Global Innovation Fund's first investments shed light on mission

The Global Innovation Fund announced its first eight grant and equity investments last week, and as starts its next chapter, it is reflecting on the process of getting started and is looking ahead to how it will streamline operations.

For the businesses, nonprofits, researchers and academics angling for GIF funding, the first generation of awardees offers some lessons, and for the GIF it offers an opportunity to refine their investment process.

The GIF was launched in September 2014 with a $200 million commitment over five years from the British, American, Swedish and Australian governments, as well as the Omidyar Network, with the goal of creating an entity separate from government bureaucracy that could look at what different financing models can do for development. The GIF has averaged approximately 300 applications per month for its multitiered financing — it is designed to provide follow-on financing in some cases or connect recipients with other investors from the public and private sector if they prove successful.

The first eight awards — five grants, two equity investments and one convertible debt investment – reflect GIF’s wide-reaching mandate “to solve any major development problem in low- or lower-middle-income countries,” and range from a family planning mass media campaign in Burkina Faso to an Uber-like motorbike service in Uganda to a payment transfer platform.

Other investments include grants a peer education program to reduce HIV and unwanted pregnancy in Botswana, an entrepreneur education program, a nutrition supplement and a new neonatal medical intervention.

“It’s a wide mandate in a sense of any sector or geography, but there are some important ground rules,” Alix Zwane, CEO of the GIF, told Devex on the sidelines of the launch of the investments in London.

Building the GIF portfolio

The GIF evaluates potential investments by assessing whether an organization or innovation serves the world’s poorest, how they measure results and their potential to scale.

“The [poverty-focused] criterion not only makes sense for reducing poverty, it complements efforts of other impact investors, many of which tend to benefit emerging markets rather than the poorest of the poor,” Zwane said.

If they meet the threshold of serving the base of the pyramid, then a group of evaluators  business, government, sector or regional experts — ask how a potential investee captures or plans to capture evidence.

Those who know Zwane, formerly head of Evidence Action, won’t be surprised by the GIF’s penchant for evidence-based programming. An emphasis on evidence also strengthens the learning exchange between the GIF and the GIF’s donors, like the U.K. Department for International Development, which are eager to share evidence to improve their own programming, but are unable for political reasons to stomach the risk.

A focus on evidence means candidates are under pressure to demonstrate potential impact, and provide a concrete plan for how impact is, or will be, measured.

“What we’re seeing is a lot of entrepreneurs who don’t know how to articulate impact, and as impact investors we’re struggling too, so if you’re struggling we’re hesitant,” said Kanini Mutooni, director for investment at the U.S. Agency for International Development-funded East Africa Trade and Investment Hub and a member of the GIF board.

Mutooni’s advice to applicants: Regardless of how impact will be measured, be as specific as possible about what strategies will demonstrate results.

GIF investments must also be scalable, but scalability can be a murky metric for success. What’s more important is “the approach of understanding the market locally. You can’t take the product to scale and expect to roll it out everywhere, because it’s going to look different everywhere you try it,” said Owen Barder, the  Europe director for the Center for Global Development.

Potential partners and investees should interpret scale based on past learning and potential growth, said Nishant Lalwani, senior vice president of investments of strategy and portfolio at GIF.

“Organizations can play very different roles in that pathway to scale,” he said. “They can be creating knowledge, growing organically, demonstrating innovation to other institutions who take it on, they can be influencing governments or large corporates.”

Lalwani also acknowledged that scalability seems to be the most challenging metric for potential investees; signaling a need for better understanding of how it is demonstrated.

Those three primary criteria are vetted through a multistep process that one awardee described as long, all-encompassing and very difficult.

Room for improvement?

Particularly from a private sector perspective, one and a half years — the time between the GIF’s inaugural announcement and the launch of its first investments — is a long time to wait for funding. Factor in GIF’s multitiered funding structure, which may lead to further funding from the GIF, and the life cycle of a single generation of investments could extend beyond GIF’s five-year donor commitment.

Much of the first year and a half of the GIF was spent setting up the organization, bringing on staff and creating their customer service standards, which are due to be released in the next 60 days. And that certainly had an impact on how long it took to make these first awards.

Asked whether GIF hopes to shorten the timeline, Lalwani pointed out that GIF is still “in its infancy,” but that as a “learning organization, there’s plenty of opportunities to improve.”

“Our capacity is increasing all the time, which will change some of our timelines, But we have been and will continue to be responsive to opportunities we think are high potential,” he said.

Specifically, GIF will ramp up operations in terms of the number and scale of investments, in addition to growing the GIF team from 16 current staff to around 20 by the end of 2016, after doubling its staff in the last year. Among those new hires will be a general counsel, a new chief financial officer, a communications lead and potential additions to the economic and analytic teams that work on impact measurement, Zwane said.

“We’re also very actively this year building partnerships, in ways that can help us operate effectively but also [to] source high-potential investments too,” Lalwani said.

GIF’s financial instruments include a range of grants, convertible loans, working capital loans and equity investments, the latter being, as Lalwani put it, “quite responsive” when a shorter time frame is necessary.

Other questions about how to improve the GIF’s model mirror those in venture capital financing: how do you match an investment with the financial instrument best-suited for the company, organization or product’s stage in the pipeline?

Pointing to lackluster returns on venture capital in the U.S. — currently less than 1 percent — Geoff Mulgan, chief executive for the National Endowment for Science, Technology and the Arts called on the GIF to go “beyond our existing repertoire of funding tools.”

“A capital market should be a way to link money to the uses that are the most productive, whether that’s economically or socially, but the truth is our capital markets, whether here in London, U.S., Shanghai, are actually not very good at doing this,” he said. “We have to be much more rigorous and much more imaginative in getting capital where it needs to be.”

“Fast-tracking” equity investments is one way to create a smarter and more reactive pipeline, Lalwani said, but also pointed out that through all of its investments the GIF focuses on evidence-based outcomes and structures instruments in a way that encourages recipients to innovate throughout the process.

“We will not do innovative financing for its own sake; only where we think it’s needed to drive the highest social value,” Lalwani said.

In some cases, as with the majority of the awards announced last week, that means offering a program or organization a loan to look at testing or scaling a product or intervention, rather than investing in a company. What’s innovative in those cases is the way grants are structured to be “outcomes-based and drive social value creation, which is not how most “traditional” grants are structured in other funds/foundations,” he said.

It’s all a part of the GIF’s efforts, despite the early stage and questions around the quickest and most effective ways to get good projects up and running, to prove “there is a new model,” Russell Siegelman, board chair of GIF told Devex.

“We want to show there's a new way to fund and support and select for great social ventures and that the way you find them is not by dumping tons of money on them and hoping they will work out,” he said.

West Coast Correspondent Catherine Cheney contributed reporting.

Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you FREE every business day.