Throughout the developing world, there are an increasing number of entrepreneurs providing solutions to poverty, and there is also an increasing number of investors willing to allocate capital to these entrepreneurs in order for them to scale their operations, since only at scale can they realistically seek to meet their social missions.
However, more investment capital is needed if early stage impact enterprises are to scale and thrive. In this report we take a close look at where venture philanthropists and impact investors are working together, and where gaps remain, so as to provide a practical and user-friendly guide to make the case for impact investors to invest earlier and more often.
Our research uncovered numerous examples of collaboration and, although this report is by no means exhaustive, we believe that we have identified a range of practical solutions that can be replicated.
The actionable solutions identified troughout this report are categorized as:
- Blended funding solutions: the strategic use of development finance and philanthropic funds to attract private capital flows to emerging and frontier market enterprises. Venture philanthropist participation alongside private investors not only encourages private capital into impact enterprises by lowering the risk/return hurdles, it often enables pilot or innovative programs and activities to be undertaken as well as ensuring that the social objectives of the enterprise are not compromised.
- Structural enhancement solutions: an increasingly common approach by venture philanthropists to mobilize investors into enterprises that would otherwise be too high-risk is through the provision of financing structures such as loan guarantees and first-loss facilities. Although some impact investors are willing to moderate their return expectations when investing in impact enterprises in order to achieve a balance of economic and social return, many find it difficult to assess the risk of failure and therefore seek downside protection.
- Impact accelerators: the funding of accelerator programs by venture philanthropists enables impact enterprises to become ready and able to accept private funding, with some accelerators accommodating private cofunding into their programs.
- Technical assistance facilities: the provision of technical assistance funding and solutions by venture philanthropists, either directly to the enterprise or via third-party providers, builds capacity within the enterprise and strengthens the enterprise in order for it to become attractive for investment.
- Information & knowledge sharing: can take many forms, from sharing due diligence materials that cuts down the time and cost for investors, to partnering in deal sourcing and screening as well as reporting best practices.
- Innovation: as part of our research, we identified a number of innovative solutions to enhance collaboration, from a new online portal facilitating coinvestment in blended finance solutions to an innovation fund supporting new business models and sector-specific hubs created to share best practices.
We hope this report will encourage venture philanthropists, impact investors, and other players within the early-stage social impactfunding ecosystem to proactively undertake the solutions that have emerged as a result of this report’s research.
This report is a “call to action” for all such participants to continue to test, scope and roll out collaborative efforts (be they partnerships or other mechanisms) in order to catalyze impact investment capital.
The reward for greater collaboration can be a higher volume and quality of investment activity, which will attract greater, smarter impact capital into the marketplace, ultimately enhancing the viability of impactful solutions for the world’s toughest problems.