For many social entrepreneurs, the valley of death — that gap between early stage financing and commercial capital — is real. But their ideas and business models, if supported by a growing infrastructure, can play a critical role in turning the list of challenges in the sustainable development goals into market opportunities that benefit society.
There are a growing number of actors engaged in social entrepreneurship — there are the entrepreneurs themselves, of course, but donors, investors, intermediaries, governments and multinational corporations all have a role to play.
And despite the challenges and infrastructure gaps, the consensus among proponents seems to be that this is an exciting moment for the field. The common trope is that social entrepreneurship and the impact investing that will support its growth are still “nascent” or in “early stages.” And that’s true — five or 10 years ago the dialogue was a whole lot different.
“The job of addressing social challenges,” according to Jean Case, co-founder and CEO of the Case Foundation and a self-identified entrepreneurship evangelist, “has largely fallen to the public sector.”
People have generally seen nongovernmental organizations and philanthropists as key players alongside government, Case explained, but more solutions need to come out from developing countries — from the entrepreneurs witnessing the social challenges.
“Honestly, the missing seat that doesn’t have an oar to row as we’re trying to get to the finish line is the entrepreneurial spirit … entrepreneurs coming in and bringing their bright innovative ideas about how we solve problems,” Case said. “That can really be transformational and I’ve already seen it happening … too much change has been led out of conference rooms with fluorescent lights, not on [the] front lines of the problem, so I believe it’s game changing.”
There is a growing cadre of entrepreneurs stretched across developing countries who are experimenting and innovating with new products, services and systems that can tackle agribusiness, access to energy, health care, education and more. Incubators and accelerators seem to be popping up left and right, donor agencies are exploring how they can support entrepreneurs and strengthen the ecosystem, some governments have created business-friendly legislation to encourage entrepreneurship, and the small group of intermediaries is growing as there is a greater need for linking and supporting promising businesses with capital.
Social enterprises have the potential to be a much more efficient vehicle for philanthropy and, if designed well, can scale, said Jim Sorenson, entrepreneur, investor, philanthropist and chairman of the board of directors of the Sorenson Impact Foundation.
“I see it as a financial revolution,” he said. “The barriers really are that we are still at a nascent stage. There is lots of activity but we lack an ecosystem that addresses the needs.”
Money, money, money
The biggest bottleneck for Hello Tractor, a company that is working to improve farmer productivity and livelihoods in Nigeria through a network of smart tractors, is financing, said founder and CEO Jehiel Oliver. Farmers or individuals need access to affordable financing to buy a smart tractor — the current interest rates from commercial financial institutions are too high to make the model work for his customers.
So his solution is to take on the risk himself, borrowing from banks so he can lend to the farmer or business owner who wants to buy a tractor. But convincing banks to give him the cash is a challenge. Guarantees to banks to reduce the risk can help, but banks also need to look at developing new products, he said. Development agencies and development finance institutions can play a role as well, but the typical deal often takes too long to structure and limit a startup’s ability to be as agile as it needs to be, Oliver said.
And development agencies have seen the need — the U.S. Agency for International Development launched PACE, the Partnering to Accelerate Entrepreneurship initiative, in 2014 with plans to invest $10 million in support of social entrepreneurship. The U.S. Overseas Private Investment Corp. has also made commitments targeted at fostering entrepreneurship and incentivizing local banks to lend to small and midsize enterprises.
OPIC, for example, is adjusting its capabilities to address current needs, including working capital and inventory financing, which haven’t typically been financed with the agency’s money, said President and CEO Elizabeth Littlefield. While it didn’t require changing any restrictions, it did mean a change in how the agency looks at credit and underwriting guidelines, she said.
The agency has also created Portfolios for Impact to help address that valley of death or pioneer gap. Portfolios for Impact allows OPIC to support smaller, earlier-stage companies that it wouldn’t normally support because the portfolio approach helps manage the risk.
Success for the agency will come when guarantees lead banks to better understand a market, develop targeted products and want to take on more risk after OPIC’s commitments have been met, she said.
Some banks, even without the support, are starting to realize the importance of the market. Chase Bank Kenya last month announced that it was committing about $600 million to fund small and midsize enterprises, especially those run by women and young people.
The bank made the decision because it has recognized the importance of both groups, which historically are underbanked and underserviced, said Paul Njaga, CEO of Chase Bank Kenya.
“The financial industry has not been very good at banking women and youth because of inherent challenges — no collateral, no track record, no history,” he said.
