For my gen-Z friends out there who have never seen – or played – pinball before, it’s a vintage game (wow that makes me sound old!) where you have a metal ball that you put into play with a spring loaded plunger button and it bounces around the machine. The objective of the game is to keep the ball in play with the use of simple flipper buttons and rack up as many points as you can by getting the ball to touch targets, ramps, slingshots, and variously placed bumpers. Totally confused? Take a look here.
For someone like me, there’s not a whole lot of strategy to pinball. You hit the ball and hope to rack up points from various parts of the playfield. Higher levels of the game result in many balls in the playfield at once, which is really chaotic!
You’re probably wondering now what this old school game has to do with anything. I believe, playing pinball is a great analogy for impact incubators in the Global South….stick with me here:
Balls = Impact Incubators (and their programs)
Targets = Entrepreneurs
Bumpers = Impact Investors
The Gamer Playing = Development Institutions (who fund incubation programs)
Playing the Game
The whole analogy starts with the funders of incubation programs – in many places development institutions and donors – who put the ball into play. The ball – or impact incubator in our case – is bouncing around the playfield racking up as many points as it can by hitting up the entrepreneurs (targets) and impact investors (bumpers).
However, the whole affair is entirely pretty random, and while just one ball is in play it’s manageable.
Soon enough the incubator is running multiple programs (multiball) and it’s near impossible to keep all of them in play, let alone successfully scoring points with both the entrepreneurs and the investors and the funder of the program because the attention of the player is now divided from one ball into many balls.
While playing pinball may be an obscure skill for a select few, for most of us, it’s random luck of the draw. For the impact incubation industry, it’s reflective of the many demands that the incubators are trying to serve simultaneously.
They’re bouncing around from place to place trying to satisfy varying expectations, and at the end of the day, they will be lucky to have collected a few points in the game by hitting the right targets with these different stakeholders.
The first set of demands come from those with the money to fund incubation programs. Development institutions are mainly focused on delivering a particular social, economic, or environmental impact, with the hope that entrepreneurs can help deliver on this goal – and they fund impact incubators to run programs that will find and scale these entrepreneurs, to reach the impact metrics or outcomes the institution is looking for.
The targets, in pinball, are all over the board and they represent the entrepreneurs, who have their own expectations of incubation programs. While this is an obvious one, it’s worth mentioning that the core responsibility of an impact incubator is to guide and support entrepreneurs so that they can build thriving businesses that are sustainable, while creating economic and/or social value simultaneously.
Entrepreneurs are interested in growing their businesses and getting financial and nonfinancial support to do so. The expectations of entrepreneur should be the most important beneficiary in the whole equation, but in reality sometimes the incubation programs that donors want to fund are not exactly what entrepreneurs need, oftentimes leaving the impact incubators caught in between.
Thirdly, if the impact incubator is lucky, it will come into contact with the bumpers – impact investors. Because incubators are supporting the growth and trajectory of viable businesses, they are simultaneously creating a pipeline for investors, but those investors are only looking for entrepreneurs who will meet their specific criteria, and have the potential to provide the returns they require.
Understanding the Strategies
We’ve been looking at this pinball machine of the impact incubation industry at Pollinate Impact for the last 18 months to try and understand the strategies of the game.
Recently, we dug in with a roomful of incubators and investors to understand “The Elephant in the Room.”. You would think it’s fairly simple – incubators support entrepreneurs, investors are looking for a pipeline of entrepreneurs – so the relationship between the two should be a match made in heaven! In reality, many entrepreneurs who graduate from incubation and acceleration programs still aren’t able to get financing from the impact investors.
Why?
Well that’s where the pinball machine comes into play. Incubators are haphazardly bouncing around the pinball machine trying to meet expectations from those three stakeholders highlighted above.
The most common feedback that we got from investors is that most entrepreneurs coming out of incubation programs just “aren’t yet ready for investment”, and need more polishing. In fact, most investors don’t get their pipeline from incubators at all – they get them from peer investors and trusted connections elsewhere in the ecosystem.
Investors themselves admitted major communications gaps.
