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The Scale Conundrum 

Profile photo of Alex Ross
Alex Ross
August 21, 2023
August 18, 2023
Investment in innovation that disrupts the humanitarian sector is very much needed. 

As a humanitarian sector we are falling short on the SDGs and the Grand Bargain. Crises are on the rise and trust in charitable institutions is decreasing from individual givers to affected populations and local actors.

Investment does not need to incubate ideas. Ideas already exist at local grassroots levels. There are many budding humanitarian entrepreneurs with lived experience, proven, cheap and highly effective solutions which are simple and can be replicated and contextualised across communities, countries, regions and continents. 

Based on my learning, outlined below, if I were to invest in innovation in the humanitarian space I would:

  • Build an investment model based on failure. It's already happening anyway. 
  • Invest in people with ideas. The idea always changes, so you want to believe in the problem they're solving, and the people that are committed to solving it. 
  • Go local where innovation is already happening, with good, simple, replicable and evidenced ideas.
  • Support these entrepreneurs to find partners to take the innovation to scale in other contexts. 
  • Provide flexible funding and invest my time not in budget tracking or due diligence but rather in influencing perverse incentives that stop much needed change from happening.

Innovation and Scale are two relatively new areas of investment in the humanitarian system over the last five years. Yet, it appears that success has been elusive.  Now, after three years of prototyping, testing, iterating and trying to scale a solution to a well identified problem, the barriers to achieving success have become quite clear. 

I am by no means a technologist, not even a tech savvy person. I am not an experienced investor nor an experienced entrepreneur. But I have spent the last three years trying to get funding to build and scale an independent, safe, open feedback mechanism for people receiving Aid. And, it's been harder than expected and harder than my entrepreneurial colleagues in the private sector are experiencing. Why?

Below I highlight seven areas to compare the burgeoning innovation and scaling investment space between entrepreneurs in the private sector with the structures and approaches in the humanitarian sector that I have seen and experienced. This experience has led to the above views on how I would invest in innovation in the humanitarian sector. 

1. Financial projections vs budget actuals

Private Sector:

When applying for investment, the entrepreneur develops a financial model with a relatively unachievable growth curve looking like a hockey stick, matched with financials and letters of intent. Once funding is received this is not revisited, funds can be spent as is needed, to ‘pivot’ and adapt based on learnings. 

The only thing that matters is customers and sales or talk around the potential for this in the future. These then inform the next round of projections and the baseline for the hockey stick. The value of the asset, and therefore the potential for investment, is based on these projections and thus are drivers for more investment (or not). As can be seen in recent infamous legal battles, people can raise a lot of funds off a lot of hype around made up projections. 

One projection and set of figures is required and every investor sees the same data (to various degrees of detail). 

Humanitarian Sector:

When applying for innovation grants, a budget is developed, based on the criteria of each donor (We won't fund more than X in staff costs or X% in over heads etc), after passing the first stages the donor can ask the charity to make adjustments to the budget as well as requesting time sheets and additional deliverables without any increase to the budget. Every donor requires a different budget format and has different criteria. 

If funding is approved, the spend against each budget line must be reported on at a cadence and in a format requested by the donor (monthly, quarterly). If a ‘pivot’ or adaptation is needed to improve the potential for success of the innovation, it usually requires approval if it varies by more than 10% from the initial proposed budget lines or outputs. As a result, organisations often avoid getting adjustments approved in case there are other negative repercussions on the relationship with the donor and increased monitoring or a hold on the grant. Funds are deposited in a specific cadence (quarterly for example), often requiring reporting on full spend before the next disbursement is made.

The more local an organisation you are, the greater the reporting criteria, the smaller the funds available and the more oversight of the spending there is. 

2. Mission objectives vs project framework

Private Sector:

An investor states the generic end goals they are interested in supporting: Technology, or Climate Change etc. The investors scout for ‘good people with good ideas’ and entrepreneurs reach out directly asking to pitch their innovation. Often agents make introductions, and can receive a cut if investment results. An entrepreneur has one pitch based on their idea and expertise and takes this to 100s of investors. No matter what their structure or who they are, they can pitch at any time.

Humanitarian Sector:

For humanitarian innovation, every donor has specific criteria and end objectives that they want to achieve with pages of definitions and criteria about who can apply: For example: An app which is available in 2 languages for health centre staff in Uganda to reduce infant mortality by 50%. Must be a CSO, in partnership with the private sector and have expertise in the Ugandan health system, technological best practices and experience building Apps for health sciences and have expertise in 3 main causes of infant mortality to children in Africa.

Every donor has a different pitch or application format and a different formulation of how the work of the humanitarian entrepreneur should fit their criteria. As a result, to get funds the full innovation often is broken down into smaller parts to try to align with the donor's criteria. This can result in the innovation being projectised and only some aspects of the idea being funded for certain periods of time, resulting in an erosion of its full potential. 

