There is a growing phenomenon taking place in now in developing countries, particularly in Asia, that merits further exploration as one solution to addressing key development challenges in the area of sustainable agriculture, renewable energy, environmental conservation, health, water and sanitation, and access to electricity, and ICT. This is the concept of funding young entrepreneurs in developing countries to undertake innovative businesses that address pressing social problems by providing access to funding and business incubation for innovative businesses seeking to address the needs of the masses at the bottom of the economic pyramid.
Although such initiatives are blossoming in the developed world and Asia – they are in infancy in Africa- where innovation in addressing the pressing problems of the content, particularly in the area of youth unemployment, is greatly needed. Many African countries are struggling with the implications of climate change and sustainable agricultural production. In addition they also are still tackling long standing difficulties in providing health, sanitation, electricity, and education, not to mention creating employment opportunities to the majority of their populations, especially in rural areas.
The Social Business in Africa Initiative (SBAI) seeks to launch a pilot program of business incubation and venture funding for African entrepreneurs who are able to propose innovative solutions to the challenges faced by their countries in addressing the sectors mentioned above. Given the complexity of the some of the issues faced by African countries in terms of addressing the area of climate change, renewable energy, and Information Communications Technologies ( ICT) among others , the SBAI seeks to collaborate with the African Diaspora of the countries it targets. It is clear that there are educated Africans living in the US and elsewhere with expertise in these areas, who are often looking for ways to contribute to their home countries. The SBAI seeks to collaborate with them as mentors to the African entrepreneurs in their home country.
SBAI was launched through a research project entitled; “Addressing Poverty and Development through Funding Innovation and Socially Conscious Entrepreneurship in Africa with Partnership of the African Diaspora.” The research proposed that in order to address poverty and other pressing development issues in Africa, it would be effective to explore mechanisms that could spur the growth of social businesses on the continent. Social businesses are those that seek social as well as financial returns for investors.
The key project activities proposed under the project were research on best practice business incubators and social venture funds in Africa. Based on research findings, a model for promoting socially conscious entrepreneurship would be developed. In addition, a mentoring program involving selected experts from the Ethiopian Diaspora would be established. Once the pilot activity was underway, the objective is to replicate it in various countries.
This initial research stage of the initiative was funded through support from the Seven Fund - Enterprise Solutions to Poverty. This program has been undertaken by Partners in Development (PID). At this time, research has been completed and a project proposal had been developed. While the SBAI seeks implementation partners to establish a business incubator and social investment fund, we are undertaking an interim activity of dissemination information on social entrepreneurship and investment in Africa. In addition, we seek to profile promising opportunities for investment in selected social entrepreneurship ventures in Africa, starting with opportunities in the first pilot country, Ethiopia.
Business incubators are recognized as promoters of innovation. Their potential as promoters of entrepreneurship is relatively a relatively untapped strategy, at this time, in Africa. There are now business incubators springing up in various parts of Africa, largely due to the efforts of international development organizations such as infoDev, the IFC; and in-country from universities and in a few cases from government.
Research shows that the rationale for promoting the use of business incubators is that young companies are particularly vulnerable in their early/start-up years, and particularly in Africa where there is a higher percentage of inexperienced workers starting businesses. A lack of exposure to the formal sector’s mature corporate governance (due to a widespread lack of employment opportunities) means that there are a significantly higher percentage of students or inexperienced entrepreneurs trying their luck at starting companies.
It is recognized by experts that ICT start-ups tend to attract technology professionals with little business experience. Further, the start-up environment can be significantly more hostile in a developing economy, where services remain inadequate, inaccessible or expensive. It is broadly accepted that incubation programs can increase survival rates dramatically when programs are well-run and start-ups pay for services.
SBAI seeks to promote the growth of business incubators in Africa, as a means of providing much needed training and business support services to local entrepreneurs in selected pilot countries as a best practice demonstration model. One objective will be to utilize strategies that ensure the sustainability of the incubation centers beyond the initial financing period. The PID research team has interviewed Mark Davies at the BusyInternet incubator he established in Ghana and have attempted to include his recommendations in the proposed pilot business incubator.
