Tips on Early Stage Financing for BoP Ventures

By March 19, 2015Blog

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By DFID - UK Department for International Development (Flickr: Lighting the way home in Sindh, Pakistan) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

By DFID – UK Department for International Development, via Wikimedia Commons

It’s been a busy start to 2015, sorry for the long hiatus! If you have been following this BoP blog series, you’ve explored different BoP business models and factors that may impact market penetration and profits, along with the need to account for community needs when developing and implementing a BoP strategy.

This post goes back to the beginning and discusses the need for more early stage financing for innovative BoP models. Seed capital allows companies to test and prove business models so these become ready for scaling up efforts and for traditional investors. But the the lack of early funding for BoP models curtails business participation in economic development and translates into missed opportunities to better the lives of low-income populations. How can these BoP ventures move away from the concept phase and into the early stages of funding?

 

BoP ventures are often faced with many challenges during their early stages of growth. Finding early stage funding is not a simple task and seems more difficult for BoP businesses when compared to more traditional investments. Oftentimes BoP ideas are difficult to benchmark and there is no market equivalent to angel investors (affluent individuals willing to provide capital for a business start-up in exchange for equity or for debt that can be converted into company shares) for these strategies. This lack of seed capital shrinks the pipeline of BoP businesses and impacts the number of ventures that eventually qualify for traditional capital investments. As a result, the thin pipeline stifles social impact. To circumvent these challenges, businesses have accessed creative early financing strategies such as grants, impact investors with patient capital, and even crowdsourcing. These options are described below.

  • Grants: The Inter-American Development Bank’s Opportunities for the Majority (OMJ) was created in 2007 to promote and finance market-based approaches to deliver quality products and services to the BoP, create employment, and enable low-income producers to join the formal economy. While the initiative provides 3 to 20 million-dollar loans and partial credit guarantees to proven models, it also has a portfolio of grants to support BoP projects and pilots in Latin America and the Caribbean (usually of up to $500,000). A part of the portfolio of grants goes to support pre-commercial pilots that are not yet ready for conventional loans but still have the potential to scale and replicate. While many funded organizations do not get pass the pilot phase, OMJ grants are helping prove the success of many model, setting them up for financing.
  • Impact Investors with Patient Capital: The more well known Acumen fund has turned charitable donations into equity lines and loans for companies that
    deliver services and products to the poor, which have, according to the Fund, impacted over 100 million people. Acumen’s average commitments of patient capital go from $250,000 to $3,000,000 with payback or exit in around seven to ten years. The Fund also provides management support to the enterprises, helping them set up their models and scaling up efforts. According to Acumen, these investments are not in search of high returns but instead to create enterprises that alleviate poverty.
  • Crowdsourcing: Our last example is best known for financing your neighbor’s band or movie, but as technology has played a larger role connecting investors and projects, crowdsourcing has become a viable source of funding for social enterprises. There are many examples of organizations that have received funding through crowdsourcing platforms, such as Kiva, Kickstarter, and StartSomeGood. We expect that social enterprises will find it increasingly easy to connect with likeminded individuals willing to give or provide incipient capital for companies that are seeking a financial and social return.

Lack of funding and investment for BoP companies are missed opportunities to serve the poor and improve the living standards of those in need. They are also missed opportunities for social investors looking to place capital. Availability of early stage capital is crucial for promising ventures to go from pilot to investment ready, reaching scale and generating impact. As this capital becomes more organized and available, we hope that the pipeline for conventional investors of BoP business models grows and so does the positive impact that businesses have on poor communities.

As always, we close with some questions for all of you: Do you have other examples of sources of early stage funding for BoP ventures? How should investors weigh social impact when calculating returns on investments (ROIs)?

Read other posts from this BoP blog series:

Social Enterprise: Understanding the Base of the Pyramid
The Business Case for BoP Strategies
Distinguishing Between Demand and Need in the BoP
Incubating Expertise: Fostering Partnerships within the Community
Should corporations promote development?

 

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