One is that they, themselves, don’t have a common definition of what “investment readiness” even means – yet incubators put an incredible amount of emphasis on getting their entrepreneurs “investment ready.”
Different investors have entirely different expectations on what they’re looking for, so it’s near impossible for incubators to keep track of everyone’s unique demands. Investors also recognized inefficiencies in how they can communicate their expectations and mandates to hundreds of different incubators.
“How we communicate [our priorities] for pipeline is not effective nor is it efficient because the pipeline will not change unless we go and activate that pipeline ourselves…through outreach [and] talking to…incubators…who are working in those spaces so that we can be able to unlock the value that we see in those sectors.”
– Investor
Even when incubators do select enterprises with particular investment funds’ criteria in mind, they also have to consider the needs of the entrepreneurs they are working with.
What’s the right ticket size and capital structure that’s right for the entrepreneur, and which investor out there can actually meet those needs? It can’t only be a top-down approach for the incubators, but a two-way consideration of what the investors are looking for and what the entrepreneur needs.
Let’s not forget that most often the incubators’ selection criteria for their entrepreneurs are set by the institution paying for the program, and development institutions want to see impact. Incubators are caught in the middle of the tension between selecting entrepreneurs based on impact and profit potential – the expectations of the donors and the investors.
“As much as the SMEs are in business, we [investors] are also in business, we need to make money at the end of the day.”
– Investor
“So I think there’s always a trade-off, especially for those that are in the impact investment space. There’s some trade-off when you’re thinking about having a strong ROI and strong impact.”
– Incubator
Incubators also recognized the need for better and tailor-made support to entrepreneurs, but cited numerous roadblocks to be able to provide it effectively. First, the time they have to run programs is too short. Support to help businesses grow is by its nature long-term, but most funded incubation programs are short term, not allowing for long-term support.
“There’s just not enough time to do any proper support…we have a program, [for] six months and you spend two months contracting and inception, then you have four months. And within four months, you need to have done some support, deployed funds, and shown success.”
– Incubator
Secondly, incubators are running very small margins and while they would love to do bespoke programming for their entrepreneurs, that’s a resource intensive strategy, which ultimately no one seems willing to pay for.
There are some incubators where entrepreneurs pay them directly for the services they render – which is amazing, but not a model that is prevalent in the industry. The investors most often don’t pay for the pipeline generated by incubators and few incubators get any success fees for investments made – all of which can lead to resentment towards investors.
This leads us to the development institutions, but because of the (obvious) power dynamics between those that fund incubation programs and the incubators that deliver these programs, the implementing incubator often lacks agency to negotiate on issues of quality versus quantity. The incubators will take the money, and do the best they can within the constraints given – short time, high volumes – no wonder the investors aren’t satisfied with the output.
Honestly, what do we expect?!
“Incubators and accelerators…aim to be very scalable, and that means they need to be very standardized, and investor relationships are a marriage where you have to develop really deep conviction about a small number…and so there’s a bit of a mismatch, and I think the more that an incubator or accelerator can build really deep conviction behind a smaller number…they can stand behind, that makes it easier to…trust what’s coming out the other side.”
– Investor
To make matters worse, because entrepreneurs can’t get money post-incubation or post-acceleration, since they’re “not ready yet,” they are looking elsewhere for funds and grant funding is becoming more and more prevalent – particularly in East Africa.
Grant funding on its own isn’t a negative thing, and could truly be catalytic to bridge the gap between incubation and investment. However, when there’s little accountability on how the money is spent and pressure from the grantors to deploy funds, we end up with a toxic environment where entrepreneurs aren’t using the money effectively.
“Our grant investors are also now in a hurry. They want to deploy their funds and they’re basically like, ‘Give me an entrepreneur that I can write a check to now’…So entrepreneurs are getting checks, but they didn’t have valid business models, or they didn’t have proper use of funds, or the money is not actually coming to accelerate or to scale a business.”
– Incubator
The result is that “grant-preneurs” are on the rise, with incubators citing a common trend that their entrepreneurs won’t consider engaging with impact investors because “the whole fundraising process is a bit too tedious, complicated, and not worth the effort.” The rising trend is entrepreneurs who only want grants, and nothing else.
