Original article appeared in Next Billion Wednesday September 15th 2021
By Alethia Kang and Luke Seidl
Social enterprises are at the forefront of developing innovative, sustainable and scalable solutions to today’s deepest economic and social issues, including gender discrimination, climate change, malnutrition and poverty. But despite the crucial role they play in global development, many of these businesses are at risk of disappearing due to COVID-19.
An ANDE survey of its members found that nearly half of funders’ portfolio companies were at high risk of failure or had permanently shut down only three months into the pandemic. A separate ANDE survey of early-stage ventures found that almost three out of five businesses indicated that emergency loans were needed to manage the crisis.
While those surveys were taken in the early stages of the pandemic, the landscape for social enterprises remains volatile as COVID-19’s disruptions continue. In the Global South, the Delta variant combined with delayed vaccination access (or vaccine hesitancy) creates an ongoing threat to public health and economic activity. Many countries are experiencing peak cases, new curfews and lockdowns. With no clear end to the crisis in sight, is the funding community — grantmakers, debt providers and equity investors — prepared to step up and keep the social enterprise field afloat? Will the future impact investing pipeline evaporate if we fail to provide flexible, emergency capital during crises like the pandemic?
FIVE STEPS FOR INVESTING IN SOCIAL ENTERPRISE RESILIENCE
1. Listen and ask questions: Are you listening to your investees’ voices to understand how they are coping with challenging situations and what unmet needs they have? The impact measurement company 60 Decibels does this extremely well, and Kiva recently undertook similar research, in partnership with other funders. Kiva interviewed 320+ women customers of two microfinance organizations that Kiva funds in Cambodia, Fiji and Samoa to understand the challenges women entrepreneurs face and how financial service providers can alter their products and services to better meet their needs. It’s worthwhile for funders to take similar steps to better understand the enterprises they’re supporting.
2. Be flexible with funding types and return expectations: Is your funding patient and conducive to the needs of a business weathering the severity of the crisis? Are you willing to adjust your return expectations during this period of uncertainty? Flexibility extends beyond funding terms and could include openness to sharing your networks, inviting in other funders or syndicating due diligence. This may be an opportunity to tap family offices and high net-worth individuals or to explore non-traditional forms of financing, as showcased in the recently released Adventure Finance book.
3. Move quickly: Can your due diligence be more efficient, or can you leverage the due diligence of other impact investors of the same enterprise? Social enterprises often do not have the luxury of time, as they are usually strapped for resources and have lean teams to begin with. And their teams are typically focused on running their business operations and/or servicing their customers’ needs. If funders act with urgency and streamline their decision-making processes — even if that means getting to “no” quicker — they can free time for these enterprises to pursue other funding opportunities.
4. Align on impact targets: Are you and your portfolio companies on the same page in terms of social impact goals and expectations? Ensuring alignment on impact targets and outcomes is critical to assessing the funding fit for a social enterprise’s greatest needs. On the flip side, social enterprises need to communicate to funders about their progress on the impact indicators that matter the most and the barriers to achieving them.
5. Look at your portfolio (again): Have you checked in recently with the enterprises you’re supporting? Existing investors are best-positioned to understand and meet the needs of their portfolio companies. Look at how you might provide follow-on support to existing portfolio enterprises or bring new investors or grant funders into the mix.
CASE STUDY: PARTNERING FOR RESILIENCE — KIVA x ACCESO
Kiva and Acceso began a partnership in 2018 through the Kiva Labs: Social Enterprises lending program, which provides short-term loans to impact enterprises during their formative and high-risk early stages. At the outset of COVID-19, this existing relationship provided a critical foundation for Kiva’s support of Acceso during the crisis. Kiva’s “impact-first always” approach aimed to prioritize existing portfolio companies and enable them to avoid insolvency and business failure — which would have essentially erased the impact of both their prior work and Kiva’s prior funding.
As the pandemic spread, Kiva surveyed its entire portfolio, current and past, with the aim of listening to these enterprises and understanding their immediate challenges, cash runways and debt obligations. Once their challenges and needs were understood, Kiva granted repayment moratoriums for current borrowers where appropriate, and developed a new Crisis Support Loan product — a zero-interest, low-fee bridge loan to cover operating expenditures, payroll and personal protective equipment. The Crisis Support Loans were larger and longer-term than Kiva had ever offered. By the end of 2020, Kiva had made $2.5 million in Crisis Support Loans to social enterprises. Both Acceso El Salvador and Acceso Colombia were recipients of this new support.