The concept of financing innovation is an area that is relatively foreign to many developing countries, particularly those in Africa. Poverty reduction and finding solutions to development challenges has been relegated to the domain of governments who are often ill equipped in human resources to explore the use of innovation within their countries. Compounding this problem, is that there are few avenues for aspiring entrepreneurs in Africa to access funding, to launch start-ups, either from banks (which require significant collateral) or from any alternative venture capital type entity.
At the same time, in other regions of the world, there is a growing phenomenon taking place now particularly Asia, that merits further exploration as one possible solution to poverty alleviation/economic empowerment of unemployed youth. This is the concept of funding young entrepreneurs to undertake innovative “social businesses” through social venture funding and business incubation support. The key difference between a social business and a traditional business is that a social business pursues two objectives: (1) specific positive social impacts; and (2) financial returns as opposed to just the latter.
There is a strong case for supporting the growth of social entrepreneurship in Africa as the potential dividends are significant. The incentives include the identification of effective business solutions to social problems while creating much needed jobs for youth. All at the same time as providing reasonable rates of returns to investors, which can become competitive rates of return in the long run. The growth of impact investing in the developed world confirms recognition of the validity of investing in business activities that provide financial and social returns.
SBAI is seeking investment partners in order to establish a social investment fund, that provides equity and debt financing to African entrepreneurs intending to launch social businesses in their countries. It is expected that this investment finance will provide incentives for local entrepreneurs to undertake business activities in sectors they would normally not engage in.
One key strategy of the SBAI is to partner with the educated African Diaspora. The program will facilitate a mentorship relationship with African Diaspora subject matter experts. The Diaspora of many developing countries can play important roles in their respective countries over and beyond the large amount of remittances they send home annually. For example, in the case of China, the impact of the Diaspora has been dramatic. Almost half of the investment that flows into China is from its Diaspora. This includes financing, know- how, entrepreneurship, and human capital.
According to a 2007 Concept Note – Mobilizing the African Diaspora for Development by the African Union, the official estimate of documented ‘voluntary’ African immigrants in North America and Europe is about 3 million – one million in the U.S.A., 282,600 in Canada, and 1.7 million in Europe). More than one third of Africa’s highly qualified human resources are presently in the Diaspora. Statistics indicate that the Ethiopian Diaspora send 1 billion in remittances annually in official remittances to the country. Unofficial remittances are estimated to be at the same level if not more.
The concept states that the high rate of highly educated Africans who do not return to their home countries has had a debilitating impact of African public and private sector institutions. Public services and businesses lack qualified human resources; there is very low health to worker population ratios; university faculties have high student-faculty ratios; many state-owned enterprises have had serious management and financial difficulties and failed, and service delivery is considered the least effective in the world.
The Diaspora of developing countries can be a potent force for development for their countries of origin, through remittances and through promotion of trade, investments, knowledge and technology transfers.
A number of United Nations Resolutions have stressed the importance of developing indigenous entrepreneurial capabilities as a means of accelerating recovery and sustaining development. The Arusha and Nairobi Forward-looking Strategies for the Advancement of Women as well as the Abuja Declaration of Participatory Development (which defined the role of women in Africa in the ‘90s), have also emphasized the importance of enhancing the capacities of women entrepreneurs as means of increasing their contribution to economic recovery and development.
These strategies urgently demand that concrete efforts be made by African women entrepreneurs to develop stronger links between women entrepreneurs in all African countries at all levels to strengthen women’s capabilities to deal and cope with the increasing challenges of the global market in order to increase market share and eradicate acute poverty amongst women.
Social Business-Africa Initiative (SBAI) intends to promote gender equity in its program activities. This will be achieved by ensuring that at least 50% of the entrepreneurs housed in the incubator are women. The initiative also actively seeks to facilitate access to finance for women entrepreneurs operating social enterprises in the countries it targets.
