From Innovation to Impact
Like a world champion Jamaican sprinter the use of the word “innovation” has exploded onto the scene in recent years as the golden ticket of international development, with a soaring number of entrepreneurs, social investors, grant-makers, corporates and public agencies in hot pursuit.
The topic was widely debated at last month’s Sankalp Africa Summit in Nairobi, a regional convening of social investors who aim to spur inclusive growth in Africa by supporting new market-based solutions. Innovation is sexy we all agreed, and yes, these solutions have the potential to tackle major development challenges at scale. Yet examples of global impact and replication remain puzzlingly rare. As you can imagine, there was no easy answer – but the emergence of new models such as venture philanthropy suggested that foundations may be a missing piece of the jigsaw.
Shell Foundation has been trying to work out how grant funding and business support can be deployed to accelerate the growth of social enterprise pioneers for some time now. Spoiler alert: we haven’t cracked the nut yet! However, if I muse on where we’ve failed and where our partners have succeeded, there are perhaps four broad areas where philanthropic capital is very well-suited to play a catalytic role in the social investment sector:
1) Supporting early-stage innovation
Backing early-stage businesses with new models and technologies to tackle entrenched global challenges is a risky business – too much so for most investors. When we started looking at the problem of inefficient cooking back in 2002 (which results in pollution that claims four million lives each year and high fuel costs that drain family income) clean cookstoves were widely-recognised as the best solution. Yet it took five years of piloting different technologies, fuels and business models before we could understand what customers really wanted and how this demand could be met.
At this point we established a long-term partnership with Envirofit
, a US-based social enterprise, and it took a further seven years to develop new technology, find the right value proposition and construct a viable model for a clean cookstoves business with a global reach.
Perhaps we could have got there quicker, and we are always learning and (I hope!) improving.
On the other hand, we wouldn’t be able to look for holiday deals on our iPad, use a sat nav to get to the airport or even take a plane ride without the astronomic public funding that was needed to develop today’s consumer technology in its earliest forms. In this context there is a chronic lack of early-stage support for pioneers who are working in the world’s toughest operating environments.
2) Building capacity for global scale-up
A second lesson from our partners’ work is that getting the product or service right is only part of the challenge they face. Social enterprises often have to create whole value chains from scratch and to overcome major market barriers related to demand creation, consumer finance, working capital and particularly distribution.
Partners like Envirofit or M-KOPA,
an asset financing company that uses embedded mobile technology and M-PESA to make solar home systems affordable to low-income consumers in Kenya, have had to overcome these challenges while simultaneously building the systems, processes and human capacity needed for national or regional expansion.
This means that early-stage pioneers of these markets need larger, more patient and more flexible support than we had ever imagined when we set out – and a wide-range of non-financial support to help build critical skills, access markets and overcome emerging barriers to growth. With a ready source of risk-tolerant capital and extensive networks spanning public and private boundaries, foundations are well placed to provide these resources. Grant is also a particularly appropriate tool at this early stage, where the need to service debt or equity investment could force a business to focus on more lucrative customers or restrict investment in capacity.
3) Unlocking impact investment and private capital
In reality, most of the social enterprises we work with are well into scale-up before they can attract and serve their first non-grant investments.
We’re looking at new ways to use grant instruments to offset risk and bring impact investors in earlier, for example by blending impact investment with smart subsidy (to fund R&D or capacity-building) or by using loan guarantees, first-lost investments or recoverable grants. (We are equally mindful of the need for social enterprises to move away from grant at the right time. In addition to creating the wrong mindset, displacing private capital would distort markets, not catalyse them.)
Four years after SF made its first grant to M-KOPA, the business has sold 50,000 solar home systems in Kenya and has attracted a range of investment from foundations, social investors and the UK Department for International Development. Just last month they secured US$10 million debt from the Commercial Bank of Africa to fund their national and pan-African expansion.
4) Creating markets to support replication and leverage investment
Pioneers of new product or service categories also rely on the right market enablers and infrastructure to succeed – and their absence adds to the risk and uncertainty of investing in these businesses. Envirofit met several major barriers to growth in its early years and these applied in equal measure to every type of clean cookstove manufacturer. No one business could solve these alone. In response, we’ve co-created several independent businesses to address these barriers at a market level; addressing problems such as last-mile distribution, demand creation or lack of working capital across the value chain.
Envirofit have now sold over 800,000 stoves across Asia, Africa and Latin America, benefitting four million people
Envirofit have now sold over 800,000 stoves across Asia, Africa and Latin America – benefitting four million people – and many other manufacturers now exist offering a range of products using different fuels and at different price points. Leveraging the investment required to meet the demand for these products will require supporting infrastructure to codify best practice, monitor impact, create industry standards and advocate for policy change. Co-creating the Global Alliance for Clean Cookstoves
with the UN Foundation in 2009 was a step in this direction.
Moving from co-ordination to collaboration
Many challenges remain and few market-solutions have reached the stage where they can show long-term impact on challenges that affect half the world’s population. Nevertheless, strong demand clearly exists for the right social-impact products and services, and the social investment sector, in its broadest sense, contains the right ingredients to support inclusive businesses to meet this need. We’re finding a growing number of foundations, impact investors, government agencies and corporates who are on a similar journey and eager to join forces to drive greater collective impact.
Social innovation may be sexy but achieving large-scale impact is exceptionally difficult and this is a long-term game. If networks like Sankalp, EVPA and the GIIN can help us understand the relative advantages of different assets for different phases of growth then this will enable us to deploy them far more effectively. As Eric Morecombe once said sitting at a piano – “I’m playing all the right notes, just not necessarily in the right order”. In time I think we’ll get that order right and demonstrate the true potential of this sector.