Investment Support

Lessons Learned from the IAP Challenge Fund

The International Finance Corporation estimates that the low-income markets of four billion people living on less than USD 8 a day represent a USD 5 trillion opportunity. Private companies can innovate for social and environmental impact and profit, but face challenges like financial risks and limited scalability due to funding constraints.

In 2020, a Global Impact Investment Network (GIIN) survey identified 1,720 organisations active in impact investment, managing USD 715 billion in Assets Under Management (AUM). These include private equity firms, financial institutions, impact founds, foundations and trusts, family offices, angel investors, multi-lateral and bilateral donors, and crowdfunding platforms, each with varied expectations for social and financial returns. Despite a matured impact investor landscape, many businesses face financing challenges as they are too large for micro-financing yet too small, risky, and unprepared for mainstream funding.

The IAP Challenge Fund is a risk sharing mechanism for small and medium-sized enterprises (SMEs) to test and develop innovative inclusive business ideas. With a focus on maximising longer-term positive social and environmental impact, the programme assists businesses in reaching scale by preparing them for investment and facilitating introductions to potential investors.

IAP’s approach to investment support to date

In addition to grant financing, IAP offers tailored advisory support for portfolio businesses, focused on organisational strengthening and growth strategy. The Strategic Investment Partners (SIP) programme pairs businesses with participating investors for ongoing mentorship, aiming to transition businesses from early to growth stage, and ultimately to maturity.

IAP supports businesses in preparing pitch decks for additional fundraising , compiling them into an IAP deal book for potential investors. The programme facilitates individual introductions and ‘dragon’s den’-style pitches at investment fora. To date the programme was not designed to provide support during the deal process and has not done so in a structured way. In the last three years, the programme facilitated 177 introductions between IAP companies and investors, resulting in six successful deals.  

Key learnings

There is a significant and still underestimated knowledge gap between SMEs and investors

IAP portfolio businesses, and many other SMEs in emerging markets, lack exposure to the broader investment ecosystem, limiting their understanding of financing options, instruments, and structures, as well as the implications for their businesses. Likewise SMEs typically do not have sufficient understanding of investors’ requirements. SMEs often struggle to align organisational systems with good practices and in-country regulations, let alone  international investment standards.

This knowledge gap poses a challenge for SMEs in securing investment. While the SIP mentoring programme succeeded in some cases, in others IAP businesses were unprepared for the sophisticated support offered. Additionally, SMEs constrained by time and resources, may overlook the significance of initial impressions and following up, understandably prioritising instead more immediate business demands.

Even if these barriers are overcome, most SMEs lack understanding of the investment process and require substantial support to close deals, covering areas such as developing investor-ready materials (ranging from financial models to business plans to compelling pitches), negotiation strategies, and introductions to other advisors. Intensive early training is crucial to bridge the knowledge gap before introductions. SMEs also require substantial support and follow up during the deal process to enhance the likelihood of mutual success.

There is a mismatch between SME needs and the size and type of funding available

Challenge funds like IAP bridge part of the “missing middle”. But the middle is extensive and enduring. Accessible financing for businesses that are not yet ready for larger investments remain insufficient. SMEs may require smaller ticket sizes and/or alternative vehicles to navigate this phase, often needing more time to meet investor requirements, all leading to a second “missing middle” (see below).

Many SMEs may find local financial markets advantageous due to exchange rates and better market understanding. However, beyond bank loans, these markets often offer limited options. Angel investor activity has increased in IAP operating countries, bridging the gap, but more localised financial options are still needed.

Successful matchmaking requires targeted matches

Due to resource constraints, IAP’s matchmaking approach was not extensively tailored. Instead, it focused on sharing the IAP deal book broadly with regional and global investors. Although this expanded reach, success requires more tailored matches aligned with both investors’ and the business’ needs. It requires ongoing dedication to understanding of investors’ strategies and criteria as well as evolutions in the businesses’ needs and capabilities.

The SIP programme thrived when matches were strongly aligned, fostering increased engagement from both parties. Business incentives for mentoring rise when they see investment potential; investors are less likely to engage without future investment prospects. Goodwill alone has limitations.

It typically takes several years for an early-stage business to be ready for investment

Investors typically require businesses to meet certain organisational standards, which can be time consuming and of little interest since the benefit of improved practices may not be immediate. Unlearning old business practices and demonstrating potential for a successful exit further requires a certain level of growth or business maturity.  In the short period that a programme like IAP works with businesses (two to three years), achieving these milestones is challenging for most businesses. To mature and access additional financing, companies need patient, multi-year support.

Structuring investment support going forward

In future programmes like IAP, SNV envisions a continued role in enhancing investment readiness and matchmaking. Early training on financial literacy and investments can reduce the knowledge gap, enabling better matches through programmes like the SIP. Deepening engagement with the local investment ecosystems and dedicating resources to understanding regional and global investor allows for more tailored matchmaking. Ongoing support throughout the deal process builds a business’ capacity, enabling them to navigate future deals with more limited support.

Though improvements will enhance investment matchmaking, challenges persist and expectations for success need to be tempered, particularly considering limited programme timeframes. Long-term success requires a robust ecosystem supporting businesses at various stages beyond programme cycles, enabling scalability, professionalization, and access to additional funding sources all along the growth journey.