What Aid Agencies Can do to Boost Social Enterprise

(Reposted from Devex and Nextbillion)

Last month, I called the disaster preparedness division of a leading international aid agency. As an investor in early-stage social enterprises, I had hoped to find institutional customers for some of the social enterprises producing cookstoves, water purifiers, rapid affordable housing, and solar-powered lighting and charging devices.

I asked if the aid agency would be interested in purchasing solar-powered lanterns or other products (the answer was no). They asked if our portfolio companies might be interested in donating those products (no).

Despite being committed to similar goals and genuine interest in working together, there seemed to be few productive ways to continue the conversation. The aid agency’s model was to provide necessary services subsidized or for free, sourcing monetary and in-kind donations from businesses and governments in the industrialized world.

As if the difference in our approaches to poverty reduction weren’t enough, we were also seriously mismatched in the scope of the industries we represent. In 2009, official development assistance – excluding the money coming from private donors – topped $100 billion. The entire impact investing industry – the source of funds for social enterprises, narrowly defined – was worth $50 billion, according to the Monitor Institute. Only a fraction of that was actually put to work.

What is the traditional aid community to do with this upstart field that doesn’t fit existing models, brings new and unfamiliar voices to the table and, frankly, is often dismissively critical of international humanitarian assistance?

Aid agencies have the capacity to nurture this growing field into a powerful set of new partners in their efforts to rid the world of poverty. If not handled with care, however, the growing interest in social enterprise may overwhelm a fragile, nascent network still finding its voice. Here are five ways aid agencies can constructively engage social enterprise:

Teach us.

Aid agencies have a hundred years of practice with some of the most painful questions that social entrepreneurs face, from how to distribute products cheaply and effectively to how to deal with prickly local governments. By serving on the advisory boards of social enterprises, aid experts can walk entrepreneurs around some of these potholes.

Introduce us.

For decades, aid agencies have worked to develop relationships with the local NGOs and customers social entrepreneurs seek ties with today. Upstream, aid agencies have longstanding relationships with foundations and governments in the industrialized world that have begun to experiment with microfinance and social investment. For the time being, aid agencies have the power to choose which social entrepreneurs have the most promise to impact the lives of the poor, introducing them upstream to deep-pocketed funders and downstream to trustworthy local partners.

Educate consumers.

As hard as design students try to make them intuitive, some of the products with the potential to impact the poor (like fuel-efficient cookstoves) may require too much customer education to be profitable. One of First Light Ventures’ investees, Under the Mango Tree, has diffused this dilemma by training Indian farmers through its nonprofit to keep bees in order to increase their crop yields, while its for-profit arm distributes the honey that these farmers produce.

Giving away or subsidizing cookstoves runs the risk of crowding for-profit players out of the market; helping educate poor consumers in how to use them effectively, however, could open up rather than choke off new markets.

Fund pilots and R&D in areas where private capital won’t go.

In a recent interview with the Global Impact Investing Network, Overseas Private Investment Corp. CEO Elizabeth Littlefield said that OPIC invests “where the markets are most difficult, where other investors won’t yet go, but where real opportunities await.”

Nonprofit capital was essential in the early stages of microfinance; today, thanks to that early and risky investment, microfinance attracts capital orders of magnitude larger than those nonprofit players could provide. If aid agencies eschew areas that attract private capital (mobile money) while focusing on areas where private capital won’t go (rural distribution chains), aid agencies can absorb risk and kick-start new industries.

Fund and develop entrepreneurs.

Perhaps the most valuable resource at aid agencies’ fingertips are its people. In economies with few opportunities for highly educated young people who choose not to emigrate, posts at aid agencies – with high salaries, benefits, job security and international exposure – are highly prized. Imagine that local talent were actively encouraged, supported, and funded to launch their own ventures in their own countries, backed by the international juggernauts in which they developed professionally.

Moving forward

By helping us source local entrepreneurs, explore new sectors, educate customers and build networks, aid agencies can play a pivotal role in the growth of social enterprise. My hope is that these are but five ideas that can spark a wider discussion about the opportunities for collaboration between aid agencies and social enterprise. That collaboration may require some effort and some realigning of incentives; the task at hand requires nothing less.

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