Inclusive Business – Make or Buy?

By Christina Tewes-Gradl, Managing Director, Endeva

Corporates venturing into low-income markets should ask themselves: could we buy one or several inclusive businesses to achieve our objectives? Our latest study reviews when investing instead of building makes sense, how to set up such investments and who can help.

Investing externally has become a real opportunity for Corporates now. More than a decade of innovation has brought forth hundreds of commercially viable companies that reach low-income communities as consumers, producers, employees or entrepreneurs. Many of them are ready for growth. Pairing up with a large company can marry the best of both worlds: agility and creativity with capacity and reach. We call this approach Corporate Impact Venturing (CIV).

Take the example of Avanti Learning Centres. The delhi-based startup helps to prepare students from low-income backgrounds for college entrance exams to study engineering and medicine. It had already established a successful model and was operating several centers. Pearson Ventures invested in Avanti and enabled it to improve its service and content and to build new centres. Pearson as a global education company could participate in an innovative solution while keeping the low-margins natural for a social enterprise off its balance sheet.

Large companies venture into markets at the base of the global economic pyramid (BoP) for one or several of the following five objectives: generate access to new markets, drive innovation, strengthen supply chains, help to recruit and retain talent and realize a company’s purpose. However, large companies have often struggled to succeed with their homegrown initiatives, due to three main barriers: lack of leadership support and conducive structures and processes, long gestation periods and low margins, and lack of relevant talent and insight. Buying, that is investing into inclusive businesses externally, is an alternative way to achieve these objectives that also addresses some internal constraints to scaling these initiatives.

For example, by taking equity in existing inclusive businesses that already cater to large numbers of BoP customers or suppliers, companies can expand more quickly and save the time it takes to come up with a functional model. And the acquisition comes ready with skilled staff with a deep insight into the market. Companies can decide how closely they want to integrate the inclusive business, and whether it should be on their own balance sheet. Managers in charge of developing inclusive business initiatives should, therefore, make a conscious decision whether to make or to buy them.

While CIV is not yet supported by a highly specialized ecosystem as mainstream Corporate Venturing is, a range of partners are available to support companies along the investment process. Consultancies help to build strategy and structures, impact investors, incubators and accelerators help to source deals, and donors and impact investors can co-fund the scale-up of initiatives.

Yet, much more can be done to facilitate these marriages with a positive impact. This could start from familiarizing both Corporates and startups with this opportunity through online activities and events, to building CIV platforms that pool money from different players (like Founders Factory Africa is doing), or for donors to develop specific financing mechanisms.

See our discussion on Business Fights Poverty  and share your ideas for how to make CIV more mainstream!

This research has been supported by the UK Department for International Development through the Business Innovation Facility and is part of its IB Boostinitiative.

Editor’s Note:

This article was previously published on LinkedIN and is reproduced with permission.

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