3. Funding cycles vs grant proposals

Private Sector:

An investor identifies where in a startups journey they can bring skills and want to engage. The earlier they engage, the more likely the returns on that investment are if the project succeeds because the value of the equity they ‘brought’ increases as the value of the company increases. 

Some investors prefer to wait until a concept has been iterated, tested and has been taken to market. Others want to find the young university students in their garage and stay with them on the journey to success. There are well defined names for these gateways for investment: Seed, Series A etc. Investors and entrepreneurs negotiate the terms of the investment. 

The opportunities for new investment happens when an entrepreneur defines that they are needed and they can prepare and seek funding at any time.  

Very few investment funds go to the existing power holders/ big players to fund their innovations, as they have their own funds to invest and to buy out successful innovations to scale them further (or kill them off if they could be competition).

Humanitarian Sector:

In the humanitarian sector timing is set by donors, not by the need of the innovation. Innovation grants are announced at different times of the year. It usually takes a year from when the grant is announced to when the first of a series of payments for the grant is made into the NGOs account. Most often it costs money to prepare and submit these grants as they are highly individualised, competitive and require very detailed grant specific submissions. This removes the chances of smaller organisations applying. 

Donors prefer timelines of one to two years maximum for an innovation and often have different amounts of funds for different stages of the start up: Prototyping, Testing, Scaling for example. Unlike the private sector, all of the parameters around timing of funds, amount of funds etc is defined in advance by the donor and not the entrepreneur or the experience of innovating. 

If an innovation starts and exceeds the budget or fails in its first iteration the likelihood for further funding to be granted from any donor, even if transparency and learning is a value, is minimal. This results in high levels of risk aversion which can stifle innovation.

The stop start funding pattern for charitable innovations also leads to limited evidence of potential of the innovation in between ‘projects’ or innovation cycles due to the lack of investment for continued marketing or improvements and limited access to flexible funds.

4. Sustainability of innovations

Private Sector:

Investors expect a return on their investment and an exit strategy is considered a success - how can you sell the innovation for more than was invested and then start a new innovation?  Investors calculate that 80% of what they invest in will fail and they hold out for a few to do very very well.  They expect for second and third rounds of raising equity as a sign of growth.

Humanitarian Sector: 

Donors have limited funds and do not want to be depended on to sustain a new innovation or for an investment to end after their grant ends.  Therefore, match funding is sometimes required as a way to evidence the sustainability of the innovation (ie: there are funds to continue the innovation after the end of the grant period). This removes the eligibility of smaller, local or newer start up charities from applying.

As a result, to mitigate the real risk of financial sustainability of an innovation, investments often go to large organisations or the existing ‘power holders’ to incubate ideas within their charities as a way to provide an element of financial stability. This tactic effectively addresses the risk but results in the new idea in the garage not getting a chance. This metaphor can be equally applied to local organisations as to small or start up charities and results in power holders defining what innovations will be successful, virtually eliminating disruption to the sector.

5. Equity vs upfront payment

Private Sector:

Board members, advisors, and networkers all make introductions. Co founders and staff themselves all work for equity. Some draw a salary or charge a high day rate for expertise. All with the widely held belief that if you get the best involved and the right networks your potential for greater scale and therefore greater resulting equity is higher.  

Entrepreneurs can build a wealth of experience and talent around them without actual money. Networkers get paid if a deal is successful, Board members get a share of equity, Founders ‘boot strap’ their first few years, charging all expenses back to the business but often not withdrawing a salary. 

Board members tend to be successful entrepreneurs themselves who have funds and may invest in the innovation themselves and/ or bring in their wealthy, successful entrepreneurial colleagues to invest as well. People invest their time in advance, dreaming of the day they will get rich and famous by selling their equity. 

Humanitarian Sector:

Potential founders with experience in the charitable sector tend to be comparatively financially poor. Those who understand the sector, incentives and see opportunities that could cross across multiple cultures have usually worked in the humanitarian or charitable sector for most of their careers. They are usually older, possibly with children and mortgages and definitely most often without a pension fund. 

Staff cannot be offered equity or a promise of a bonus in return for lower salaries. Contracts are insecure due to the stop start of the funding cycles and salaries are lower to try to make the grant stretch and fit within budget criteria set by donors. This results in higher staff turnover and staff with less experience being recruited by smaller, local or start up charities. 

Board members are volunteers who give up their time to be associated with a new initiative. They are more likely to support an initiative with a large, recognisable brand (UN Ambassadors, etc) and these roles are quite competitive. Finding a Governing Board member or networker to open doors for free or help find grants is nigh impossible due to the leg work required and the highly competitive nature of the funding environment. 

Increasingly successful entrepreneurs are interested in being associated with the charitable or humanitarian sectors. Being associated with recognisable brands is more attractive to them and their reputation, reinforcing the investment in branding recognition. This understandable pattern however confounds the earlier issue of innovation in the humanitarian sector being held by the current power holders and stifling the potential for disruption.

