Providing Comprehensive Technical Assistance to SGBs: Exploring Competing Approaches
The Aspen Network of Development Entrepreneurs (ANDE) is a global network of organizations that supports entrepreneurship in emerging markets. ANDE focuses on small and growing businesses (SGBs) based on the idea that SGBs have the potential to create jobs, stimulate long-term economic growth, and produce environmental and social benefits. SGB’s, as defined by ANDE, are commercially viable businesses with 5 to 250 employees and seeking growth capital from $20,000 to $2,000,000.
Resonance has been an ANDE member since 2014 and is constantly engaging with SGB’s across its diverse portfolio. Whether we are supporting capital raising for agribusinesses through the West Africa Trade Hub, or mentoring clean energy businesses in the Private Financing Advisory Network-Asia, we consistently work with brilliant entrepreneurs and dynamic businesses in a variety of capacities. Generally, our engagement comes about as part of a larger, donor-funded engagement, rather than as a direct contract with the SGB itself. In the development context, such support funded by a third party is typically referred to as “technical assistance” (TA).
At ANDE’s annual conference in 2016, Resonance’s Director of Sustainable Investment, Darius Li, moderated a spirited discussion on technical assistance alongside two other panelists, Tahira Dosani, Managing Director of Accion Ventures, an impact investor, and Pedro Eikenbloom, Business Development Manager at PUM, a volunteer-based technical assistance provider. The discussion explored three main issues in the provision of TA: 1) Making the case for TA – where is it still most needed in the process, and how best can it be most effectively utilized?; 2) Discussing the different approaches and best practices in TA delivery; and 3) Identifying ways TA can be improved in its application and value to clients and beneficiaries.
Major takeaways from the discussion include:
- Both pre and post investment TA are vital to the success of SGB’s. All participants agreed upon the necessity of TA and how it is a critical enabler to the placement of capital, and success after the fact, as the company absorbs the investment and continues to grow. The question remains, however, who is best positioned and willing to pay for that support.
- Although the majority of TA for SGBs today is subsidized by donors, there may be a business case for investors to invest in pre-investment TA as a way of increasing overall returns. Anecdotally, doing so creates long-term financial value: supporting early stage companies increases their probability of ultimately being successful, and thereby improving exit opportunities and returns. Providing TA also helps attract better deals because it allows the investor to offer more value to potential portfolio companies, attracting a higher quality pipeline, transactions, as well as co-investors, particularly in a competitive deal situation with multiple bidders. Investors also learn from providing TA- it makes them better investors because they become more adept at understanding and solving the issues their portfolio companies face, enabling them to spot red flags early on. The combination of these benefits strongly suggest that providing TA can be a differentiator that yields greater returns for investors.
- There are many different models of providing and paying for TA, and there may exist more effective models that better align long-term interests between TA providers and recipients. TA providers have explored a number of different models in this regard. Open Capital, for example, charges a deferred fee, payable on success. Others, like Growth Africa, take a combination of equity and success fees based on revenues, capital raised, etc. Other models for paying for TA include profit sharing models, self-liquidating exits, VPO, etc – all can be great for aligning incentives between TA providers and SGB’s, but the downside is they are also more complicated to structure. The bottom line is that there are a number of creative approaches emerging that TA funders, recipients, and providers can explore in finding better ways to work together.
- Standardizing TA service delivery is key to reducing cost and increasing efficiency. For example, Accion always evaluates whether the TA needed is truly bespoke, or, alternatively, is an opportunity where best practices can be extracted and template-ized so that it can be shared with the broader portfolio on a more cost effective basis. Over time, Accion has recognized distinct patterns within their portfolio, with many companies sharing similar challenges. This is made possible by their narrow focus on seed stage investments for financial inclusion startups operating in emerging markets. As a result, they have met common needs for TA by developing distinct learning tools that are shared online and dramatically reduce costs over the long run. 20 such examples are available to the public in Accion’s Venturelab resource library.