What About the Demand Side of Impact Investing?

Over the past several years we have seen an exciting growth in the Impact Investing sector. Several of my colleagues have written recently about the growth in the supply side of the Impact Investing sector -- and the catalytic potential of this type of capital.

But one might ask, what about the demand side? We know the challenges that the world is facing are numerous, but are there enough businesses out there that are working to address these issues AND that have the capacity to take on the type of capital that Impact Investors are offering?

At ANDE we think so -- and in particular we're focused on the potential of small and growing businesses (SGBs) around the world to create economic, social and environmental impact -- and impact investments are one of the many tools they need to leverage to do this. SGBs are defined as growth-oriented SMES employing between 5 and 250 people, and seeking between $20,000 and $2 million in investment capital. These firms often face constraints to human capital, access to finance, and access to markets.

These are exactly the types of companies that could and should be sourcing impact capital because of their potential for social and environmental impact as well as financial returns. But often it is not that simple. Investors in this space complain that they have a hard time finding "investment ready" opportunities, and entrepreneurs complain that impact investors aren't willing to take enough risk. This results in multiple investors chasing after a few star businesses, while multitudes of other businesses stagnate because they can't find the kind of capital they need to grow. Husk Power is a great example of an SGB that has attracted multiple investment and support from key players in the space, but they are arguably the exception, not the norm. Clearly available supply alone isn't enough.

As this sector grows, there is a growing recognition that many promising enterprises find it difficult to attract capital to get off the ground, due to a lack of business training at the early stages of their growth. Many organizations are working globally to address this by providing capacity development support to enterprises at a variety of different levels. ANDE believes there is a pressing need for a more holistic, evidence-based approach to best leverage the potential of these organizations for the SGB sector. We are particularly interested in the role of incubators and accelerators, and have engaged a range of key stakeholders to truly understand the current reality and impact of existing incubators and accelerators and to then use that research to help strengthen and scale their work. Essentially, we want to accelerate the accelerators.

We have identified three critical issue areas and research questions to inform this strategy. The first is a question of pipeline. How do existing incubators currently source enterprises for their portfolios and what are the challenges they face? And how do we expand and diversify this pipeline? What are some potential new sources for impact accelerators to identify social enterprises?

The second is a focus on operations. What services are currently provided, and how useful do entrepreneurs find them? How do they compare to best practices in developed economies? What is the importance of philanthropy/donor funding in incubator business models? What should be promoted and scaled in emerging markets?

And finally -- evaluation. How do we know if they are working? Do SGBs that have access to accelerators actually perform better? Can accelerators play an amplified role in reducing deal sourcing, due diligence and advisory costs for impact investors? Do they improve pipeline for the impact investing industry, and help develop a greater number of investable SGBs?

We believe this strategy will enable us to better understand the conditions and criteria for success in incubating and accelerating enterprises, leading to a more well-developed entrepreneurial ecosystem, stronger entrepreneurs, and more investment opportunities for the growing Impact Investing field. So yes -- we are excited about the increased interest in Impact Investing on the part of investors. But in order for this burgeoning sector to continue to be successful we need to ensure that we are working together to support the development of the entire ecosystem.