Entrepreneurs in the humanitarian sector do not go in expecting to get rich from their innovations, but they do want to feel like their work is having an impact as well as needing to have some level of job security and a basic wage for them and their team in order to build a successful sustainable solution.

6. Risk Appetite 

Private Sector:

Investors calculate that about 80% of investments will not deliver a Return On Investment (ROI) but a few successful or dreamed of Unicorns, will cover the costs and result in profits for further investment. Investors have different theories of change based on who and when to invest but the risk tolerance is high.

Data shows that start ups in the private sector do fail and few make it to their 5th year in business. 

Humanitarian Sector:

Because individual donations and public taxes are used to invest in humanitarian innovation, risk tolerance is very low. Every penny of funds diverted to support innovation could be spent on saving a life or responding to a crisis somewhere else. This results in a need for more stringent application processes, budget reporting, brand management etc.  

However, what has been the success rate of investment in humanitarian innovation over the last 5 years? 

What is the conversion rate from a pilot which showed evidence of improved impact to a widespread adoption and scale?

What is the risk and financial cost of the status quo? 

7. Competition vs Consortiums

Private Sector:

Entrepreneurs are highly competitive with non disclosure agreements, takeovers and successes and failures played out on social media and in the public sphere. Success is based on profit for investors, entrepreneurs and Board members alike. It's the name of the game.

Something succeeds if the user appreciates and values (pays for in some way) the experience, thus creating a profit for the investors and those who hold equity in the company.

Humanitarian Sector:

Cooperation, open source, consortiums, partnerships and integration is the lexicon of new initiatives in the Humanitarian sector. The talk is very collective but the incentives drive a highly charged, competitive and protectionist strategy. 

This is because the client is essentially always the donor (Foundation, individual donor, Government - with tax papers money etc). In the vast majority of cases, even if an innovation is paid for by INGOs or the UN, their funds come from these same original sources.  The client is never the person affected by a crisis. 

There is a high risk aversion to any media about fraud, abuse or diversion of Aid in the western media. It feeds an agenda or protectionism and reduces overall commitments to the funding of Aid. Again, this reinforced a greater investment of all actors in branding, positive storytelling about impact (ensuring affected people's voices are not central - as per clients views in the private sector), protectionism of existing donor relations etc. 

Investment and resources from local communities, volunteers, national philanthropists, diaspora etc flows through a different system, operating at what some call the ‘edges’ of the system. A few innovations have been successful in capturing this funding and remaining at the edges of the system while impacting some local populations (Give Directly, local philanthropy for example). But real scale must harness the billions invested annually in the ‘official system’.

Imagine if only services large Hotel brands wanted and would pay for would get investment, AirBnB would never have existed. 

Imagine if we didn't want negative comments about a holiday being made public incase it tarnished the whole travel industry. Tripadvisor could never have existed.  

8. The inclusion dichotomy

Private Sector:

White middle class men receive up to 98.7% of investment. There is a growing movement to diversify with a small but growing amount of investment, being ring fenced for women founders or founders of colour. Representation on Boards and staff is being analysed in some businesses and it has been evidenced that a more diverse Board and Leadership team results in greater returns on investment.

Humanitarian Sector:

Grants for innovation are aimed at impacting and therefore must include partnerships and design processes with local populations from diverse backgrounds including ethnicity, age, gender, ability, legal status etc. They need to be contextualised and have impact nationally. We have seen a shift in recent years towards greater diversity and representation on Boards and in leadership, possibly more so than the private sector. However, many logistical barriers are faced that are not relevant for the private sector. For example:

  1. Sending money to countries in conflict due to fear of funding terrorism
  2. Inclusion of staff from the South on global systems (Quick books etc)
  3. Accrediting Governing Board members ID and addresses from global south locations on charitable legal documents.
  4. Opening bank accounts with Governing Board members from global south countries

These are not issues unique to innovations but they do create glass barriers to delivering on stated aims and objectives of greater representation and inclusion and it all costs time and money.

In summary, current innovation funding is not comparable to innovation in the private sector. If donors want to see innovations that disrupt the humanitarian system or innovations that can go to scale to create change in the sector, then the current approach is not the answer as it kills the huge amount of innovation that exists and by design (intentional or not) it reinforces the existing incentives and power structures. 

However, if donors want to see innovations that help to incrementally improve the existing system through the use of technology, then that should be made explicit and the existing approaches maintained

If true innovation and scale is the ambition then it is possible, but we need to:

  • Build an investment model based on failure. It's already happening anyway.
  • Invest in people with ideas. The idea always changes, so you want to believe in the problem they're solving, and the people that are committed to solving it.
  • Go local where innovation is already happening, with good, simple, replicable and evidenced ideas.
  • Support these entrepreneurs to find partners to take the innovation to scale in other contexts.
  • Provide flexible funding and invest my time not in budget tracking or due diligence but rather in influencing perverse incentives that stop much needed change from happening.

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Alex Ross
Loop Lead