Rise of ‘Impact Accelerators’ Offers Potential for Developing-World Startups
Innovation is always risky. This is especially true for the social impact enterprises that target bottom-of-the-pyramid clients. While that market has massive potential—and the idea of investing in companies that both provide financial returns and benefit society is very attractive—it remains difficult for entrepreneurs to locate capital for such ventures.
The problem isn’t a lack of money. Significant capital is available for entrepreneurs looking to build these businesses, but most investors wait until the businesses prove commercially viable before signing on. Impact investors are interested in later-stage investing opportunities, but few social impact businesses make it to that point. According to a 2012 report by the Monitor Institute and Acumen Fund, only 7 percent of impact investing funds offered the early-stage capital needed for a company to develop its core product and validate it through market testing. This creates a loop of “not enough quality companies in the early stage and… not enough effective support to produce later-stage investable companies.” However, this does not mean that early stage companies are low quality, but rather that they are too risky overall.
Is there a solution? A recent study by the Aspen Institute and Village Capital suggests that “impact business accelerators” can provide the early-stage support that these companies need.
Similar to regular accelerators, impact accelerators provide mentorship from experts, business skills training, access to potential investors, networking and usually access to shared work space. At the same time, impact businesses have a set of issues specific to their ecosystem. These companies usually operate near their target customers in the poorest regions, where the talent—skilled labor—is extremely scarce. While the founders may be the experts in their particular subject, like irrigation or greenhouse building, most of them do not know basics of running a business or ever had access to formal banking. Accelerators not only provide business expertise, but also can help locate the talent from other regions and create favorable relocation terms.
Moreover, the customers that these businesses usually target also require different marketing approaches. To sell to people with minimal income, the new product or service has to be endorsed by a trusted source and have a potential of making a significant difference in people’s lives. Pricing also needs to be very precise: affordable for the clients yet able to generate profit for the company. Impact accelerators help inexperienced founders gain valuable knowledge in all of these specialized areas.
Agora Partnerships offers a great example of an impact accelerator. Agora works with growing small businesses throughout Latin America, including Nicaragua and Guatemala—some of the poorest countries in the region. According to their mission statement, Agora only works with “early-stage impact entrepreneurs that are commit[ted] to solving social and environmental challenges through business.” Once accepted, entrepreneurs participate in a six-month accelerator program that covers all aspects of sustainable business growth and helps these businesses to scale faster and get attention of larger investors.
That said, Agora Partnerships is not philanthropy. They only accept businesses with credible leaders who have prior expertise in the subject, and scalable ideas that can generate value for both the society and stakeholders. The selection process ensures that businesses already have at least a prototype of their product, some market base and the capital necessary to begin growing.
Founders also must measure and monitor their company’s social or environmental impact using the same rigor with which they track other business metrics. This further differentiates these businesses from non-profits, many of which do not quantitatively track their impact. The goal is to build a business that can compete against other investment opportunities on the market—and also offer the additional benefit of creating a positive impact.
Impact accelerators offer great potential for new businesses that target bottom-of-the-pyramid customers. The spread of impact accelerators in the developing countries could help those businesses take off. Doing so would significantly expand the scope of impact investment opportunities, thereby accelerating market-based solutions to social problems.