Incubators are concerned about this ever-rising demand for grants for a few reasons. Firstly, the right entrepreneurs might not be getting the available funds, and those who are “in the know” end up getting visibility and opportunities to apply to such programs – and more importantly they get good at it. In my own experience with enterprise support, oftentimes the entrepreneurs who were the smoothest talkers, actually did the least to grow their businesses; and some of those who had very solid business, were the least articulate at explaining it, hence have the least chance at getting any grant.
Secondly, entrepreneurs may not be able to use those grants in a catalytic way, because they may not have enough financial advisory support to really understand how best to use that money. Common examples are to procure machinery that can’t run at capacity – was that the best use of funds? Maybe they didn’t think through their supply chain and cash flows to actually have the machinery run at capacity. Maybe if they had someone looking very deeply at their financial projections, the funds could have been genuinely utilized in a more catalytic way.
At the other end of the spectrum, we’ve all heard stories of entrepreneurs who didn’t use the money for the business at all. Maybe they’re a few bad eggs that spoil the bunch, but I personally worked with an entrepreneur not so long ago, who received a grant – prize money – from an alphabet soup development institution (who shall remain nameless). This entrepreneur didn’t meet a single milestone, but already had the money, and showed up with brand new expensive phones and laptops for his team. He also brought in a lady to co-pitch his business with in order to meet the “woman-founder” quotient, and to this day, I strongly suspect she was a tagalong cousin or family member, who actually knew nothing of the business. He always did all the talking, and she couldn’t answer a single question.
“Then we had…’Did you give the money to a woman?’ And if you didn’t, then it’s a problem. So now we are also finding entrepreneurs where the business is owned by a man, but the woman is at the front, at the face.”
– Incubator
All in all, from the perspective of incubators, grants distort the market for entrepreneurs, and the incubators we’ve spoken to have a deep seated fear that grants are here to stay – they’re not a passing fad.
“I was just sitting having my coffee [and] I thought, what if [grant funding] is permanent? We keep thinking about it as temporary, like see if it will go away, but what if it’s permanent as a disruption? And it’s something that is going to keep disrupting how the world works, both its entry and its exit, you know, how it’s coming and going. So what if grant funding and the reality of grants is sort of permanent? How does that change how we interface with entrepreneurs and how we develop our programs?”
– Incubator
Solutions to the Pinball Dynamic
The obvious solution to this pinball machine problem, is to involve investors in the co-creation at the design phase of the incubation program.
The ability to do that requires not only a strong understanding of who’s doing what, in each sector so you know who to involve, but also requires strong working relationships between incubators, funders, and investors. Unfortunately, the reality is that current relationships between these players are strained.
Incubators feel like investors “don’t want to hang out with us” and that they’re “always chasing the investors,” yet investors expect “quality pipeline” from incubators on a silver platter. The incubators are left wondering how to know what the investors want, if they never get a chance to connect, resulting in a strong sense of resentment.
If we continue to operate in silos, we will only continue to perpetuate inefficiencies across the ecosystem, and entrepreneurs are the ones who will suffer. Individually, each entity can only do so much, but an integrated and interconnected impact incubation industry will result in a thriving environment for impact entrepreneurs.
“On the ESO side, they say the investor connection is not working, so they start to try and build their own fund. And then the investors are like, we’re not getting a good pipeline, so they start to build their own venture studios and acceleration programs. And so everyone tries to do it all and then doesn’t do anything very well at the end of the day in trying to solve the problem.”
– Incubator
Pollinate Impact will continue to host these deep dive conversations (check out our last Funding Flora webinar) and (hopefully) launch a working group with impact investors – a small coalition of the willing – who want to not only talk about the problems we’re seeing every day, but who want to proactively change the status quo.
If you’re an incubator, investor or funder – do you resonate with these issues and how are you resolving the challenges of this game?
Arielle Molino
Arielle Molino is the Chief Convener of Pollinate Impact. She has 15 years of experience in impact investing, social entrepreneurship, and non-profit sectors in Africa, India, and the United States.
