How to leverage development aid to build your enterprise and start-ups?

Know the context: I did not use social enterprise in my title and there is a reason why. By principle, development aid is channeled towards interventions that would generate the desired impact for the targeted households. As such, by design, aid is meant for social impact. It therefore (typically)does not matter whether your enterprise is defined as social or not or whether it is a start-up or a established venture. The first question is whether your venture is solving the problem that the aid is mandated for and whether it has the promise to scale and sustain.

Understand how development aid works: It is a very complex web. This discussion is limited to a very small part of the whole eco-system that is relevant for this topic. Take note- Aid can be direct and it can be indirect. The direct approach involves channeling the fund or the intended service directly to the targeted beneficiaries through the management contractor of the project or the program.

The direct approach is used primarily in humanitarian context (post disaster relief, refugee setting), for social services (health, education, water, sanitation, hygiene) and to address cross cutting themes (gender, climate change, technical and vocational education and training for skills development). In the direct approach, the management contractor will usually hire service providers to deliver the critical services- for example, cash aid, direct food assistance, skills training, installation of water stations, installation of hygiene latrines, building capacity of teachers, undertaking behavioural change campaign on gender based violence). The direct approach is still to certain degree applied by some donors for cottage, small and medium enterprise development where the management contractor provides range of technical assistance, grant and market expansion support to the CMSMEs.

In the indirect approach, the management contractor engages range of private sector enterprises who are supported to build solutions that will scale beyond project's scope (beneficiary, location and duration). This approach is also applied for social services sector and to address the cross cutting themes and CMSME competitiveness. However, the mandate shifts from directly serving the end beneficiaries to investing capacity of the private sector to sustainably addressing the issues. Projects that are mandated to address these issues will provide catalytic funding, matching grant to selected private sector enterprises to develop, trial and scale solutions. The projects that are working on agriculture, fisheries and livestock, financial inclusion (including insurance), industrial value chain development, service sector development provides such catalytic funding or matching grant along with technical assistance.

Globally, projects working on humanitarian contexts, social services, and cross-cutting themes are shifting towards a hybrid approach that involves both direct and indirect form of development assistance.

In this grand landscape, only a fraction of aid projects have exclusive mandates to support start-ups. Development aid has somehow equated start-ups to youth based organizations. The interventions thus focus on incubation and acceleration support with small grants to start-ups led by young founders typically on deeply entrenched social problems (related to social services, climate change). The support and funding landscape here can be dwarded by the total fund managed per year by an established NGO in the Northern or the Southern districts in Bangladesh.

Leverage:

(i) By directly servicing the international development partners as clients: If you have a solution to support safe cash transfer to the marginalized households then you can support an extreme poverty alleviation programme or a relief programme that transfers millions of dollars to the households. Cash transfer is now shifting to digital methods. All the leading MFIs of Bangladesh are now being engaged by the donors. This example should help you to understand that the aid programs and projects, along with the international development partners can be your biggest client. Some of the established start-ups in Bangladesh that I know make the most of their revenue by servicing the development projects. In the business model canvas, you need to shift organizations in international development from being 'key partner' to be 'institutional buyer' under the revenue stream. This approach also helps you to establish territorial presence and to acquire the end customers who you can serve through differentiated products. It does not really matter whether you are established or new. The beauty of aid is that it is flexible. As long as you have the right product to serve the clients, they will procure your service.

(ii) By using catalytic fund or matching grant to meet your development goals: The biggest challenge of social ventures is that the services that are provided are often taken as public good and the services are meant for people who cannot pay! This means you are solving problems that are sticky and that have a thin market. Development aid can help you to subsidize your market entry and market expansion through two arms - (i) funding that helps you to acquire technical and technological breakthrough (ii) funding that helps you to provide subsidy on the product price to acquire the target customers, increase your economies of scale. You can also avail services from individuals and institutions from the host country (aid provider) at a concessionary rate. Besides, they will give you access to downsteam investors for your venture. Enterprises also use catalytic funding or matching grant to develop a concept or to proof a concept. The results then can be used to attract investors. Besides, you can use aid funding to undertake market research, develop collective agencies through your associations or business networks. In my two decades of work, I have scores of successful cases on each of these arms and I hope to share them separately.

(iii) By acquiring goodwill: Your engagement with international development partners provide a strong message to both your customers and your investors about your credibility. Development partners know this. As such, while making an entry to a competition and getting awarded is relatively easy, it is much more difficult to get catalytic funding or matching grant. There is flexibility from the perspective that depending on the appetite of the project, the management contractor and the donor, your current size or scale of operations may not matter as long as you have the right solution and the agility to adapt. However, the due diligence process is complex and can be frustrating. Even more frustrating will be the reporting requirement as aid is report hungry for obvious reasons. All of these mean that only a fraction of enterprises that enter in the system eventually become successful or stay for the long action. But this is also good; it offers a goodwill. A symbol of trust to those who stay and build for the longer action. If you have made an entry to the system through an incubation program or a youth focused start-up program, be aware that you have just got a share of the smallest of the supports that you can avail.