Updated: Jun 30, 2022
An interview with Maggie Flanagan on growth and sustainability of social enterprise incubators.
Recently, while drawing a strategic plan for engaging with our network of incubators, I was prompted to look at alternate and admittedly much more ‘diluted versions/definitions’ of sustainability. This pushed me to address the proverbial elephant in the room: Is impact incubation self-sustainable? Will it ever be? While I had multiple opinions about this, I thought I’d rope in an expert to speak on this subject.
I decided to interview Maggie Flanagan of The Lemelson Foundation - a long time partner, supporter, and champion of Villgro’s work. Maggie has been an entrepreneur in the past and is now on the funding side of the ecosystem as a Program Officer at The Lemelson Foundation. Here is an excerpt from the interview.
Q. There has been a significant increase in the number of incubators over the last decade, but very few success stories of them becoming financially sustainable. Do you think a pathway towards sustainability is possible?
Outside of the high-profile accelerators for high-profile ventures, primarily based in developed economies, I have not seen financially sustainable models for entrepreneur support organizations (ESOs) that did not require some level of grant support. According to a study, 3 out of 4 accelerators relied on philanthropic grants. Further, a DGGF-supported research stated that those who used the cash-for-equity model found that it took a long time to generate revenue and even then were able to cover less than 5% of their operating budget.
While philanthropic grants are likely even more critical to social enterprise incubators, the good news is that they are also probably better aligned to an incubator that has a clear thesis about what social or environmental issues they are trying to address through supporting enterprises. This alignment also dictates the most-suited type of grant maker--a domestic public-funded foundation vs. an international cause-focused one. Overall, recognition of the critical role social enterprise incubators play in commercializing impactful innovation by the grantor is ideal. In addition to grants, incubators have also begun charging for their services. The recent SCALE report by Argidius foundation even reports an increase in enterprise performance when incubators charged for services. On the other hand, recent Social Business Support Landscape Studies by Yunus Social Business (in India, Brazil, Columbia and Kenya) indicated that about half of the enterprises were willing to pay low-bono or market rates for these services.
Incubators have used consulting income and corporate partnerships as other components of their sustainability plan. They usually have small teams and this approach runs the risk of stretching that team and/or mission drift away from impact and tailored support to enterprises. However, if an incubator can balance the partnership agenda well to align this practice with needs of their enterprise portfolio, that synergy becomes a win-win. For example, Innosphere had an agreement with a major beverage company that involved searching for external innovations that can address their global supply chain and distribution issues. For a fee (which offset its operating costs), the incubator served as a technology scout and hosted tech discovery pitch sessions semi-annually. If a promising technology was identified, there was a predefined set of potential collaborations with the corporate partner that were also aligned with the commercialization journey for the startup client.
Obviously, there is no “one right way” to attain financial sustainability. The best strategy is based on where mission meets context and some combination of the above.
Q. You have been on both the entrepreneurial side and the donor/funder side of this ecosystem. What has this unique set of perspectives shown you about concrete steps an incubator can take in approaching sustainable growth?
It takes entrepreneurial initiative and deeper understanding of funders’ mandates on the part of an incubator to get the right approach and mix of funding. Incubators should be clear about the segment of enterprises they serve (stage, sector, founder background, growth trajectory, etc.) and how they create value for those enterprises. It’s not as simple as it sounds, as well-communicated clarity on value delivered is rare and, without it, entrepreneurial ecosystems are inefficient for all actors.
For social enterprise incubators this goes another layer deep. These incubators need to also be clear about what their social mission is and base their enterprise selection and offering on how they think that will be best achieved. Incubator managers should go where their team has passion and there’s a real opportunity based on what is happening within the region and sector. Even if it’s an under-appreciated issue area when they set out, focused incubators can become a beacon for new networks and catalyze markets while quickly gaining credibility as the experts in their space. The grant funding will follow credible impact.
An incubator is part of a broader ecosystem and the role that it plays is going to evolve over time. Just as the barriers that an entrepreneur faces within a particular region are going to shift based on maturity of that ecosystem, the incubator needs to think about what their programmatic offering is going to address for each enterprise. If there are platforms that the incubator can launch that would cost effectively address a systemic barrier, those can be a great revenue stream that is strongly aligned with mission and key stakeholders. To identify these, I recommend incubators engage a diverse group of local stakeholders, including perceived competitors to talk about shared challenges. Sometimes the lowest cost solution is an unexpected partnership.
Q. For an impact incubator in its early stages, or located in a nascent ecosystem, what can be some proof points in demonstrating readiness for growth/scale while being sustainable?
As outlined above, I can’t overstate the value of a clear strategy, backed by evidence and research. Even grant makers who are comfortable with less of a track record or lots of risk will want a clear thesis and proof that the leaders of the incubator are capable of learning and adjusting their plans based on results. It’s not unlike how incubators select entrepreneurs. Most funders will want a phased approach and won’t commit larger amounts of funding until they have worked with a team on a smaller scale.
Funders aren’t interested primarily in the growth of an incubator. They are interested in what outcomes that incubator can contribute to. An incubator needs to have a compelling plan for how those outcomes could be achieved more cost effectively and more sustainably than the alternative mechanism available to that donor. For example, for the Lemelson Foundation, the most compelling outcomes are related to how an incubator can address a systemic gap faced by invention-based enterprises in a particular region. Addressing systemic gaps almost always requires collaborating and building connections with other actors in the ecosystem, unlocking new assets and capacities or reducing transaction costs and friction that enterprises experience. So, it is imperative that an impact incubator collects information and partners with diverse stakeholders in the ecosystem. Out of this, a clear strategy backed by research and data should emerge. The strategy then directs the growth of their enterprises while simultaneously delivering measurable impact.
Arun Venkatesan
Co-founder and CEO at Villgro USA
Arun is passionate about scaling impact by helping impact incubators succeed. He led Villgro India's health sector before his current role at Villgro USA
With
Maggie Flanagan
Program Officer at The Lemelson Foundation
Maggie believes in market–based solutions to environmental and social problems, and is now working on systemic change to enable more local inventors and enterprises to solve urgent, global problems at scale