Social Enterprises to Inclusive Businesses – Challenges and support
This blog is part of a series of articles on inclusive business in Asia written by a wide range of experts in the run up to the ADB’s 2nd Inclusive Business in Asia Forum in Manila. See the full series here.
DFIs are starting to show interest in helping Social Enterprises (SEs) to scale. But are their traditional approaches suited to addressing key challenges that SEs face? Can innovative methods like Challenge Funds help? How should these be designed for maximum impact?
Not all Social Enterprises employ business models that are scalable. This is important to note, as the excitement to scale SEs is increasing. However, many can actually scale. This blog focuses on those, where the intent is to grow into an inclusive business. However, to manifest this potential, several challenges need to be addressed.
Dalberg conducted a survey of several social enterprises and industry experts, to understand what they see as their challenges, opportunities, funding issues and strategic next steps, as they navigate their ecosystem.
SEs look to scale but are constrained
1. Securing financing
Access to financing for social enterprises is a complex and multifaceted issue. There are challenges pertaining to the funding gaps, managing risk perceptions, impact measurement and most importantly investment readiness.
2. Talent Management
According to analysis performed over a series of reports on the social enterprise sector, the key issues driving the talent management challenge are across both recruiting and retention.
3. Dealing with regulation and bureaucracy
The current challenges faced by social enterprises with regard to regulations and bureaucracy may be broadly classified into the lack of a separate legal form for social enterprises and high levels of bureaucracy in registration and other key business processes.
DFIs have the opportunity and capability of not just addressing these challenges but overall growing the SE ecosystem.
Given these challenges, growing the ecosystem will require DFIs to focus on four key priorities
- Increasing the availability of capital available to SEs –directly addressing the SE challenge of raising adequate funds
- Providing support for building capacity – Through partnerships, DFIs can help mentor leadership teams, and create capacity at different levels in SEs
- Creating a network of entrepreneurs and supporters and facilitate conversations
- Creating success stories that can drive interest in the sector - to encourage collaboration, sharing of best practices and creating a buzz.
DFIs are seeking to help grow the ecosystem
Although DFIs have traditionally invested in projects/organizations which are able to absorb large investment sizes, more recently there has been a considerable interest within DFIs to support smaller inclusive businesses and in some cases, high potential social enterprises.
The report on ‘Impact investing in development finance’ (2014) classifies the various ways in which the DFIs support impact investing.1
However, the traditional methods employed by DFIs fall short on several of the strategic priorities for developing the SE ecosystem.
It is, therefore, imperative to explore alternative mechanisms to extend support to social entrepreneurs. Providing solutions across the following four dimensions through a challenge fund structure, could be the key to addressing the issues identified above, and unlocking impact and growth in this sector.
A Challenge fund - an alternate solution
Challenge funds first appeared around the turn of the century under the UK aid program. The first fund within the British overseas development assistance program was the UK business sector challenge fund[1]. A challenge fund, as the name suggests, creates a fund to support organizations and/or individuals who have the capacity to solve a challenge within a sector or geography.
The following section maps out the various characteristics of a challenge fund across its key elements. The characteristics reported are by no means exhaustive but cover the common elements observed during the research for this study.
Comparative Evaluation
When compared with traditional approaches, the proposed challenge fund appears to be a more aligned solution
As can be observed from the table above, the challenge fund is best positioned to serve across the strategic priorities and hence, it is recommended that DFIs invest in creating a challenge fund that attracts, finances and nurtures social enterprises.
However, collective experience with challenge funds gleaned from primary and secondary research shows that for Challenge Funds to be successful, a few key learnings and best practices need to be deployed
Challenge fund best practices
Target Segment:
DFIs should identify a sector, a problem to be addressed, geography and stage of business that the challenge should be focussed on.
Evaluation Criteria:
The criteria should be designed such that they help establish additionality, by establishing the counterfactual. For example, a few cases for additionality could be in which the grantee cannot self-finance the project, or does not have the knowledge, or is unwilling to implement because of low risk appetite.
Program Support:
It is recommended that the proposed challenge fund provide engaged support via incubators in the pre-finale stage to all finalists. This will help them learn from experts, build capacity and refine their pitches before the finale. As the program transitions, the support engagement activity can be progressively reduced and be limited to providing access to network.
Impact Measurement:
It is important to identify the impact goals at the beginning of the program. Measures and the methodology adopted should be non-ambiguous and transparent. Standardized tools such as the GIIRS or ‘DFID’s results framework’ should be a requirement for the finalists to adopt and report.
Operational Structure:
It is recommended that the challenge fund be run in coordination with local incubators/accelerators, impact and philanthropic investors. DFIs should find ways to contribute financially to the challenge fund. This contribution would be used to invest in the winners (equity or debt) as well as cover the administrative costs. Furthermore, since it is important for the challenge fund to not only support the direct investees but also to improve the SE ecosystem in the relevant geography, it is imperative that the DFIs work with local players such as incubators, accelerators and impact investors.
Dalberg Global Development Advisors
Amritha Subramanian, Vineet Bhandari, Gayatri Nair Lobo & Rajen Makhijani
[1] Challenge funds in international development, University of Bath, 2013 (#90)