Acceso operates three social enterprises in El Salvador, Colombia, and Haiti working end-to-end, “from seed to market” across multiple agricultural value chains to revolutionize food systems for small farmers. The initial partnership with Kiva kicked off at a critical time: In 2018, Acceso had spoken to many impact investors, most of whom were interested in providing debt to the El Salvador business. However, these investors’ due diligence processes were typically quite long and time-intensive, and while their interest rates were lower than those of formal financial institutions, they did not always make sense for a business of Acceso’s size, given its cash flow and working capital needs.
Kiva offered Acceso speed, flexibility, repeat loans and streamlined due diligence, all funded by its crowdfunding model, which leveraged funds from over 1,500 individual microlenders for each loan. The first loan of $50,000 in 2018 funded quality inputs for fishers in Acceso’s smallholder network, enabling them to improve their production quality and incomes. Once that was successfully paid back, Acceso raised a second Kiva loan of $60,000 in 2019 to support the construction of a processing facility, and to purchase processing equipment to provide new income opportunities for farmers through higher-value products. That loan was due to be paid back by mid-2020; however, with the onset of COVID-19 and the additional challenges of Tropical Storm Amanda, which hit El Salvador in June 2020, Kiva granted a three-month extension on the payment.
Given their previous history of working together, Acceso El Salvador qualified for a $200,000 Crisis Support Loan from Kiva. Due diligence was quick and straightforward, and the loan was raised in less than 30 days from Kiva’s network of microlenders at the end of 2020. Kiva’s rapid response and flexible capital allowed Acceso to better support small farmers and fishers in their recovery from COVID-19 and Tropical Storm Amanda, through additional credit for inputs like seeds, and by enabling the extension of farmers’ and fishers’ loan terms. This support ultimately strengthened El Salvador’s local food system, which — as crises like COVID-19 have illustrated — is key to food security.
The longstanding relationship with Acceso, and its exemplary record of repayment, made it an easy decision for Kiva to restructure the existing loan and quickly approve additional capital. The business was clearly well-managed, with a strong model solving a significant market inefficiency. Acceso’s outcome-proven social impact has generated $35 million in income for over 1,000 farmers and fishers in El Salvador, placing them firmly in Kiva’s top impact rating tier. This was all built on transparency and trust, which the two organizations had developed over time, and which we leveraged to move swiftly to support the communities impacted by Acceso’s reach.
A CALL TO ACTION FOR INVESTORS, FUNDERS AND PHILANTHROPISTS SEEKING TO SUPPORT COVID-19 RECOVERY
Acumen, Open Road Alliance and Big Society Capital are all funders that launched COVID-19 emergency funding facilities globally, focused on helping social enterprises build resilience, continue operating and, in some cases, even pivot their business models. These funders’ efforts, along with Kiva’s partnership with Acceso, have been bright spots in the social enterprise sector’s pandemic response. But COVID-19 is far from over, and the sector is still at risk.
We are not alone in identifying the urgent need — and opportunity — for more creative and efficient ways to fund social enterprises. The World Economic Forum’s COVID Response Alliance for Social Entrepreneurs (of which Kiva is a member) convened a collaborative working group of more than 80 members very early in the crisis. As Alliance member Lior Ipp, CEO of Roddenberry Foundation notes, “the call for more creative and efficient ways to fund social entrepreneurs is certainly not new; what is new is an awareness of the glaring inequities that have been worsened by the pandemic.” It is by reaching out, despite these inequities, and placing social entrepreneurs at the center of the funding process that we can create “a space for genuine partnership that enables shared decision-making and accountability, promotes flexibility and transparency, and accepts experimentation and failure.” Based on the years of productive partnership between Kiva and Acceso, we wholeheartedly agree — and we believe this approach can help both social enterprises and funders navigate the unprecedented challenges we face today while preparing for the challenges of tomorrow.
Note: Acceso and Kiva are NextBillion partners, supporting our Recovery 2021 series.
Photo credit: Acceso/Paramo Films