August 30, 2016 - Resources

Impact Investment Incubators and Accelerators: Engines for Growth?

As the impact investment sector continues to grow, it is important to understand and evaluate the role that impact-investment incubators and accelerators may play in driving value both for social entrepreneurs and impact investors.

What services do incubators and accelerators provide to social enterprises?

As with their counterparts in the traditional, for-profit space, social-impact incubators and accelerators provide a number of potentially valuable services for social enterprises. In a June 2013 survey of 52 incubators and accelerators conducted by The Aspen Network of Development Entrepreneurs (ANDE) and Village Capital, the surveyed incubators and accelerators uniformly reported providing mentorship from experts, access to potential investors, a network of partners and customers, and business skills development. Other key services provided by certain incubators and accelerators include direct funding, technology assistance, hiring referrals for team members, access to extensive alumni networks, media exposure, co-working or physical office spaces, and hosting a “pitch day” or similar showcase event.

How effectively are impact incubators and accelerators increasing value?

With respect to tracking the value created by incubators and accelerators for both social entrepreneurs and impact investors, an information gap currently exists. While tracking financial and social returns is a necessary accountability mechanism for impact investors to report to their sources of capital, most impact incubators have not kept up by tracking even basic metrics over time with respect to their alumni (such as revenue, profitability, or amount of capital raised).

In a survey of 54 social enterprises, the services ranked most valuable by companies upon graduation from their respective incubators or accelerators were (1) business plan development; (2) opportunity to pitch their business at a pitch day or similar event; (3) access to peer mentoring; and (4) business strategy planning support.

Surveyed impact investors generally valued incubators and accelerators for their intangible ability to strengthen the overall impact-investment ecosystem. However, investors were generally unimpressed with incubators’ ability to improve transactional efficiencies. A November 2014 report produced by ANDE, Agora Partnerships, and I-Dev International surveyed 18 impact investors equally divided between those focused on investments in early stage enterprises (less than $500,000 in revenue) and growth-stage enterprises ($500,000 or more in revenue). The report identified several key recommendations for strengthening value for impact investors, including the following:

  • Shift away from a standardized or “one-size-fits-all” approach towards mentorship tailored by the life-cycle of the social enterprise and/or the specific sector the social enterprise operates in (i.e. energy, public health, education, etc.);
  • Reduce transaction costs for impact investors by simplifying the due diligence and deal sourcing process for incubated entities (investors reported 63% of their operational budget was directed towards due diligence and deal sourcing); and
  • Incorporate investor criteria and expectations into the selection process for incubated entities.

Spotlight: Peer-Selected Investment Model

Village Capital is one organization that has developed a framework addressing some of these identified issues impact investors have raised with current incubators and accelerators. Village Capital, a nonprofit accelerator, operates an affiliated investment fund which selectively invests in its incubees based on a peer-selection model. Social entrepreneurs are first divided into “cohorts” of approximately 12 companies focused on a particular geographic region or sector. The companies in each cohort then rank each other based on six objective criteria with the two top-ranked companies receiving $50,000 or more in funding. Thus, as the social entrepreneurs move through the incubator, they receive sector or region-specific mentorship, both from the incubator and their peers, while being assessed against objective criteria that ultimately determines whether they will receive in-house financing.

From 2009-2014, Village Capital has invested in 51 companies through its peer-selected investment model, and its peer-selected portfolio companies have experienced a 93% survival rate over the same period.

Conclusion

As the impact investment sector matures, incubators and accelerators will continue to play an important role by providing resources and access to financing for social enterprises around the world. Incubators and accelerators can improve their value creation by better tracking data for their graduates and adopting industry-wide reporting and measurement frameworks. Moreover, providing mentorship to companies in a more tailored fashion and streamlining the due diligence and deal sourcing process for investors will enhance the ability for social enterprises to grow and obtain investment.