The PID research team undertook desk research to identify best practice in business incubation and social venture funding in Africa and other developing regions. Two consultants were recruited to undertake two separate studies. A summary of some of the key findings were as follows:
Business incubators, as economic tools, have become increasingly common in the last decade and a half for stimulating local development. Incubators provide facilities and services which can include business planning and legal, accounting, and marketing support etc to catalyze small-business growth. In fact, incubated companies have dramatically shown higher rates of survival than those not benefiting from such services.
All incubators researched did have similarity in that they managed to get start-up grant or a sum of money given for free to get the incubator infrastructure facilities established. Large organizations such as the World Bank, through its infoDev program, has been instrumental in providing seed capital for some of the incubators. In the case of South African and Indian Incubators profiled their government has been the most important factor in providing help and support ----predominantly through financial interventions. In the case of the Ghanaian example though the government support has not been sufficient and the growth of incubators has been hampered by lack of positive policy making from the side of the government. In regards to information technology/Internet issues such as allowing IP routing and termination to minimize costs.
The majority of the technology incubators also had shown an affiliation with universities to gain from the centre of excellence and capture the new ideas incubated in the university research environments at an early stage. The academics and management of these universities have helped bridge the gap between the entrepreneurs in the incubator unit and the larger established industry of the country. This has been done by maturing the business ideas and allowing the incubates to access exposure and grants as well as collaboration to take them to the next phase of their development..
Social Venture Financing ResearchIt is clear that many of the organizations profiled experience common challenges in that they are closely tied to two fundamental areas of social investment and business incubation.The first major challenge is how to quantify social returns. In some case (for some metrics) this can be quite straightforward but the ‘improved health of a community’ for example, is not as simple to put some kind of an objective framework around. This factor also has a great deal of influence on the second major challenge, how to balance social return with financial ROI.
MetricsThe critical question of balancing and quantifying social returns against financial ones is a key challenge for a social investment fund. Even if it is not possible to derive quantified values for certain measures, it would seem that listing those measures down and employing values such as ‘High’, ‘Medium’ and ‘Low’ (which are of course subjective in their own right) is a useful exercise. Although a few of the profiled social investment organizations employ metrics systems of some sophistication, the simple Investment Performance Evaluation Matrix (incorporating SVA or Social Value Add metrics) employed by SPESA, one of the funds reviewed, seems to do a great job of capturing the social and financial elements important to SPESA’s approach of impact investment.
Business Support ServicesVirtually all of the organizations profiled offer some kind of institutionalized business support service if not outright incubation. This is partially recognition of the fact that many of the investments funded by impact investors are likely to be targeted at entrepreneurs and/or communities that may not generally have had the benefit of top quality education or access to resources/facilities to help them succeed in their undertaking. But another equally important part of the calculus that more traditional venture capital or private equity investors may want to pay attention to, is that it is simply good business for the investor to do everything possible for the investees to succeed. Such an approach ensures that investees are following good practices in terms of business planning, marketing and more furthermore allowing them to place more focus on the specifics of the business idea or innovation they are trying to execute rather than spending undue time figuring out generic business practices.
The degree of business support provided has been observed to vary in some measure amongst the organizations reviewed. For some of them, it has been restricted to assistance with business planning, mentoring and other consulting services (e.g. Root Capital). For others, it can run the gamut from a very comprehensive and hands on set of services (Villgro) and even extending to physical facilities such as office space, clerical assistance and more (Busy Internet).
The exact mix of business support that should be provided will be predicated on the perceived gap between existing capabilities in the target environment and what should reasonably be present in order to maximize chances of success.
MarketingAlthough the provision of marketing assistance to investees could legitimately be viewed as just a subset of the business support services mentioned above, it is treated separately due to the significant focus that this particular area receives across virtually all profiled organizations.It is an implicit recognition of an area which is particularly problematic for many new businesses particularly those involving new innovations. The best product in the world cannot succeed if it is not marketed in the right way and for new businesses in the developing world, it can be an especially challenging aspect of succeeding in business. This is of course doubly true for those seeking to export their products to developed markets – market linkages have long been identified as a significant weakness amongst most Sub-Saharan countries for example.
