Turning challenges in impact investing into prototype innovations seed Monday, 05 December 2016

Turning challenges in impact investing into prototype innovations

Kenya, where our first Impact Financing Lab took place, is one of the global centres of impact investing! But even there, many challenges for deal flow exist…

In order to identify the key challenges in impact investing in the context of East Africa by stakeholders in this field, we launched our first Impact Financing Lab at the 2016 SEED Africa Symposium in Nairobi.

In collaboration with our session partners Africa Enterprise Challenge Fund (AECF), Inclusive Business Accelerator and Open Capital Advisors, this closed-door event brought together more than 30 leaders from investors, banks and development finance institutions. On this day, senior level financial experts, practitioners and project developers transformed into “lab members” to identify challenges and turn them into solutions creating new instruments to improve the impact investing process.

So, what are the REAL challenges?

In four collaborative working groups we dove deep into intensive discussions. Here’s what we’ve echoed as the main challenges, as well as solutions for tackling them:

  1. Still there is a huge lack in early stage capital. Commercial capital is not usually used for early stage investment. Early stage investments are usually taken on as 'family, friends and savings' types of investments. In order to encourage early stage capital, a key solution is capacity building to use the received capital more efficiently. In addition, instead of just offering a single type of capital, breaking down the investment model into smaller hubs and creating a pipeline that takes different types of capital and gives at different stages of early stage companies can be great solutions.

  2. Strengthen the potential of next round ready enterprises. Many eco-inlcusive enterprises have still a way to go, but can demonstrate good potential. However, the majority of applicants for the business plan competitions and incubators or accelerator programmes do not get any feedback or support on their application and on their business. The organizations and institutions should not only focus on the enterprises who have already made them into a cohort (Level A enterprise), but also need to take time to look at how the ‘serious but failed by a margin’ enterprise (Level B) can improve their business model and application for the future. There is a lot of potential in them for the next round and future deal flow.

  3. Of all the due diligence challenges, legal due diligence is the most critical. Specifically, the problem is that very few lawyers are working in this field in East Africa. To this regard, a solution from the investors’ perspectives is seconding lawyers into private equity funds. This will be helpful for organizations to better negotiate with investors and also for reducing legal costs.

  4. There are various challenges in the deal process & management. Investors are not sharing ideas. Moreover, actively sharing ideas, the need to create a platform to share ideas, and high expectations regarding the outcomes of incubators hubs or programs can become points of contention/ so that people can easily feel disappointed, but that does not mean that the basic idea or the impact of those institutions are low. Getting people in the right programme and connecting people are very critical. 

… So, what to do with the challenges? Use them as ingredients for innovation!

What made the Impact financing Lab novel was the fact that we did not leave the challenges to stay as they are, but instead, we as lab members used those challenges as the ingredients for prototyping innovative impact financing instruments.

How did we do it? Lab members chose one of the specific challenges identified and based on those we prototyped the innovations into five prototype canvases, including innovative characteristics of the mechanism, key partners and resources, critical factors for successful implementation of the prototype as well as the next steps to be taken to realise the prototype.

Here, we present the key elements of the five prototypes:

Prototype 1: Create a partnership between investor and development agency which provides technical support to reduce risks and high transaction costs as the holistic approach

Prototype 2: Advance of level B applicants into level A, invest-ready enterprises

Prototype 3: Second lawyers into funds to reduce transaction cost

Prototype 4: Set up a standardised financing scheme based on big data and existing relationships to meet the demand of bank clients and decrease mismatch

Prototype 5: Develop and utilise cost-effective ICT system to better manage information and time during the due diligence process and to rank and prioritise companies

Click here to closely look at the five prototypes developed during the Impact Financing Lab.

At the prototype pitching session as the wrap up, all participants truly enjoyed learning by witnessing how challenges turned into innovative ideas! As the response to the importance of the deal flow challenge, the prototyped instruments will provide concrete solutions to challenges faced in early stage impact investing, and be able to build new mechanisms, attract new investors, and help to increase the deal flow into projects. We, SEED, are also ready to adapt the innovative prototypes to multiply the impact of SEED programmes and supporting pipelines!

© Copyright 2018 adelphi research gGmbH. All rights reserved