As CSI matures in South Africa, questions are being raised about funding models. Should CSI funding be limited to grant-making, or do new models like debt funding or social impact bonds have a role to play?

The number of people packed into the session on funding innovation at the 2015 Trialogue CSI Conference was a clear indication of the interest in the topic.

Bridget Fury, South African Director of the Aspen Network of Development Entrepreneurs (ANDE), a global network of organisations that propel entrepreneurship in developing countries, highlighted that South Africa’s SME failure rate is one of the highest in the world (as many as 70% of SMEs fail in the first year). “I am passionate about how we create robust ecosystems for entrepreneurs, whether social entrepreneurs or not,” she said. “The question is, ‘How do we start to think about grant capital in creating ecosystems that generate market-based, sustainable solutions to CSI challenges?’”

Fury says instead of finding effective ways to collaborate, mainstream investors and development professionals often “miss each other because they don’t talk the same language”. She advised stripping away jargon to focus on appropriate solutions to address the mismatch between capacity support and funding.

Stuart Bartlett, Head of Agency Development and Support, Industrial Development Corporation (IDC), agreed. Bartlett’s division is tasked with advancing development and job-creation opportunities in marginalised areas, and he believes that this expanded mandate plays a role in building the ecosystems Fury envisions.

He spoke about the Social Enterprise Fund (SEF) as a means of achieving greater impact within IDC development outcomes. “The SEF aims to assist in developing innovative and economically sustainable enterprise opportunities that don’t appear to have high profit potential, but that have high social developmental impact,” he explained. “The SEF will provide investment/finance to establish and develop social enterprises/entrepreneurs; facilitate their integration into the main-stream economy; build and strengthen social capital and inclusivity; and support initiatives where community-driven empowerment and integration of first and second economies are fundamental.”

In considering social enterprises for funding, the SEF focuses on six elements: the enterprise must have a primary social or environmental benefit or purpose, operate as a business (i.e. it must trade), and reinvest surpluses in its mission (no funds to be paid out as dividends). It must use a financially sustainable business model, be democratic, accountable and transparent, and operate in a socially and environmentally responsible manner.

The SEF funding comprises R100million from the IDC over a five-year period, combined with R100million from Flanders Government (funding specifically dedicated to KZN, Limpopo and Free State). A maximum of R5million is allowed per business.

The SEF will use “asset locking” mechanisms and focus on “convertible or impact-driven grants”. This will ensure focus (i.e. avoid “mission drift”), maximize impact by honing in on clear deliverables, and ensure reemployment of surpluses into the mission. The SEF will also consider alternative strategies using other funds (special interventions) and blending available finance to build opportunities and strategic partnerships.

“Social enterprise is still in its infancy in South Africa,” Bartlett said. “Many potential social enterprises/entrepreneurs are not being adequately catered for by financial institutions due to rigid investment criteria and the nature of social enterprise (social rather than profit maximisation).”

Other challenges include accessing the right kinds of finance at the right time, the legislative and regulatory environment, good governance and impact evaluation. The answers, Bartlett believes, lie in building a supportive ecosystem for social enterprises through partnerships, policy, appropriate research, ensuring access to capital, and social enterprise specific support.

Setting an example in funding innovation

Sonja Giese, Director of Innovation Edge, a new multi-donor initiative aimed at promoting innovation in early childhood development (ECD) in South Africa, shared her organisation’s model: multiple funding mechanisms aimed at every stage of the innovation pathway, from recognition of a problem to invention, development, implementation and diffusion.

Innovation Edge offers a platform to test the feasibility and effectiveness of bold ideas that can fundamentally change early life experiences for children, giving them the best possible start. To access Innovation Edge funding, the application must be innovative, have potential for scale, be aligned to the organisation’s conceptual framework, apply to children aged 0 to 6 years (or pregnancy), and be implemented in South Africa.

To increase the number of truly innovative applications, Innovation Edge holds pitch sessions, idea generation workshops, web-based challenges and “potluck sessions” (gathering unlike minds – people who are not experienced or interested in ECD, which Giese notes yields a different realm of thinking). “‘The best way to have a good idea is to have lots of ideas,’” she says, citing Linus Pauling.

Her advice in creating winning funding proposals: consider ability to scale, whether what you’re attempting has been done elsewhere, opportunities for collaboration, and whether there is clear logic to achieving desired outcomes.

Written by Tamara Oberholster