Scaling High Impact Startups: Challenges & The Right Kind of Support (Article 1 of 3)

I-DEV teaching the iHub Traction Camp in Nairobi, Kenya. Traction Camp was a program created to prepare high impact entrepreneurs for the investment process and long-term growth. Photo Courtesy of I-DEV Africa and I-DEV International.

By Patricia Chin-Sweeney, I-DEV Co-Founder

Over the years, I’ve been asked to speak at various conferences as well as advise a range of clients on programs to support and grow high-impact startups and social enterprises. The company I co-founded 9 years ago, I-DEV has advised over 50 impact and investment organizations in this area, including on incubator and accelerator design, impact investment fund structuring and follow on support programs, due diligence and screening processes and impact investment thesis and strategy. We’ve also advised over 350 early to growth stage high-impact companies across 45 countries on strategic and growth support, and a few multinational corporations as well.

At the SEED Conference hosted by the Impact Hub SF last year, the question was posed, “What continued support can we provide to companies beyond an incubator or accelerator and final demo day?” This article and 2 follow on pieces outline take-aways from the SEED Conference, as well as some other insights I’ve gained from helping companies through I-DEV to scale. In particular, these articles focus on high impact startups operating and focused on providing products and services in challenging contexts, especially in Latin America, Sub-Saharan Africa, and Asia. But many of the insights and resources included apply globally.

The Reality & Challenges

Startups need a range of support. When you factor in business models that target emerging markets, low income communities and a large, lower-margin customer base, steep learning or product adoption curves, and a trickier investment landscape, this obviously poses an even greater challenge! Incubators/accelerators provide valuable community, baseline training and business planning prep for concept to early growth companies. Many also focus on investment readiness, yet the elephant in the room is that most companies continue to struggle to raise the capital they need to implement the very plan they hone during these support programs. And they often struggle for quite some time - raising only smaller pools of funding or none at all.

Then, there’s the issue of who is able to raise capital…

In the United States, nearly 80% of investment capital goes to companies in three states, less than 10% goes to women, and less than 5% goes to black or Latino entrepreneurs.

In East Africa, where the majority of early stage investors are foreign, investors tend to rely on an in-group bias-specific small networks (expat-heavy) that lead to a recycling of the same pipeline, which not surprisingly also tends to be expat biased.

Ninety percent of disclosed investments in East Africa for 2015 and 2016 went to startups with one or more European or North American founder…

This has left many local founder-only companies in the dust. Beyond that, among those who raise capital, only 10% go on to raise Series A and B rounds. All these stats and more can be found in Village Capital’s Breaking the Pattern report, released in June 2017. While raising capital is not always a success metric or primary goal of incubators/accelerators, it is a universal indicator of long-term growth and sustainability potential, as most companies will need capital to scale at some point!

Questions That Often Arise

  • What support is needed and effective for early to early growth high impact startups? Where are startup support programs falling short in providing that?
  • How do startups raise the capital needed to implement plans built during incubator/accelerator programs? Or in general?
  • Who pays and how when startup founders are cash-strapped, and so are the support providers?

What Startup Founders Want: 
More Bespoke & Senior Level Support, Please!

We know our business, but what we really need is help raising capital- getting materials ready - the pitch deck, the term sheet - and support and insight into appropriate investors. Partnerships, new clients, in-depth ad hoc items as well when it’s beyond core expertise.”

Most founders agree that structured programs such as incubators and accelerator are valuable, but not enough. Capital and ongoing bespoke support targeting an individual business’ challenges, such as operations, pricing and customer acquisition, distribution, tech development and HR require expert support or at the very least, a focused advisor, and ideally some capital to pair with the consulting support so implementation can happen when it’s needed most.

What Startup Founders Want: Capital to Execute

If this was Y Combinator, demo days would be enough because companies get funding to begin with, plus they are essentially guaranteed another $2M in capital raised through YC’s strong investor network.”

Y Combinator is often highlighted as the star of Silicon Valley’s tech startup accelerators because of the startups it attracts, its track record, and a carefully curated and managed investor network. Not to mention, the company invests capital into its cohort, in addition to support. So perhaps if Y Combinator were the norm, the fine tuning of the data room (materials investors expect to see) and other general investment readiness prep would be already addressed or less important because investors in the network trust in Y Combinator’s screening and due diligence capabilities. However, at SEED, founders in the room agreed that YC’s model is not the norm, and most companies still need this bespoke investment readiness and strategic growth support regardless. Furthermore, in the impact incubator/accelerator space, there are a number of other factors that influence the focus of a program. For Y Combinator, successful exits and capital raise are the key driver. Many impact programs are focused on business model strengthening and priming, or helping to develop the impact strategy. The vast majority of impact programs also don’t take equity stakes or provide capital like a Y Combinator or 500 Startups does, so some might be focused on success aligned with funders’ impact priorities.

What Startup Founders Want: We Need Investment Now, Not a Year From Now…

Another often unspoken reality is that even if many of these programs know investors, most investors do not move fast, especially many of the impact investors, so capital from the program or a lot of support to develop a bridge strategy to keep the lights on and progress forward during the capital raise is key! I-DEV has worked with over 40 companies to raise growth capital from impact and emerging markets VC and PE investors, so I can unfortunately very confidently tell you that if you’re lucky and all stars align, you may raise a small $250k or less round of capital in 4–6 months. More likely, it will take you 8–12 months to get from conversation to serious conversation to due diligence for green light approval to green light committee review and approval (or follow up questions) to due diligence to Investment Committee review and approval (or follow up) and then term sheet negotiation, legal due diligence…and finally, actual capital disbursement!

Questions to Ask When Seeking the Right Support

For these reasons, founders should but don’t always investigate these questions before entering a program or engaging third party support:

  • What are success metrics the organization targets, and track record?
  • What is the impact thesis, e.g. global scale vs. deep local impact, impact returns 1st vs. financial returns 1st, etc?
  • What is the internal expertise of staff, coaches, and program presenters, consultants or built into the immediate networks offered?
  • Who are the program funders and board, and how has that influenced the answers to the questions above? Or for third party advisors, who have been other clients?
Courtesy of Conveners.org. Screenshot from https://conveners.org/accelerator-selection-tool/

Quick Take-Aways

  • There are plenty of incubator and accelerator programs out there, but do your due diligence to make sure they offer what you need! Or build a parallel strategy to fill the gaps.
  • Founders want more bespoke support to tackle specific issues such as capital raise to customer acquisition strategy
  • Founders need capital to implement growth, and an interim bridge strategy to keep the lights on and business model on course while waiting out the grueling investment process

Resources