Investing in Inclusive Innovation

Nicolas Chevrollier
By on September 24, 2014

One of the major challenges facing the emergence of BoP ventures is the lack of investment capital available in early stages of an inclusive innovation development. Here I would like to share my thoughts on the latest developments that we have witnessed at the BoP Innovation Center on investing in inclusive innovation.

Inclusive Innovation opportunity

The people living at the BoP lack proper access to basic goods and services such as food, water, clothing and housing resulting in stringent challenges like chronic malnutrition or increase health issues. The private sector can play a pivotal role being a driver for sustainable growth and self- reliance of BoP communities and ultimately mitigating these challenges. For the private sector, this is also a growth avenue as the size of the overall market opportunity for essential goods and services for the BoP – housing, rural water delivery, maternal health, primary education and financial services – was estimated as representing a $400 billion to $1 trillion market opportunity over the next ten years.

 

Inclusive Innovation:
“Something new with sustainable impact for and with the BoP”. The novelty can be in the form of a product, services or process. Inclusive Innovation is about harnessing science, technology and innovation know-how in order to address the needs of the BoP.

To address these markets, conventional product development and innovation strategies are most of the time incompatible with the conditions and constraints present at the BoP. There is a need to enhance the capacity of market-oriented alliances in order to tailor innovative products and services for unusual markets balancing the four A’s: affordability, accessibility, availability and acceptability, and create market based pro-poor innovations or inclusive innovation.

Financial gap

However, in developing countries, market and financial sophistication score poorly and local entrepreneurs are challenged to find (financial) support in pre-seed/seed phases of innovation from existing financing institutions. These phases of innovation, the so-called Valley of Death, include the transition from applied scientific research to the development of a proof of principle, the development of working and production prototypes, and the product creation and introduction. In a nutshell, this “valley of death” is a gap (in time and money) between commencement of a venture and generating a positive cash flow. Later stages of investment (after positive cash flow) are better served by existing financial institutions and informal and formal investors. Besides the stage of financing itself, the amount of money requested in this early stage is smaller than average. Financial institutions or informal – and impact investors tend to move to amounts higher than USD 1 million and do not serve this particular area. Another consequence of this finance gap at the early stage of an innovation development is that deal flow towards more mature financial instruments (e.g., VC) tend to be challenging to sustain due to a limited amount of investment ready cases.

I truly realized the level of this gap attending Put Your Money Where Your Mouth Is Community-event in Amsterdam early April, bringing together families, angels, and entrepreneurs who use their money and mission to create positive change in the world. It was a very dynamic event to understand the work of organizations like Root Capital (financing grass-root entrepreneurs in developing countries) or the view of commercial banks like Triodos around impact investment. One obvious conclusion is that wealth managers and traditional financial institutions are very much willing to enter the space of investing in ventures with significant social impact. This is very positive development in the field of impact investing, but as obvious was that the focus of this investment remains in growth financing, not in supporting early stage innovations.

Existing solutions

At the BoP Innovation center, we are currently designing a financial instrument that would support inclusive innovation. To do so, we have looked at a variety of emerging instruments to provide adequate financial mechanisms in this pre-seed, seed stages of innovation development. Few examples include:

From donors

– Development Innovation Ventures from USAID that supports new applications of technology, new service delivery practices that lead to transformative improvements to development outcomes.

Innovation Against Poverty from SIDA supports with small and large matching grants, and guarantees new product / service / market system development that would otherwise not have taken place due to perceived risk or uncertainty.

From government

– India Inclusive Innovation Fund (IIF). The IIF will provide funding to BoP-focused companies across the venture development cycle – both in early and in growth stages.
– A nascent movement can be found in more innovation funding/ideation mechanisms based on crowdfunding (enviu) or peer-review selection (village capital) are also emerging. However, these examples remain the exception as most current impact investors still behave like traditional investors, being quite risk averse and looking for sizable investments. Consequently, many inclusive innovation propositions fall short on their selection criteria and are not sufficiently ‘investment-ready’.

Way forward: Inclusive Innovation Hub

At the BoP Innovation Center, we believe that a new hybrid structure must be established to play a catalyzing role in making inclusive innovation cases investment-ready for early-stage social impact investors. Business cases will be innovative and financially viable and – most importantly – will promise to improve the wellbeing of low-income groups at the Base-of-the-Pyramid at a larger scale. This structure will combine the will and strength of the donor community in investing in inclusive innovation (particularly true in the Netherlands) with the innovation mechanisms (like crowdfunding) promoted by the BoP Innovation Center and its partners. Our challenge this year is to design and launch this structure to support actively inclusive innovations.