Editor's Choice June 2012: a must-read for funders of inclusive business
If the whole idea of inclusive business is to leverage the market to solve social problems, what then is the role for philanthropists and donors? That is a good question that is well addressed in the latest Monitor report.
►From Blueprint to Scale, from Monitor and Accenture, provides a convincing and well-evidenced argument that philanthropic funds are critical to the evolution of this sector. It argues that more, not less, philanthropy is needed to help plug the 'pioneer gap' before enterprises become investor-ready. But not just any old philanthropy – it has to be strategic.
The logic of the argument stems from looking at three perspectives. Firstly, the pioneering entrepreneurs in inclusive business. Great ideas, but many challenges, few are yet commercially viable, a small minority have reached scale.
This in turn means that even though the impact investment community is growing fast, there are not enough inclusive business ventures ready to absorb their capital. As the report says: ‘Although excited by their novelty, investors are often rattled by these firms’ risk profiles and are unimpressed by their financial returns, all the while suspecting that they might actually be savvy nonprofits masquerading as commercially viable models.’
So the gap between the entrepreneurs and the investors is precisely where philanthropic money steps in – to ‘close the pioneer gap.’ ‘The right grant support can help pioneer firms get through the stages of inclusive business development, progressing from blueprint, to validation, preparation and ultimately scale.'
The analysis is spot-on in many ways, asking the right question with well-argued answers. What I particularly like is that it gets into the logic of donors and philanthropists. Not just saying inclusive business needs you. But matching their objectives with the potential of the space. Because their investment is predicated on potential social and long-term return, they can tolerate risk around commercial viability of a single business. For them, the risk of copycat replication is a bonus – whereas to finance-first investors it is a major risk. Knock-on social values are for these funders a gain, and often a prime drivers. So helping to cover the cost of expanding markets, building consumer awareness and supplier capacity makes sense for them, unlike the investors.
I know that staff in donor organisations and foundations are busy writing the business case to invest in this sector, and trying to work out how. I know from experience in Business Innovation Facility and Innovations Against Poverty, it can be hard distinguishing the right and wrong way to allocated grant money to effectively support inclusive business. This report will help us all.