Written by Robert Haynie, SPRING Accelerator and Priyanka Rao, FHI Ventures.
Once a tool strictly for the private sector, accelerators are now being run by a variety of INGOs and development consulting firms as an approach for addressing specific social and environmental issues. Of 554 existing accelerators, almost half are headquartered in emerging markets where businesses often face additional challenges for growth. Like Silicon Valley counterparts, accelerators in emerging markets boost startup growth potential via financial, social, and human capital.
While a great deal of support and capital exists for startups, there remains a gap for early and growth-stage businesses because traditional investors see them as too high risk. Business skills development, operations management, and impact measurement are often the most requested needs from entrepreneurs.
Herein lies a prominent opportunity for INGOs to provide entrepreneurs the skills they need to successfully de-risk and scale their business and help them engage with investors for growth. By targeting this ‘pioneer gap’, INGO accelerators are able to blend capital and sequence support needed for social enterprises to navigate the high-risk growth phase.
Why INGOs run accelerators:
Accelerators have a unique opportunity for INGOs to accelerate the growth of social enterprises, and also benefit the INGO in a variety of ways, including:
- Accelerators are often a tool for sourcing and creating innovative products or services that INGOs and businesses can leverage to multiply their own impact.
- The comparatively shorter nature of accelerators compared to incubators helps INGOs maximize time and provide value-added coaching in their core areas of expertise, e.g. investment readiness and impact measurement.
- Accelerators can be a vehicle to attract new partners and investors. INGOs are increasingly including accelerator activities in proposals to donors (something donors have been increasingly requesting).
- INGOs can set up external investment mechanisms that complement accelerator activities by taking debt and equity stakes in the businesses supported. This can in turn serve as a revolving fund to provide ongoing support and reinvest in new opportunities.
Why INGOs have what it takes to run an accelerator:
Not every INGO possesses the capabilities to run a successful accelerator. To be well-position to succeed in impact investing and run a self-sustaining social enterprise accelerator, INGOs should offer a multitude of expertise to leverage internal and external partnerships and have access to strong funding opportunities. The following are attributes that are important for INGOs to possess to run a successful accelerator:
- Global reach: INGOs and development consultancies with presence in developed and frontier markets possess strong networks capable of reaching and engaging entrepreneurial ecosystems and investors. They are well-placed to leverage this presence to support accelerators to tap into a wealth of opportunities for market testing products and services, and leverage expertise from an INGO’s regional and sectoral experts, clients, and partners.
- Ecosystem support: It takes an understanding of local context and the business enabling environments that startups and social enterprises face to help them scale. Accelerators often have to assist small businesses beyond just their intended core focus to address issues within the broader ecosystem of support that is necessary for businesses to thrive.
- Access to donor capital: Given that most accelerators are not revenue generating past break-even, access to capital to sustain operations is important. Funding generally comes from anchor investors, such as foundations or corporate sponsors, or through grants from donor agencies. INGOs benefit from the backing and credibility of major donor institutions that can be leveraged to attract private-sector partners and build a longer-term strategy for achieving a self-sustaining operating structure.
- A separate legal entity: Establishing the accelerator as a separate legal entity protects the non-profit from any potential risks associated with the investments as they grow. It also allows for the accelerator to accept external funding in the form of loans, grants and other investments to support its operations and long-term growth.
- Capacity building: The internal capacity and experience INGOs have in strategy, entrepreneurship, advisory support, marketing/product development, regulatory affairs, and sectoral and regional technical expertise are all key ingredients for the effective set-up and running of an accelerator. INGOs understand the local markets in which they operate and offer a range of skillsets and resources that match the needs of the businesses they support.
- Partnerships: Partnerships are key to the success of INGO-run accelerators. Developing strategic and informal partnerships within startup ecosystems is important to not only ensure INGOs are driving value to social entrepreneurs, but connecting them to key resources and networks, providing access to new growth capital, facilitating industry development, and maintaining a healthy deal flow. By understanding the mechanisms for grant capital, i.e. often more restrictive and on a longer timeline for distribution, and how to leverage donor funding to catalyze private sector capital, INGO-sponsored accelerators are primed to serve as an intermediary of public institutions, private sector entities, and development organizations focused in emerging markets, while also possessing a unique understanding of how to combine and sequence resources to help businesses scale.
