Over the past decade, impact investing has gained significant traction and traditional development organizations are increasingly leveraging pro-poor business solutions to solve social and environmental problems. Yet over and over again in nonprofit board rooms, social enterprise staff meetings, and investment committee meetings, leaders debate how best to achieve “scale."
Likewise, with a surplus of impact capital to deploy, impact investors are eager to see a larger number of entrepreneurs ready to take on greater levels of investment. As a result, many who have spent the last decade investing in social enterprises are awakening to the understanding that the success of the firm is directly influenced by the environment in which it operates.
In many ways, social entrepreneurs have been lauded for their desire to address market failures by providing valuable services for the poor when government and the traditional private sector have fallen short. Similarly, leading impact investment firms have jumped on the bandwagon and focused almost exclusively on investing in the most promising social enterprises, often doing little to address the systemic failures surrounding that enterprise. But despite this desire to operate independently, there is a significant body of knowledge justifying the idea that small and growing businesses (SGBs) can more effectively scale when the broader ecosystem is healthy and favorable.
Last month, the Shell Foundation released a seminal report entitled Enterprise Solutions for 2030 which outlines a similar premise related to social enterprises. A main conclusion from their research over the past 15 years is that “the supportive ecosystem must function as an integrated whole in order for social enterprises in new sectors to succeed.” As more industry leaders like the Shell Foundation publicly tout the need to take a more systemic approach to supporting SGBs, many government, foundation, and corporate leaders are eager to understand what the successful cultivation of an entrepreneurial ecosystem entails. Is a "puppet master" needed? Or can the necessary environment be created organically with a few targeted catalytic infrastructure investments?
While few examples of successful systemic interventions exist in emerging markets, practitioners are beginning to share best practices for successful entrepreneurial ecosystem interventions. The Competitiveness Institute outlines how a cluster initiative can be a useful way to strengthen joint activities among ecosystem actors related to: increased innovation and technology capacity, cluster networking and trustbuilding, and human resources upgrading. Likewise the United States Small Business Administration (SBA) has had some success in funding regionally specific industry clusters over the years. The critical component to each is a clear focus on a regional metropolitan geographic footprint and a specific industry, such as renewable energy, tourism, information technology or fisheries. To evoke Goldilocks, economic developers have found national level efforts to be too big, city level efforts to be too small, and metro-area efforts to be just right.
Based on the work of organizations like the Competitiveness Institute, the SBA, and research on competitive market dynamics, ANDE suggests development professionals consider the following when implementing an entrepreneurial ecosystem initiative:
- Begin with a focus on a single metropolitan area in order to implement a set of integrated programs designed to build a strong ecosystem for entrepreneurial startup and scaling.
- Further focus on a subset of regional industry sectors, or clusters, that have the potential to grow. Even within a regional context the specific needs of entrepreneurs in different industries will vary.
- Develop a consortia of entrepreneurial support organizations that will would be responsible for the ultimate design and implementation of the regional entrepreneurship ecosystem initiative. There doesn’t need to be a "puppet master" – but there does need to be a backbone organization that supports collaborative efforts.
- Understand the present level of entrepreneurial activity within the region and the roles of local entrepreneurial support organizations and programs.
- Cultivate support from the local, regional, and national governments and the business community for the proposed initiative. The latter is the most critical – the local business community has to be on board with any proposed plan.
- Develop a strategy for short and medium term actions. Quick wins are key to consolidating community stakeholder support. But these efforts will take at least 35 years to show significant impacts. So, the design and funding structures need to reflect this reality.
While ecosystem building endeavors are not straightforward to design, nor easy to implement, a successful entrepreneurial ecosystem initiative can help hundreds of social enterprises to thrive by providing access to an integrated set of inputs: capital, capacity development, training and regulatory improvements. Piecemeal efforts to address the inputs separately, on the other hand, will continue to leave impact investors searching for “investable” businesses and social entrepreneurs still striving to deliver their potential positive community impact at scale.
View additional posts in the USAID blog series.
Photo credit; Daniel Wilson