In some instances, the investors themselves have turned out to be the buyers for some of their investees leveraging a natural synergy that can exist by symbiotic relationships in a supply chain. Not only does the buyer/investor get access to a good source for its products, it is instrumental in helping establish that supplier and sharing in its success.
The PID team undertook field visits to two business incubators in Africa. The first one was BusyInternet in Ghana. The second one was the SME Solution Center in Nairobi, Kenya.
(i) Ghana- BusyInternetBusyInternet was founded in Ghana in 2001 with a unique mission to provide both commercial services as well as social and economic development. The company received a grant from the World Bank’s infoDev program. It is located in a 14,000 square foot former gas-bottling factory in the heart of Accra, Busy is in collaboration with two local investment companies (Fidelity Capital Partners and Databank). With a range of events, training, debates, as well as a growing community of IT entrepreneurs, the BusyInternet story has been featured in the New York Times, Wall Street Journal and is a key Ghanaian initiative focused on transforming the local economy to meet the opportunities of the digital age.
The Busy team is made up of over 100 staff. The company's ultimate aim is to become Africa's largest IT provider with new breed 'incubator' or an IT factory and an E-SAT to stimulate IT growth first in Ghana and later in other parts of Africa to ultimately provide income generating opportunities for disadvantaged populations.
The incubator provides an ISP, internet café accommodating 1,500-2,000 customers per day on average (providing 30% of revenue), as well as providing broad band services to corporate and SME clients (60% of revenue) and Data Storage (5 %), e-learning (5%).
BusyInternet has evolved from just being an Internet café /ICT business incubator to becoming an important social addition to the Accra IT community as THE ICT knowledge Hub, as a place people meet to discuss, as place small companies conduct conferences etc. It has attracted local and international attention. One can say it has developed a valuable brand name recognition for the services and scale of internet access it provides in the city.
(ii) SME Solutions Center (SSC) / IFC ProjectThe SSC is an incubation center financed and being operated by the International Finance Corporation (IFC). The Center was established to support the sustainable development of small and medium enterprises (SMEs) in Kenya. The SCC started as a pilot initiative in 2005 and its pilot status will end in June of 2010. Since that time 37 businesses have graduated from the center. The participating SMEs operate in the software, tourism, crafts, financial services, career development; real estate sectors among others.
IFC operates a Risk Capital Fund that provides financing ranging from 4- 40 million Kenyan Shillings for viable business propositions and qualified entrepreneurs. In the process of implementing this fund, IFC observed that most entrepreneurs needed information and guidance more than funding. Therefore, the decision was made to also establish an incubation center focused on providing key needs such as access to information; access to finance; access to capacity building; and providing a business enabling environment.
The SSC provides entrepreneurs with office space in a modern well furnished office building in an upscale neighborhood at highly subsidized rates (tenants are paying $40 per square feet as opposed to $ 350 per sq. feet). It is housed on the first floor where related IFC project staff is also located. The participants receive high-speed Internet; furnished office space (cubicles for start-ups); training in accounting/book-keeping; marketing; proposal writing; and IT support.
Currently there are sixteen participants in the incubation program. They have found out about the center through word of mouth and submitted business plans that were screened. The entrepreneurs range from start-up companies (conception to eight months); to those who have been in operation 1-2 years; and those who have been incubated for three years. Start-ups use cubicles and pay only $75 per month to use the incubator if they have their own computer. Those without computers pay $125 per month.
The normal incubation period is 18 months. There is some time gap as re-structuring for the next phase is taking place, therefore, some incubatees have been able to stay a bit longer than the designated 18 months. SSC often follows up with the participants that have left for a period of six months to track their progress.
PID has prepared a proposal for a pilot business incubator and social venture fund, based on the research undertaken, to encourage and support the growth of social entrepreneurship in Africa. We will focus on supporting entrepreneurs launching businesses in the area of environmental preservation; alternative energy; access to health services; sustainable agriculture; and Information Communications Technologies for development (ICT4D) among others.
The first pilot program is to take place in Ethiopia. The rationale is to implement a demonstration project to be followed by replication in various African countries. At this time we are actively seeking partnerships for this pilot initiative.