to overcome gaps in the value chain, measure impact, and build the systems, talent and assets to achieve a net positive cash flow. This concurs with other tentative conclusions and adds substance to such estimates.
On finance, the report marks out a ‘fundamental misalignment’ between social investor expectations and the return that social enterprises serving low income consumers are able tot deliver. That’s a pretty important challenge. Shell Foundation argue that the majority of social impact businesses are low margin businesses, while the majority of investors seek hard currency returns that they can’t reach, or certainly can’t reach for many years. This means the businesses can only reach scale if the social value they create is monetised. Or put another way, finance that values social return as much as financial is expanded.
It is not just arguing that all grant finance or venture philanthropy is great, however. The report flags the risk of providing grant finance to an enterprise that does not have a genuine first move disadvantage. Concessional funds must be very carefully deployed to build the path to scale. Cross tiered capital structures and impact monetisation are heralded as part of the pathway.
Shell Foundation note that transparency is an important tool to help steer their concessional capital to the right places and build capital structures. So it is to the benefit of us all working to scale social businesses that in this report, it is not just data but lessons, challenges, and some hard thinking about what will build inclusive markets is shared.