- Blended finance: Given their role as intermediaries between grant capital and impact investors, accelerators inherently serve as a blended finance mechanism for helping address the pioneer gap. Accelerators can help better sequence the range of capital needed to scale businesses in emerging markets, while also helping to change the perception around grant capital so that more investors recognize it as an asset class that is essential in paving the way for debt and equity investments in emerging markets.
Equity investments make up about half of deployed capital by accelerators in emerging markets while around 30% provide grants, quasi-equity, and debt. Blended finance is a mechanism that can offer win-win options for private, public, and philanthropic investors to advance social impact across these investment instruments. Studies have shown that public and philanthropic funds that are strategically deployed through blended vehicles can leverage three to four times more private capital. In this way, private investors can earn risk-adjusted returns, while being protected from transactional risks. At the same time public or philanthropic investors can more feasibly achieve their development objectives by enabling and encouraging private sector investments that would otherwise not be able to invest in development causes. In addition to grants, accelerators should also offer debt and equity investments to further support companies in scaling their businesses and allow the INGOs to generate returns to support their ongoing operations.
Accessing financial capital for accelerators:
While many INGOs are financing their accelerators out of their own unrestricted funds, research and development budget or investment income, there are several other funding channels available to accelerators. It is important to understand their source, their suitability for each accelerator type, and how to access them. Accelerators can be funded by any one, or multiple, of the following channels. • Donor governments (bilateral and multilateral institutions): While traditional development aid agencies are increasingly funding accelerators to assist in providing the ‘missing middle’ of capital needed for growing enterprises (beyond the start-up phase but too early for commercial lenders/investors), the timing and resources (e.g. personnel time commitment) needed to obtain the funding often takes too long for smaller accelerator programs to prioritize.
- Foundations: Many family-owned foundations support accelerators but have specific focus areas (i.e. geographic and issue-based) which limit access. Their timeline for planning can be upwards of a year in advance as they must allocate resources and obtain board approval.
- Corporations: Large multinational corporations increasingly support accelerators as they begin to see the value in being more connected to innovative trends and startups in their industry. In GALI’s 2016 Report, where 164 accelerators worldwide (86% in emerging markets) were surveyed, nearly 50% of accelerators responded that they received corporate funding, 21% of whom relied on corporate funding for at least half of their total funding. Corporations generally operate their accelerators in three distinct ways: in-house accelerators (e.g. Microsoft Ventures), outsourced (e.g. Barclays), or partnered (e.g. Red Hat). These approaches are normally justified as ways to source innovation or support R&D, but these partnerships often take many months to yield new programs, and corporations often like to start small by piloting a program with an existing accelerator (which can be a huge time commitment) before launching a program that can help scale the accelerator.
- Impact Investors: Some investors understand the important role accelerators play in preparing businesses to scale and absorb debt/equity investments – especially in emerging markets. However, many traditional investors or venture capitalists still see this as an additional expense. Accelerators are well-positioned to help demonstrate that grant capital is an asset class that is indicative of a healthy investment opportunity along with debt and equity.
INGOs have shown real progress in moving into the traditional investment space and have the potential to rise as leaders in impact investing through accelerators because of their wealth of sector and geographic expertise in frontier markets. They are also uniquely positioned to demonstrate how to efficiently deploy capital to address the pioneer gap by utilizing a range of asset classes and blended finance mechanisms from grant, first loss, and concessionary capital, to debt and equity, seeking commercial returns.
INGOs should leverage their role as intermediaries and serve as a blended finance mechanism, demonstrating how philanthropic capital is an important asset class to use with debt and equity investment. INGOs can help the broader finance industry recognize that grants and capacity building are important precursors to unlock additional financing for early and growth stage businesses.
This piece is a chapter from the report, Amplify Impact Investing: The Next Mile of Impact Investing for INGOs, published by Humentum and the International Non-Governmental Organization (INGO) Impact Investing Network.
Read the full report including case studies, citations, and other chapters.