This is the fourth installment of a five-part blog series on scaling environmental entrepreneurship in emerging markets. In this series, experts in the field provide insights on how business accelerators, technical assistance providers, investors, and the philanthropic community can work with developing market entrepreneurs to increase their economic, environmental, and social impacts. Read the rest of the series.
What do development banks, impact investment funds, foundations, and business accelerators have in common? Each of these organizations plays a significant role in supporting entrepreneurs in developing countries, including those who are trying to solve environmental problems through commercial enterprises.
But in most cases, these groups have traditionally occupied distinct niches in the support they provide. Development banks specialize in providing businesses with grants, loans, and technical assistance; impact investors provide debt or equity at market or near-market rates; foundations channel their philanthropy to create change; and business accelerators help entrepreneurs hone their business skills and attract investors.
What would happen if these groups worked more closely together? As we discussed at a recent WRI event, if organizations were able to combine their respective strengths, entrepreneurs could capture greater benefits than if groups work alone.
Industry Organizations Have Real Opportunities to Play Together and Enhance their Impact
WRI recently brought together entrepreneurs and industry experts from development banks, impact investing firms, and business accelerators at the launch event for our publication, Voices of the Entrepreneurs. As panelists discussed the ways in which their individual organizations helped environmental entrepreneurs overcome challenges, one audience member interrupted with a clear call to action: How could you accelerate the success of entrepreneurs by bringing together a hybrid of investment capital, grant capital, and accelerator support?
Bob Webster from Grassroots Business Fund (GBF), an emerging markets impact investment fund, explained that in many ways, GBF embodies the intersection of these different types of support. GBF originated in the International Finance Corporation’s (IFC) Grassroots Business Initiative, and in 2008, spun-off through a grant from the IFC to become an independent non-profit.
Scaling Environmental Entrepreneurship Blog Series
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In November 2011, GBF established an impact investment fund of $47 million with a blend of capital sources taking different levels of risk. Government agencies, foundations, and investment banks have provided the fund with debt capital (loans); several development finance institutions have become preferred investors (meaning, they have preferential repayment status); and a variety of angel investors got involved (and are focused more on helping the fund succeed long-term than on actual returns on their investments). In addition, GBF’s non-profit capacity-building arm received $12 million in grants from donors to provide advisory services to businesses in which the fund invests. GBF exemplifies a hybrid model where grant capital, investment capital, and business acceleration all play critical roles.
In Webster’s mind, a key component of GBF’s success was its initial grant from the IFC, which served as a “first-loss” investment, essentially de-risking the returns of other fund investors. He’d like to see more donors and foundations take on this important role which is critical to achieving scale.
Signs Are Promising for Greater Industry Collaboration
GBF isn’t alone in taking a collaborative approach. A couple other examples include:
Aspen Network of Development Entrepreneurs (ANDE): Enhancing effectiveness through collective action was one of the main reasons for founding the group, a global network of 170 organizations that work to propel entrepreneurship in the developing world. Over the last several years, ANDE has been connecting organizations to one another so that they can share and collaborate in a way that strengthens the industry as a whole.
UK's Department for International Development (DFID): Just last week, the Department launched its new 13-year Impact Program. A key component of the initiative is a new £75 million DFID Impact Fund, which will provide capital to kick-start promising funds and attract new investors by sharing the risks of early-stage investments – exactly what Webster called for. The program also includes £7.5 million devoted to technical assistance to help strengthen businesses and a separate £10.5 million commitment to the Global Impact Investment Network (GIIN), a non-profit organization dedicated to increasing the scale and effectiveness of impact investing. The £10.5 million will support the GIIN’s efforts to grow the impact investing market in sub-Saharan Africa and Asia. It will complement the blended funding that the network received earlier this year from Omidyar Network, The Rockefeller Foundation, and the U.S. Agency for International Development.
Growing Environmental Entrepreneurship through Partnerships
These actors came together in recognition that a combination of their strengths and resources will create a greater impact. After all, ensuring that entrepreneurship grows is critical to solving complex, global challenges—entrepreneurs and the small and medium enterprises they create contribute up to 78 percent of employment and more than 29 percent of GDP in developing economies.
Collaborating can be extremely challenging, yet can yield better results because of the knowledge-sharing and innovation required. As Luis Roz from the Inter-American Development Bank’s Opportunity for the Majority initiative pointed out, “Knowledge transfer happens when you are forced to find partners to work with…if you’re able to get all the resources you need internally, you become inward-looking.” It will be exciting to follow the models of collaboration that are already underway and to watch new models arise in the coming decade.