Aligning your incubation process with investors
I wrote about inclusive incubation in my previous blog where I explained how inclusion of the customer at the idea and design stages (innovation) and inclusion of ecosystem stakeholders in the guided growth of a social enterprise (incubation) are both very powerful practices. The natural progression is to leverage this inclusion in the next step of social enterprise (SE) incubation: Investment.
We intuitively know that SE's are a good fit for the mandates of impact investors, but do we, the incubators, understand impact investors and their needs as 'customers'? What are their expectations, their requirements? What excites them? And what keeps them up at night?
They are focused on impact, yes, but there are other key factors that weigh on their decisions, such as returns, revenue, enterprise risk, availability of rich data about the enterprise, and team risk. However, a critical challenge for investors is also access to a good pipeline. Not just quantity but quality of enterprises at the appropriate stage is important too, since investors simply do not have the time or bandwidth needed to hand-hold SE's.
This is also true for funders, such as family foundations, government / multilateral agencies, and development finance institutions, which are key funding sources at different stages of growth of an SE. Impact incubators should be using a matrix of such funds to accelerate the SE’s journey. In fact, this positions incubators as key partners for impact funders – because incubators are primarily generating a de-risked pipeline of growing social enterprises.
Impact incubators have been holding deal sourcing events at various scales - events like iPitch by Villgro India, AI4D by Villgro Africa, and ReachHealth by Villgro Philippines. But do these automatically create a reliable pipeline for impact investors? While these do surface many good, early-stage (perhaps idea to proof-of-concept) SE’s, those in the growth stage, capable of absorbing funding for growth, are few. Furthermore, each investment partner has a different risk appetite, impact mandate and return expectation.
So, how can we ensure that good value is delivered in an incubator-investor partnership?
One experiment that we have tried is a ‘conveyor belt’ approach. If we have a partnership that aligns impact mandates and growth trajectories with one or maybe a few investor partners, then we can form a conveyor belt of enterprises, where different funders can participate at various incubation stages. Before it brings visions of a mesmerized Charlie Chaplin in ‘Modern times’ to your mind, let me give a couple of examples.
As social enterprise incubation at Villgro India matured, we realized that there was a huge gap in growth / scale capital for SE’s who had intermittent or growing sales. So Menterra was launched, as an ‘incubator-affiliated’ fund with Villgro DNA but as an independent organization. This partnership enabled better / richer data sharing with a high level of trust and a better approach to de-risking the SE’s being incubated. As a result, about 3 enterprises incubated by Villgro India were invested in and one had a successful exit from these for the fund.
This ‘conveyor belt’ leveraged other funding such as the BIG and SBRI programs of BIRAC to help enterprises grow into a de-risked version that aligned with the mandates of Menterra and other such funders. Although the current challenge is replicating and scaling this conveyor, the crucial role of an incubator in operating this conveyor belt is clear. We are also piloting this conveyor belt in the East African ecosystem through JazaRift - a fund leveraging Villgro Africa’s incubation success.
Obviously, there is the risk that the fund’s thesis may sway incubators’ theory of change - prioritizing return vs. impact mandates. If left uncorrected, it may also attract only a particular type of social entrepreneurs. But if this conveyor belt is done well, good synergy can be created in the SE ecosystem. Regulatory constraints and process hygiene can and do prevent an incubator from exclusively incubating enterprises for an investment partner.
Now, should impact funds 'facilitate' early-stage incubation by funding some parts of the incubation program? It would certainly help incubators scale their impact, but it really depends on maturity of the ecosystem, diversity of pipeline from the incubator, and stage-mandate of the fund. Nevertheless, the case for alignment to make a conveyor belt happen is quite strong.
How far up and down can the conveyor go? That is the million dollar question!
For more insights, watch our Feb 2022 Wednesday Wisdom Session “FROM AN INCUBATOR TO AN INVESTMENT FUND” in the Villgro Knowledge Hub.
Arun Venkatesan
Co-founder and CEO at Villgro USA
Arun is passionate about scaling impact by helping impact incubators succeed. He led Villgro India's health sector before his current role at Villgro USA