This post originally appeared on WRI Insights.
By Aram Kang
Over the past few years, we have seen tremendous growth in impact investing, investments made to generate both a financial and a social/environmental return. The sector now manages about US$40 billion.
While this growth on the supply side of mission-driven capital has been tremendous, we must now focus on the demand side — in other words, the entrepreneurs themselves. It’s essential to ensure that there are enough entrepreneurs and small and growing businesses (SGBs) out there to address today’s complex, global challenges. These businesses must also have the capacity to take on the type of capital that impact investors have to offer. Accelerators and incubators are and will be increasingly critical to achieving these goals.
Accelerators are groups that provide business development support to enterprises with existing customers and revenue, while incubators typically serve earlier stage enterprises (pre-customers and pre-revenue). These types of groups can help grow environmental entrepreneurship by ensuring that demand meets supply; in other words, a strong pipeline of deals is ready to meet the growing supply of capital.
Accelerators play a significant role in linking capital to entrepreneurs
SGBs are defined as growth-oriented small and medium enterprises (SMEs) employing between five and 250 people and seeking between $20,000 and $2 million in investment capital. As highlighted in the recent WRI publication, Voices of the Entrepreneurs, many of these enterprises have the potential to create beneficial social and environmental impacts as well as financial returns, but they’re often not considered “investment ready.” They sometimes face constraints to human capital, access to finance, and access to markets. They have difficulty attracting the right type of capital, due to a lack of business training at the early stages of their growth. Particularly in innovation-driven sectors—where environmental enterprises often operate—entrepreneurs face a critical skills gap in growing their companies from the prototype stage to expansion stage.
Business accelerators and incubators can play an important role in filling this gap and helping SGBs build their capacity to attract and manage capital for long-term growth. Incubators and accelerators like New Ventures and others in ANDE’s network can help entrepreneurs by:
- Providing basic business skills training to entrepreneurs, many of which have technical expertise but don’t come from a business background
- Providing networks and connections to other entrepreneurs, mentors, investors, and business partners
- Conducting market research, facilitating the investment process between entrepreneurs and investors, and training people to manage a growing business
How can we accelerate accelerators?
While WRI’s New Ventures accelerator program has been in operation for more than 13 years, the majority of accelerators in emerging markets are relatively young (founded after 2006) and small (a recent survey of 25 global accelerator programs conducted by Village Capital found that most have fewer than 15 employees). We still don’t know much about what SGB models are the most successful in emerging markets, what kinds of services entrepreneurs find most essential, and the value SGBs create for investors. So, a huge question for the industry is: “How can we accelerate accelerators to scale SGBs that have positive financial, social, and environmental impacts?”
ANDE recently engaged a range of key stakeholders—including incubators, accelerators, investors, foundations, and development finance institutions—to identify three critical issue areas and research questions to inform how to accelerate accelerators. They include:
- The first is a question on pipeline – How do accelerators currently source enterprises for their portfolios, and how can we help them expand and diversify this pipeline?
- The second is a deeper focus on operations. This involves carefully documenting the services accelerators provide to entrepreneurs, as well as how well they address barriers. This also includes a better understanding of the different funding models and how accelerators compare to best practices in developed economies.
- Finally, accelerators’ performances need to be better evaluated by comparing SGBs that receive acceleration services to comparable enterprises that do not. Do accelerators help reduce costs for investors performing due diligence on potential investments?
Exploring these unknowns—and finding solid answers to them—can help accelerators and environmental entrepreneurship grow. Answering these questions will allow entrepreneurial firms to make more educated decisions about whether to join an accelerator—and if so, which one. It will inform accelerator managers about best practices and provide mechanisms to improve services and performance. Finally, foundations, investors, and development institutions will be able to assess the impact of their investments and identify strategies to scale or replicate successful incubator and accelerator models.
We already know the hugely beneficial impact SGBs can make in developing nations. As we noted earlier in this blog series, entrepreneurs and the SGBs they create contribute up to 78 percent of employment and more than 29 percent of GDP in developing economies. Now it’s time to focus on expanding and improving the accelerators and incubators that help these entrepreneurs grow.
This post was co-written with Saurabh Lall, Research Director of Aspen Network of Development Entrepreneurs (ANDE) and first appeared on the WRI Insights blog. ANDE is a global network of over 170 member organizations that focus on the potential of small and growing businesses (SGBs) around the world to create economic, social and environmental impact.