Blended Finance: A Key Mechanism for Mobilizing Private Capital for Public Good
By Laura Davis | Wed Jun 07 2023
Addressing today’s development challenges requires a fusion of creativity and collaboration. That's where blended finance comes in. According to Convergence, blended finance is the use of catalytic capital from public or philanthropic sources to increase private sector investment in sustainable development.
Renew Capital, an Africa-based impact investment firm, partners with development agencies such as Global Affairs Canada and USAID to achieve leverage through a blended finance model.
“Blended finance is critical to achieving sustainable impact in Africa. We're committed to strengthening the investment ecosystem by developing pipeline for investors, organizing local capital and improving the investment environment. We also promote women's economic empowerment and address climate change by helping companies become more climate and gender smart,” says Renew Capital Managing Partner Laura Davis.
Renew Capital has implemented its blended finance model in Ethiopia for more than a decade. Here, they share their eight biggest lessons learned in blended finance. These lessons are paving the way for Renew Capital’s rapid expansion across East Africa, and are key for any organization looking to implement blended finance.
A Decade of Lessons in Blended Finance
LESSON 1: FIND A BALANCE BETWEEN MONITORING AND EVALUATION AND REPORTING
Implementers of many blended finance projects face the ongoing challenge of serving two masters which both require robust and specific reporting. Additionally, obtaining timely and accurate financial statements from portfolio companies and other non-investee SMEs required for reporting can become a challenge.
Tip: During the planning stage of a blended finance project, be intentional in what you agree to in terms of reporting. Creating alignment and overlap of reporting requirements for your different stakeholders will lessen the burden of monitoring and evaluation during implementation.
LESSON 2: PERSIST ON THE OUTCOMES, BE FLEXIBLE ON THE ACTIVITIES AND OUTPUT
Investing in blended finance projects in Africa is a relatively new initiative for government and donor partners. Some approaches that work well in one country may be unsuccessful in another. It’s important to stay focused on the outcomes, remain nimble in the activities and apply lessons learned as you go.
Tip: Make sure your donor partner and your investors are flexible and allow you to adjust activities and pivot plans as you begin implementation and apply lessons learned. Be diligent in documenting your failures and reviewing them to extract lessons learned.
LESSON 3: DON’T BE AFRAID TO TRY SOMETHING RADICALLY NEW
Be willing to try something totally radical. One component of our blended finance project in Ethiopia was to expand our reach to “investment hubs” in larger cities outside of Addis Ababa and to educate SMEs on investing, sourcing deals and creating valuable business networks. Due to unrest, logistics and a lack of local partners in these cities, our efforts had little traction. Instead of continuing down a failed path, we pivoted to a new, radical idea to reach the masses— an edutainment show customized for the Ethiopian culture and aired during prime time on Friday evenings. We soon went from minimal touchpoints in four cities outside of Addis with only a few stakeholders, to millions of viewers. By trying something new we were able to raise excitement for entrepreneurship and the formation of local angel networks.
Tip: Be open to trying something radical if the status quo is not working. You may end up unlocking impact at a larger scale than you ever thought possible.
LESSON 4: MONEY TALKS WITH POLICY REFORM
In 2022, Renew Capital celebrated 10 years of investing in Ethiopia. “Despite the challenges of investing in Ethiopia, Renew Capital has so far invested in 12 companies here,” says Laura. “This gained us credibility and a seat at the table when the government was updating the investment code and creating the Startup Proclamation. Our track record of bringing Foreign Direct Investment (FDI) into the country allowed us to help influence several changes that will have a significant impact on the future of the investment and entrepreneurial ecosystem.”
Tip: Establishing a solid track record in a challenging investment environment can lead to valuable opportunities for influence and collaboration. We believe many African businesses can be attractive investments. If investors have a clear path to invest in them, they will. By blazing this trail, we hope to inspire others to invest in Ethiopia and other emerging markets with confidence and purpose.
LESSON 5: STAY THE COURSE, DON’T GET PULLED AWAY FROM YOUR SWEET SPOT
As an investor there is a temptation to pursue grant opportunities or venture into areas beyond one's expertise or investment goals. Social enterprises with an alluring narrative, but no real investment case, can be particularly captivating. Nevertheless, it is crucial to stay focused on investment strengths and avoid sacrificing long-term sustainability for short-term funding and recognition.
Tip:It's easy to be distracted by soft funding and grant dollars, but it's essential to remain disciplined with your investment model and focus on longer-term sustainability. Stay the course.
LESSON 6: EXTEND THE TIMELINE
Investing in SMEs requires a long-term approach, as realizing impact and growth can take several years. External factors such as market and economic conditions can also impact success. Committing to long-term goals can help overcome these challenges and create greater value over time.
Tip: Work with your donor to find ways to either extend the project or the reporting period to get a truer sense of the long-term positive impact of a blended finance model.
LESSON 7: 80/20 RULE: FOCUS ON A FEW GROWTH COMPANIES, VERSUS TRYING TO HELP EVERYONE
Not everyone is meant to be an entrepreneur, and blended finance interventions need to realize this. You’ll figure out quickly which entrepreneurs have the capacity to take on financing and scale.
TIP: Be aware that 80% of the impact and results will come from 20% of the SMEs you support under a blended finance model. Focus on the 20% and those who are equipped to grow and create impact at scale.
LESSON 8: BE PREPARED TO EDUCATE ALL STAKEHOLDERS, MULTIPLE TIMES
Blended finance is still relatively new to some stakeholders and you may need to educate them as they may not fully understand the ins and outs of blended finance. Some of the reporting, forms and requests will make little sense in the greater context in which the project operated. Some in the donor community will say blended finance projects are only making rich people richer. Some SMEs will think of and approach investors as grantmakers. And many investors will be ignorant of Africa’s private sector potential.
Tip: Be prepared to educate stakeholders to dispel misconceptions and recognize the potential of the private sector in developing economies.
Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.