But now, new types of records tracking — including from mobile payment systems like M-Pesa and a credit scoring engine — are opening up new ways to prove credit worthiness without the need for collateral.
And while Oliver is just one of many entrepreneurs that list financing as their biggest hurdle, the challenge exists not because there is a lack of money, said Andreas Zeller, a managing partner at Open Capital Advisors.
The problem is that the available capital doesn’t have the right expectations and incentives are misaligned. Some conservative investors still don’t want to take the risk that comes with investing in a small business. With currency exposure, particularly in Africa, there needs to be more proof of success and sometimes entrepreneurs may have a great idea but lack the skills to accept the available capital.
Bridging the labor and education gap
The iHub in Nairobi, Kenya, is a center of innovation and home to many budding and already successful entrepreneurs. But even there, in a room full of creative minds, the conversation sometimes turns to the challenges and long searches for a chief financial officer or chief technology officer.
Many social enterprises face challenges when it comes to building a strong team, partly because of lack of training but also because of competition. The pay at a startup is typically low and top talent is often lured by offers from major consulting firms that offer salaries young enterprises can’t compete with.
Others may have the basic skill sets but still need additional training and support — an accountant for instance might make a good CFO but only if they can step up and do financial planning in addition to tracking profits and losses. Stronger talent development and vocational training programs that include more than the basic skills can help, Zeller said.
Open Capital Advisors, which is based in Nairobi, has an internal training program to help build the skills of recent university graduates and equip them with the critical thinking and business skills they may not have learned in the classroom, he said. That type of vocational training and curriculum change is one way governments can also help support a stronger entrepreneurial ecosystem.
As Kwami Williams, co-founder of MoringaConnect — a company working to support smallholder farmers through moringa exports in Ghana — is quick to point out, even if a social mission drives the work, a social enterprise is at its core a business.
“Sometimes as a social entrepreneur you can get carried [away] with purpose and passion and are not as disciplined [at] looking at the numbers [and] financials,” he said. Being good at the business is critical to growth and scale, and investing in those skills is critically important to success.
Accelerators and incubators can sometimes help entrepreneurs gain skills they lack, especially when it comes to creating a business plan or managing employees. Incubators can help entrepreneurs at different stages and the needs are different. A company may find that it has to “zigzag” in its progress as it attempts to go to scale and finds it needs to retool the model to succeed, said Cathy Clark, an adjunct professor at the Center for the Advancement of Social Enterprise at Duke University’s Fuqua School of Business.
That is not unusual and she has seen it among the businesses at the Social Entrepreneurship Accelerator at Duke. What’s important is that a company has the skills to make those adjustments to the business model and the individual entrepreneur is not expected to do it alone. The innovator or founder cannot be good at everything but building a team that as a whole has the necessary skills to succeed is key, Clark said.
A turning point?
This may well be a critical moment. U.S. President Barack Obama’s visit to Kenya during the Global Entrepreneurship Summit in July has helped shine a bigger spotlight on entrepreneurship’s potential to tackle global challenges.
What happens now under this heightened attention is what matters. Results and more success stories of companies scaling and providing investors with what can be an elusive exit are important.
But progress will still take time. Systems change, after all, and what this paradigm shift ultimately requires isn’t easy. The comparison is often made with venture capitalism, which had its share of challenges and took time to develop efficiency and good intermediaries. That progression may provide a glimpse of what is to come.
“Governments and large corporations need to adjust,” Clark said. “If they don’t adjust, the market will find other ways and will end up competing.”
Some governments are taking notice. Kenya’s President Uhuru Kenyatta has been vocal about his support for entrepreneurship and is supporting legislation designed to promote small business growth. Other countries lag in supportive policies and all will have to continue to work toward creating a thriving business environment in their countries.
While perhaps not raised as an issue as often as financing or personnel, government policies are also critically important for a strong ecosystem. From business registration laws to improved transparency and a reduction in corruption — positive changes can help promote growth.
As world leaders prepare to gather in New York to finalize the SDGs and discuss how they will be implemented, everything, including entrepreneurship will be on the table as one of the potential solutions.
“Every problem is an opportunity to help people and create value,” Williams said. “Social entrepreneurship is the perfect vehicle to make this happen.
To learn more about social entrepreneurship, check out our series the #SocEnt Revolution: How entrepreneurship is changing global development, which explores the entrepreneurship ecosystem, from the roles of different actors to donor support, financing and incubators, in an effort to examine what needs to be done to maximize the impact of entrepreneurship in the post-2015 era of development.