Closing the Pioneer Gap Effectively

5th Nov – Michiel Elich (CEO) and Lisa Jordan (Chair of the Board)

If we are betting on social entrepreneurs to drive change in dysfunctional markets, we are not doing very well. Enviu’s aim is to make markets work for the people and planet. But as we enter our 16th year of venture building, we have learned that without a wider array of capital on offer, most social entrepreneurs will fall into the ‘pioneer gap’ – the gap from promising social enterprise to commercial, investor-ready organization – and never emerge.

Catalytic capital offered with non-traditional risk-return profiles is crucial to bridge this gap. If we want to secure the pipeline for a better future, we need to enhance the availability and attractiveness of catalytic capital as a matter of urgency.

Entrepreneurial pioneers drive failing markets forward …

History shows it’s hard for existing market players to disrupt their own, often successful, business models. Understandably, the first reaction of most established market players is to defend their current position. By stalling radical change and – only grudgingly – adopting incremental innovation, established successful companies are not going to solve climate change or bring sustainable solutions to the bottom of the pyramid.

Pioneering by impact driven entrepreneurs is crucial to building sustainable markets. Social entrepreneurs experiment, take disproportional risks, ignore barriers, leapfrog incremental innovation, fail and try again. They pioneer to prove and showcase that new sustainable models can be created, driving markets forwards.

For example, at the end of 2018, with the support of Plastics Solution Fund and three family foundations, Enviu launched the Zero Waste Living Lab in Indonesia. This is a market development program to create, test and build impact-driven enterprises to radically reduce single-use plastics. The plastics industry and its stakeholders are focused on defining (and minimizing) their responsibility and taking first steps in the areas of clean-up and recycling, but they mostly ignore the need to reduce use. Their aim is to avoid radical change and look for innovations within the existing model. The Zero Waste Living Lab and its social entrepreneurs are driven to develop new models that skip single-use plastics altogether.

… but at present social entrepreneurs are not equipped to do this 

So, we seem to be betting on social entrepreneurs to change the rules of the game and drive the market towards a better future, yet they are not well equipped for this task. Most social start-ups stall in their pioneer phase. While the exact failure rate is debated, the number of start-ups that survive the pioneer gap is between 5% and 30%. Fewer than 0.5% reach serious scale. 

We need the social entrepreneurs’ innovative, flexible mindset to realize the paradigm shift we are looking for. However, their task seems quite out of balance with their very limited resources. A key issue is that social enterprises lack the financial means to invest the time and money needed to build a sustainable business. From our own experience this takes at least three years. In some domains, i.e. inclusive pensions, reaching break-even can even take up to six or seven years. 

More catalytic capital is needed to bridge the pioneer gap …

Having worked as a serial venture builder for many years, Enviu’s conclusion is that a more mature market for catalytic capital would accelerate the growth of our own impact ventures and of many other promising ventures we see in the market. If we want to create a steady pipeline of potentially world-changing ventures, we need a different approach. Supporting social enterprises to bridge the pioneer gap requires catalytic capital – capital with an impact-first perspective. This means being committed long term, accepting a non-traditional risk-return profile, and valuing social return. 

… and more effective catalytic capital 

While we understand the ‘high risk, low financial return’ aspect of catalytic capital, we believe that with the right approach it’s possible to a) de-risk the investment, b) increase its catalytic function and c) enhance the expected impact and financial return, thus securing maximum value for money for every catalytic impact dollar.

Our experience in building 16 social ventures (and deciding not to build many more) suggests:

1. The importance of basing design on customer needs. A huge risk of an impact-driven start-up is that it focuses too much on the issue instead of the market. As with any company, the key is understanding customer needs and behavior and using these insights to design the solution, to secure market fit and effective growth.
2. The need to fail quickly. Not every idea is a great business idea. We recommend using the lean start-up approach to help enterprises to rapidly prototype and validate. This should enable them to quickly learn, pivot and retry, or to close without having spent too much money.
3. The importance of experience. Research concludes that experience is a relevant factor for success: it helps entrepreneurs to have succeeded or failed before. The valuable lessons learned will reduce the time and money spent on ‘the basics’. 
4. The need for teamwork. Entrepreneurs tend to have a form of heroism, overestimating their own skills. But most of the time they’re also just human, with strengths and weaknesses. It is therefore crucial to ensure there is the right set of competences within the team or around it, and to be able to adjust this along the way, as the enterprise goes through its different stages. 
5. The need to use all available support. The great advantage of the impact space is that many grants and subsidies are available to support non-commercial activities in the ecosystem of the business. Using these as much as possible will help social enterprises to make more effective use of the catalytic capital provided. As we often say: ‘if you think you can do it alone, then you’re not thinking big enough.’ Committed partners providing funding, networks, expertise, etc are crucial to reduce risks and push the business forward.

Building on these lessons, Enviu is now in the process of setting up its own catalytic capital fund. Its aim is to provide effective support to its ventures to enable them to achieve systemic impact.

We hope these lessons will also be helpful in a broader market context, to stimulate the development of catalytic capital as an attractive asset class and to improve the survival rate and growth of potentially world-changing ventures. This is what we need if we are to secure the pipeline for realizing a better future. 

Contact us to continue the conversation or join forces in this quest:

Michiel Elich, Enviu CEO – michiel@enviu.org

Ankie van Wersch, COO – ankie@enviu.org