The current funding system threatens potentially life-changing innovations

The world is hungry for new innovations that solve some of our biggest global challenges, such as food insecurity, financial illiteracy or a lack of healthcare and education. Social entrepreneurs in emerging markets are some of the biggest innovators in providing services and products for the world’s poorest, ready for the challenge to combine profit and social impact. I don’t think many people would argue against my claim that entrepreneurs are essential to creating long-term impact and change. Unfortunately, funders still direct little capital to them.

This is because our current funding system kills potential innovations that could impact the lives of millions of underserved people. As demand for profit dictates, private investors tend to aim to maximise their financial returns while risk-adjusting their capital. Donor agencies, foundations and philanthropists focus all their grants almost exclusively on traditional NGOs because of constraints they face around using taxpayer’s money: for-profit companies not only have a bad reputation when it comes to ‘doing good’, they also lack the clearly predefined goals and outcomes of NGO projects that donor funds require to ensure accountability, such as ‘this education initiative will reach 5000 girls in a specific school district in Nepal in two years’. Businesses just don’t work like that – trial and error are part of their journey to growth which extend beyond a project’s shelf life. As a result, donors often only fund ‘proven interventions’, leaving entrepreneurs with debt and venture capital as the only available financing options and next to zero capital to try out high-risk and potentially high-reward innovations. This exposes a funding gap for impact-oriented businesses that needs to be bridged.

Not only does our funding systems deny social entrepreneurs innovative capital and flexible

funding options. We also expect our investees to bend over backwards: businesses often spending the equivalent of their grant funding on lawyers to go through expensive, long and complicated application, due diligence and reporting processes that aren’t standardised but unique to each funder.

Funders should take two steps to close the funding gap for-profit companies face

It’s time to support businesses based on the potential of their innovation rather than their ability to fit into our funding systems. But to facilitate systemic change to the entire ecosystem, we, as funders, need to act as system entrepreneurs by modernising our funding processes – and taking risks will enable the development community to make progress. I would like to see two essential changes:

  1. Investors need to provide access to high-risk, long-term funding;
  2. Funders (including traditional donors) need to start providing grants to for-profit companies, and not just NGOs, to encourage businesses to try new innovations and to enter the challenging or hard-to-reach markets that desperately need them.

Impact investing works: innovative capital for is key to enable social businesses to thrive

As a Co-Founder and Managing Director of The Case For Her, a philanthropic funding collaborative that mixes grants, equity, convertible debt and SAFEs, I know that particularly financing early-stage businesses in high-risk markets might seem scary at first. But it works, and innovative capital can help them achieve both positive impact and profitability.

One of our first investees was AFRIpads – a Ugandan business founded by two entrepreneurs who dreamed of ending period poverty by providing women with high-quality, reusable sanitary pads. They started off by making pads in their own homes. In just five years they have provided sanitary pads to over three million women and girls, opened a factory in their hometown and employed over 200 people – thanks to bold funders who provided them with early-stage funding, including a mixture of equity and grants.

Another business in our investment portfolio is Kasha – a Rwandan e-commerce platform that enables women to discreetly purchase healthcare and beauty products such as contraceptives and HIV self-testing kits. When Kasha was just a year old, we supported them with equity investments through small convertible debt. While many investors were too scared to invest such an early-stage ecommerce business that targets consumers living on under USD4 per month, we spotted an opportunity to try something new. With great success: Kasha has expanded across Rwanda and Kenya and 80% of its customers belong to the country’s poorest socio-economic group.

To ensure their products reach women in the remotest corners of the country, Kasha built trust and raised brand awareness by employing low-income women as Kasha Agents. The availability of flexible funding options played a crucial role in successfully developing such an innovative last mile deliver model.

Funders need to step up to the challenge of supporting for-profit businesses to achieve development progress

As an investor, my goal is to provide financial resources to entrepreneurs that are customised to their unique ambitions and to take a holistic ecosystems approach to our funding portfolio by supporting businesses whose ambitions for social impact complement each other.

But a few small innovative funders and impact investors, like our funding collaborative, are not enough to deliver large-scale impact. Other major funders and institutional donors need to step up to the challenge and provide more flexible or streamlined funding models and innovation grants to for-profit companies. It’s time to change the investment paradigm and system for the better.

Notes: The views expressed in this blog are those of the author. / Kasha was supported by SPRING Accelerator, which helped 75 social businesses in nine countries in South Asia and East Africa to develop innovations that improve the lives of adolescent girls and marginalised communities. 

The post Rising to the Challenge: Donors Must Change their Funding Systems to Ensure that Businesses Achieve Social Impact appeared first on Business Fights Poverty.

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