The shortage of high-quality impact investment opportunities with the potential to generate both financial and social returns remains a critical challenge for the industry. There is a growing sense that the profile of enterprises investors would like to see—particularly in terms of quality leadership teams and business models—is not reflected in the pipeline of enterprises actually emerging. Meanwhile, philanthropic and aid donors supporting this sector are increasingly frustrated, as examples of large-scale impact remain few and far between.
Scaling Out: The Forgotten Side of Scaling
In the past few years, my colleagues and I have observed two important aspects of this problem in our work across India and Africa.
One of these is the “pioneer gap,” which we first wrote about in 2013. This is the lack of support for social entrepreneurs pioneering new business models through the critical stages of validating their models and preparing for scale. These ventures particularly need more capital that is more risk-tolerant, patient, and flexible than conventional return-seeking investment capital—in short, greater philanthropic funding.
The other is the need to address “ecosystem scaling barriers,” as my co-authors and I described in our 2014 report, Beyond The Pioneer. Across myriad business models in the preparing for scale stage, many barriers lie outside the firms themselves—for example, in the industry value chain, in public goods, or in government—and are difficult for individual firms to address effectively. Yet the great majority of scaling efforts are focused exclusively on pioneer firms and neglect to address the systemic issues that will continue to constrain scale. We recommended greater effort around industry facilitation initiatives that work alongside firms to remove these barriers and accelerate scaling.
But there is a third aspect to the scaling challenge that has received relatively little attention to date—namely, the role entrepreneurs who follow the first pioneers play in taking promising models to scale. Instead of creating entirely new models or solutions, these subsequent entrepreneurs build on existing breakthrough ideas that have yet to achieve their scale potential. These entrepreneurs have the potential to bring a stronger set of skills and experience to the development of an idea than the original pioneers, and as a result can be better positioned to scale. They might also be able to take existing models to new customers and new geographies, particularly as markets that serve the poor tend to retain stronger elements of local differentiation, compared with the increasingly globalized and interconnected markets serving richer communities around the world.
But while “following” or “replicating” are convenient terms to describe these endeavors, they run the risk of considerably understating the degree of challenge involved. Many of these entrepreneurs need to exercise a great deal of boldness and ingenuity as they adapt, and often improve on, the original ideas that inspired them. For this reason, my co-authors and I used the term “scaling out” in a recent report, Hardware Pioneers, to describe this process of taking ideas far beyond their original progenitors.
Where Ideas Have Scaled Out
Perhaps the most famous example of this process is the microfinance institution (MFI) model, which dramatically scaled out across South Asia and Latin America. In India, many MFI entrepreneurs were able to establish themselves much more quickly than the original institution; Equitas and Ujjivan took one and four years, respectively, to reach operating breakeven, compared with Grameen Bank in Bangladesh which took 17 years. While some of this reflects the benefits of learning gleaned from the pioneer’s experiences, it is important to note that later entrepreneurs tended to have more of a commercial background, and therefore brought a stronger suite of business skills and experience to their efforts.
This process has also been taking place more quietly in other sectors. For example, the illustration below shows the evolutionary “tree” of the low-cost sanitary pad manufacturing idea. The idea started with founder Arunachalam Muruganantham founding Jayashree Industries in the south of India, and later spread to the rest of India, the Middle East, and Africa via a diverse range of entrepreneurs. Similar to the previous example, later entrepreneurs such as Jaydeep Mandal were more intentional about building a scaling business, and brought new skills around product design and marketing that further developed the original idea.
Intentionally Scaling Out
We believe there is great potential for the sector to build powerful engines that intentionally scale out ideas, solutions, and tried-and-tested business models. Development in this area could significantly evolve the social enterprise ecosystem over the next 5-10 years, dramatically enhancing the impact of social enterprises and generating stronger, higher-quality investment pipelines for investors.
One important reason for this is that the impact enterprise sector is more mature than it was 10-15 years ago. A number of business models now have profitable, growing pioneer firms, at least in some markets, and we understand much more about where market opportunities lie, which models work, and how they work.
However, there is a dramatic asymmetry in knowledge and understanding between experienced participants who are well established in the social enterprise sector (investors, funders, advisors, facilitators, and experienced entrepreneurs) and the wider pool of individuals out there who represent the potential talent base for future enterprises—particularly since many of these individuals still reside in the mainstream commercial world.
As a result, great ideas and great talent do not coincide in the social enterprise ecosystem to the extent that they do in the mainstream commercial world. We believe this not only results in too few strong ideas for businesses, but also keeps many talented individuals—people who want to come up with new ideas but can’t, and yet have valuable commercial experience—outside the impact space.
Despite this, those in the impact enterprise and investing ecosystem—from incubators to investors—remain largely reactive rather than pro-active in their approach to the problem of a weak entrepreneurial pipeline. This is based on the unsafe assumption that great talent and great ideas will naturally occur together or naturally find each other. Meanwhile, communications from this ecosystem to the wider world—and therefore to the pool of potential entrepreneurial talent—tend to be inspirational or general in nature, without any intentionality around the kinds of ideas or models that new entrants could adopt or adapt.
And while there is a growing range of supports for impact enterprise, as a philanthropically funded ecosystem it has the tendency to gear toward what is usually called “innovation,” but in reality is better described as novelty. The new, exciting ideas pique interest and attract funding, support, and recognition, while older, more-established ideas struggle to get attention. But, in fact, the replication and adaptation of older ideas is also an innovative process, and one that frequently requires substantial support before an enterprise becomes investable.
Nevertheless, we feel there is a growing appetite for more-evolved models of both impact investing and impact enterprise support—models better adapted to the realities of the impact environment than the Silicon Valley venture capital sphere. Impact investors—particularly those with access to donor resources—could more pro-actively “build their own companies” by partnering with high-caliber entrepreneurial talent. At the other end, philanthropic funders and their intermediaries could create stronger public-good guiderails to spur the emergence of more—and stronger—enterprises around the most promising and exciting opportunities.
Learning from the Past, Designing for the Future
Over the next few months, we intend to deepen our understanding of this area and develop ways to advance the field around scaling out. We hope to draw on not only our past work in India, but also the collective experience of other players across the world, including Fundación Chile in Latin America, and SELCO Labs and Aravind in India. We also hope to engage and learn together with other efforts, such as the recent replication initiative launched by Connovo, Enviu, and the Miller Center for Social Entrepreneurship at Santa Clara University, and venture-building efforts by Accion Venture Lab in West Africa.
Together, we hope to develop and advance more powerful pathways for impact enterprise to truly contribute to sustainable development at a global level