With the growing interest in social impact enterprises and
sustainable development goals, government departments, corporations,
foundations, and trust funds, are backing startups that are doing business for
good in the form of grants.
A grant is non-refundable funds given to individuals,
organizations, educational institutions, and businesses to fund a specific
project. They are usually competitive and proposals are submitted before one is
selected.
While grants may be a perfect way to get funds to kick-start
your start-up and gain valuable networks, if you are looking to make your
business sustainable, you are advised to avoid total reliance on them.
Villgro Kenya Chief Innovation Officer, Wilfred Njagi gives
his perspective on the limitations of grants to social enterprises. If you are
a social enterprise that has it’s funding strategy reliant on grants, not to
worry, he also offers alternative options to help you scale your enterprise
sustainably.
What are the
risks/limitations of a startup involved in ‘grant-preneurship’?
Wilfred: There are a number of risks associated with grants.
The first one is donor-dependence syndrome. Overdependence removes the
necessary pressure required to make a business sustainable. The danger is this
approach is that when the donor withdraws the startup is basically dead in the
water.
If you are not building a business, then you can go ahead and
raise grants but if you start out as a social entrepreneur who wants to apply a
market-based approach to address a social problem, then you can’t rely purely
on grants. You have to move away from grants as soon as you can.
The other risk is donor fatigue. Normally after deploying so
much money in a space or a sector and the impact numbers are not as compelling
to warrant continued spending in that sector it reaches a point where the
donors just get tired and withdraw from a sector.
Grants can also move your focus and energy from the core
business. If you get many grants from different organizations you are obliged
to report to them, each with different funding guidelines and reporting
metrics, you may find yourself spending more time reporting instead of actually
executing your business.
This slows down operations during reporting seasons due to
the limited bandwidth of time and team members.
If you are an entrepreneur who is serious about building a
business, once you have used grants to de-risk, to do market research, R and D
to validate a few assumptions, my advice would be to run away from grants as
soon as possible. There is space for them but do not get caught up in
‘grant-preneurship’.
Villgro Kenya has
previously employed grants and is moving more towards Venture Philanthropy can
you speak to that
Wilfred: There is an emerging thinking around blended finance
and in a much bigger context of venture philanthropy. Venture Philanthropy
looks at to administer traditional philanthropy with the discipline and rigour
of venture capitalists.
We have seen family offices, traditional donors like USAID
and GCC move away from a blank writing a blank cheque to milestone-based
financing. This phased investing approach ensures that the entrepreneur hits
some set their targets before unlocking the next tranche.
Another innovative approach by donors is repayable grants.
Once an enterprise has reached financial sustainability they are required to
repay the grant which can then be re-deployed to another deserving case.
Venture Philanthropy leads to better leverage for both the
startup and the donor. The entrepreneur ends up reaching the milestones faster,
scaling up faster and hence a much wider impact as opposed to pure traditional
grants where recipients just write reports.
Blended finance, on the other hand, looks at mixed
instruments. For example, if you are a family office, incubator or a donor you
typically would start off with a milestone-based in a phased manner and as they
continue to hit the milestones it reaches a point where they are fully/semi
de-risked to be considered for equity and other return-seeking instruments.
Villgro Kenya is going the direction of the broader venture
philanthropy and more specifically blended finance. We are likely to blend
grants and returnable instruments on a case by case basis. We are moving from
traditional grants.
A startup could start off with a USD20k-USD40k grant and as
they meet those milestones and prove their business models Villgro Kenya might
consider them for additional funding of up to USD50-USD200K returnable capital
(equity/quasi-equity).
Villgro Kenya addresses the lack of access to quality and
affordable health services and technologies in Africa by investing in
innovations with the potential for scalable and sustainable business models and
by offering technical assistance to entrepreneurs.
Discussion about this post