What makes for effective nurseries for young businesses

A US-based charity is funded by the UK government to explore how well they are working in Africa – a project which touches all sorts of issues and contains advice for all Entrepreneur Programme managers.

Funded by the UK Department for International Development’s Impact Programme, Village Capital’s research aimed to convene leading African Entrepreneur Support Organisations (as accelerators, incubators et al ‘ESOs’) and share best practices. What does this project tell us and why do we not have the benefit of a similar study of the UK?

‘We learned’ says the ‘VilCap Communities’ report ‘that the entrepreneur support sector in Africa has an opportunity for better communication and collaboration. ESOs are growing businesses – much like the startups they serve. We need to focus on resourcing and strengthening existing hubs, rather than creating new ones.’ The same conclusion might well apply to the UK, so I abstract below the key findings from this report.

Building cohorts of entrepreneurs

1.Consider running programmes with a narrow focus. ESOs that run sector-specific programmes reported that they were able to attract higher-quality mentors and raise more funding later on.

2. Don’t treat a livelihood-sustaining business as though it was a high-growth startup.        It’s tempting to group micro, small and medium-sized enterprises        (MSMEs) together  under the category of “entrepreneur” or “small business”. But these businesses can have incredibly diverse business models.

3. Peer collaboration matters. According to a 2018 study, accelerators that place a heavy importance on peer collaboration between startups tend to outperform. Avoid bringing direct competitors into the same cohort; otherwise, try to bake in as many opportunities for interaction and collaboration as possible.

Designing a strong curriculum

1. Be smart about selecting programme partners who will roll up their sleeves. A study found that partners who are perceived as “adding brand value” because of their famous names do not play a major role in delivering positive programme outcomes. On the other hand, partners who contribute to the curriculum and play a meaningful role in programming tend to yield better outcomes – even if they are not as well-known. If your accelerator is going to partner with a corporation or a large institution, it is a good idea to educate these partners on how to add tangible value to the entrepreneurs.

2. Spend time on 1-1 interaction, not lectures. Avoid building your entire programme around guest speakers or formal classroom-style sessions. Research shows that one-on-one mentoring is more effective than lectures, and our highest-rated curriculum modules – stakeholder advisory sessions, mock board meetings, investor forums, and milestone planning – all involve identifying and matching startups with external stakeholders, customers, strategic partners, investors or advisors. If a mentor is well matched, they tend to enjoy the session and come back when invited again.

3. Build in time for reflection and repeat mentor interactions. Investors at the early stage are often taking a bet on the founder and their ability to execute. It can be very valuable to facilitate repeat interactions between entrepreneurs and the mentors or investors they meet at a programme, so that the entrepreneurs can demonstrate how they respond to feedback and report on their progress over time. Traditionally, Village Capital programmes have a one-month gap between each four-day workshop.

Building a sustainable business model

1. Diversify your revenue streams. Several of the most successful ESOs in Africa have sought funding beyond philanthropic capital and subsidies – for instance through consulting and research fees, co-working space rental fees, sponsored data and impact research, or in some cases commission on capital raised for their startups.

2. A fund is not a business model – at least not in the short term. Several ESOs we have spoken with are looking to set up their own micro-VC funds. This can be an effective strategy for supporting entrepreneurs, and may deliver returns in the long run. But the most common types of funds have minimal management fees (2-4% of fund value) and are unlikely to deliver payouts in the first eight years.

3. Develop (and track) relevant impact metrics. Many ESOs [commented] that they struggle to measure and evaluate data on their programme’s impact. The good news: this is not a problem exclusively felt by your organisation. The bad news: if ESOs as a sector do not get better at measuring impact, donors will stop funding the sector. Valuable metrics include venture growth, job growth, positive social and environmental impact etc.

4. Build templates for systems and repeat processes. The VilCap Communities Toolkit harnesses learnings from more than sixty programmes. It includes templates, guides, and programme management tools, including a template that guides ESOs through the process of performing due diligence on applicants to accelerators.

Developing your team

1. Petition partners for unrestricted funding to support team capacity. Grantmakers often provide constraints and restrictions on how funding can be dispersed. Restricted funding often leads to scope creep, distracting ESOs from their core work, which should be to support entrepreneurs.

2. Hire for the stage you want to reach, not the stage you are at. Early-stage CEOs tend to treat hiring as an administrative function rather than a strategic one. Hiring for the future involves thinking strategically about where your company is going, identifying areas where you need help, and making a plan for how you will fill those critical skill sets, even if it is down the road.

3.Entrepreneurial experience should be non-negotiable. ESO programming that is managed by people with no entrepreneurial experience can actually have a negative impact on entrepreneurs. Meanwhile, “Knowledge, mentorship, or investment coming from an entrepreneur who has led a company to scale was associated with approximately two times greater prevalence of top performance.”

Thinking regional

1. Consider coordinating on regional programming. We have found that ESOs that run regional programmes, or facilitate cross-ecosystem connections, have been more successful in raising operating and investment capital. We share insights on how to implement incubation programmes, provide seed investment, conduct research on growing sectors, and advocate for startup-friendly policies.

2. Consider collective advocacy. Organisations like i4Policy are leading the charge on lobbying governments for startup-friendly policy – both on a country-by-country basis and by creating collaborative links across ecosystems. Contributing to this kind of collective advocacy can feel off-mission, but will yield returns in the long run.

[‘Many accelerators end their programmes with an on-stage pitch competition, where investors in the audience will pick a winner. When we surveyed our companies and asked them where they met investors, it was rarely at an actual pitch event. The format privileges the ones who pitch well, rather than the ones who have the highest potential. At Village Capital we have replaced demo days with 1-1 investor meetings.’]

The report also has insights for Grant makers and Funders, about embracing additional forms of support and working longer term.

Vilcap, an Impact Invester par excellence, is a US-based charity that identifies significant regional needs, raises funds, and builds and runs teams to deliver solutions to those needs.

See Unlocking-Pipeline-Playbook-Village-Capital-1.pdf

John Whatmore, September 2019

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