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Tackling the Sustainability Challenge: Sector Report

By November 13, 2015 No Comments
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We’re excited to announce that last month we released our first every Sector Report, “Accelerating Change: Tackling the Sustainability Challenge in For Impact Accelerators in India & Beyond.”

For organizations like UnLtd India in the social entrepreneur support space, sustainability (either through market means, grant support or a combination of both) is a buzzword that we are confronted with often. But truthfully, it is something that we at UnLtd India, an incubator for early stage social entrepreneurs, are still wrestling with. Should we be able to sustain ourselves through market means alone, or will grant funding always play an important role in our revenue model? What innovative approaches to revenue generation are being successfully implemented by other accelerators?

These are big questions for both UnLtd India and the sector at large. So we set out to collect some data and better understand the market in which we operate. We interviewed and analyzed 15 peer organizations across five countries (concentrated in India) in an effort to better understand best practices around fundraising and market revenue generation.

Some of our key findings included:

 

Grant funding is and will likely remain n a critical source of revenue for impact accelerators

More than 85% of overall impact-accelerator revenue in our sample came from grants. Although many accelerators have or plan to launch revenue-generating services, balancing an impact focus with profit making—especially for firms working at the idea stage and in developing markets—is incredibly challenging. None of the impact-focused accelerators interviewed were financially sustainable from market activity alone.[1]

Accelerators are working towards long-term sustainability

Given that independence from grant funding is not a realistic definition of sustainability for many impact accelerators, how can we tell if we’re making progress? For many accelerators in our interview, a big piece of the sustainability equation was creating balanced and diverse revenue streams to smooth funding fluctuations and reduce risk. As accelerators in our sample matured, they tended to supplement revenue from grants with money generated from a diverse range of sources including consulting, research and corporate engagements. This blended approach contrasts with most purely commercial accelerator revenue models, which tend be supported through financial services to investees and rental income.

The science of finding the right balance of philanthropic and market services is still very much being developed. Indeed, accelerator and investee characteristics, such as geographic, sector and venture stage focus, often play a significant role in the viability of various options. That said, some general best practices and observations have emerged.

  • Connecting entrepreneur needs to Corporates and HNIs presents a revenue opportunity for accelerators. Accelerators can act as an important bridge that connect inspiring entrepreneurs with real business needs to corporate High Net-Worth individuals interested in making a difference. Accelerators like Dasra have monetized this through an innovative partnership with Vodafone’s World of Difference program, where Dasra matches and manages 8-week consulting engagements for Vodafone employees with Dasra investees across India. Social Venture Partners uses a similar process to engage its HNI donors. Using its needs analysis system, SVP maps its investees’ strengths and needs in areas like marketing, legal and technology– matching them to qualified SVP donors interested in doing pro-bono work.

 

  • Serious equity returns are still far-off. Although four of the impact accelerators and networks we interviewed see equity investments as a key piece of their long-term sustainability strategy, none of the impact accelerators in our sample have seen returns from their equity positions. This can in part be attributed to the fact that nearly all of the accelerators in our sample were less than five years old, which is likely too short a period to expect returns. Other contributing factors include the relative scarcity of exit and follow-on funding opportunities for social ventures, as well as the tendency for social ventures to have smaller profits—making returns to equity investments more difficult to realize than in commercial accelerators.

 

  • Convertible debt is a good equity alternative for many accelerators. Convertible debt is like an equity loan hybrid where an accelerator gives a loan to an entrepreneur that may (if the accelerator chooses) be turned into equity at a later date (usually at a funding round). Under this type of arrangement, an accelerator may choose to convert its loan into stock. Convertible debt has two distinct advantages for impact accelerators and entrepreneurs. One, it allows for accelerators to recoup some of their investment as a loan—without putting pressure on the entrepreneur to find an exit. Two, convertible debt delays the issue of valuation until a follow-on funding round, helping to align entrepreneur and accelerator incentives around achieving the highest valuation.

 

  • Success fees and give back. In many countries, strict laws govern the types of fees that a non-profit can charge—making it difficult for many accelerators to take equity or issue loans. Voluntary give-back programs can offer a low-cost, low-risk way to generate revenue without the legal challenges. They can also generate revenue for accelerators in a shorter timeframe and have been used effectively by several in our sample. In order to get the most out of a success fee or give-back model, accelerators must set clear repayment milestones with investees and formalize systems for monitoring progress against them.  Accelerators can also consider diversifying repayment options to include in-kind donations of time, but must have a transparent and fair process for calculating and tracking the value of the entrepreneurs’ time.

 

  • Consulting and research can be an important source of revenue but are most successful with dedicated staff and sector-specific expertise. Consulting and research were two of the most significant forms of market revenue for accelerators in our sample, and represent promising market opportunities for accelerators –especially those with a specific sector focus and dedicated research staff. Having a sector focus allows these firms to more effectively engage corporates and foundations with specific interest areas, while dedicated research teams give the accelerator the needed credibility and bandwidth to follow through. In addition to some monetary rewards, consulting and research activity can also create positive synergies with existing incubation and scouting efforts by deepening the accelerators knowledge, needs and networks within a particular field without spending their own money.

[1] One accelerator that was not impact-focused was profitable from its equity positions alone

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