Few years back, I was part of a group discussion inside New Delhi office of International Finance Corporation (IFC) about how social responsible enterprises can be supported to grow and become mainstream. I presented some ideas there for discussing. Those were either adopted and modified ideas, or in few cases my own ideas. All those ideas were modified/developed based on my understanding of the situation on the ground, which itself had its basis in my reading and experiences with small enterprises in India.
In this post (and the next), I have taken a few of those ideas and tried to briefly explain those in the context of building an innovation ecosystem for governments i.e. how governments (or their representative organizations) can positively intervene to build a strong innovation ecosystem.
We can usually divide these ideas into two categories (i) investment based ideas, and (ii) non-financial support ideas.
Investment Based Ideas
1. Domestic procurement: Often, strong and competitive teams with good ideas don’t find it extremely difficult to raise funds from angels/VCs. But after having built a product they find it very hard to sell it i.e. often finding the first big (paying) customer becomes the biggest obstacle in growing as a company. So if the governments really want to promote entrepreneurship and reduce reliance on foreign vendors, it has to start with building procurement programs that experiment with a lot of local vendors for pilot demonstrations. Based on the performance in the pilot projects, it can then award bigger deals to the competent local firms. This process would involve facilitating or providing purchase loans to service the orders (i.e. advances to the awardees for delivering) either directly or through banks. It should also include provision of advisory support to meet the quality standards that are expected by the government.
2. Exit facilitation: In this, the idea is to design a new investment instrument, which is like a commitment/guarantee of exit to other funds making investments in start-ups/SMEs if pre-decided milestones are reached and certain conditions are met. This instrument could be made available at the deal basis (or maybe at fund level) and made available to all VC and angel investors in the country or globally at a price. Assumption here is that these funds would follow best rated investment governance e.g. investment criteria, monitoring requirements, Technical Assistance plan to make their investee companies become investment worthy for the government or its appointed entity (e.g. a sovereign wealth fund) over a period of 3-5 years. This means, the govt. will commit for investments/buy-outs in to specific SMEs/start-ups (i.e. giving exits to funds), if quality deal flow is ensured by the funds buying a right to join such a program.
The rest of these investment based ideas listed in this post are almost always discussed in the circle of individuals/organizations working on building innovation ecosystems talk about. I am still mentioning these because these can’t be ignored as they address genuine needs in the market.
3. Working capital finance: Almost always start-ups and SMEs find it really hard to raise working capital based on their cash flows alone (i.e. without collateral/security) or against the big purchase orders from their clients (becomes idea 1 above, if govt is the buyer). Addressing this gap through some special investment facility or by supporting some independent fund providing such short term loans could provide a great boost to the growth of start-ups and SME which need such debt.
4. Launching Sector/Industry specific financial products: Investments and/or insurance products for different sectors/industries could be designed and rolled out through investments in financial companies willing to provide such offerings. Understanding and managing risks through highly specific financial products is more feasible and sustainable than the generic approaches for all social enterprises e.g. financing scale-up of schools, maternity centers, providing working capital finance to livelihood collectives and insuring players of an industry again regulatory risks, weather, etc.
5. Mobilizing Large Scale Funds for Early Stage Financing: In order to have a steady deal flow of growth stage companies for the VC/PE investors, early stage investments need to happen in much larger numbers. Mobilizing large scale funds from sources which have the appetite to make risky investments (e.g. government, donors) in early stage social enterprises is very critical for building a strong ecosystem for such enterprises i.e creating the required momentum towards making this sector equally attractive as regular businesses for investments in the future. Investment size in such deals is expected to be in the range of $100,000 – 500,000.
In the next post, I will write the little bit I know about non-financial ideas.