Two years ago, a startup founder who was one of the grantees in my portfolio, proudly informed me on Skype that they were undergoing due diligence for a potential investor. I was immediately delighted since the “leverage ratio” or the additional amount in private sector funding generated by every dollar of philanthropic grant has become one of my key performance indicators as a USAID Grants Manager. While I was mentally celebrating how sexy my annual evaluation would look from this news, I asked “Who is the investor?”.
The answer to that question quelled the celebration in my mind. This startup was founded to reduce food waste along the country’s supply chain of agricultural products. It was intended to offer a way for small farmers to avoid middlemen and negotiate directly with institutional retailers, therefore increasing farmer incomes and hopefully reducing retail prices. This startup gained enough traction that the venture capital arm of one of the country’s biggest retailers is interested in investing in it.
The deal did not push through. I expressed my full support to the founder who deserves the investment. Yet I spent the next few days mulling it in my head – “Did I allocate 20% of my grant portfolio to subsidize the R&D of a company with a $15B market cap?”
Disrupting Development Work
The past three decades have shown the powerful ability of startups to reinvent society and the world. Industries one by one succumbed to the disruption brought about by digital technologies from communication, finance, government, and education to entertainment. This wave of transformation, once limited to the private sector, has increasingly expanded to the realm of international development.
Innovation has become a common requirement in development projects. Over the past fifteen years, huge innovation-focused funds have emerged. Global Innovation Fund was established in 2015 with the support of multiple aid agencies. USAID’s Development Innovation Ventures was founded in 2010. Both funds awarded more than $300 million in funding for unique solutions aimed at improving global health, education, and agriculture.
Integrating environmental and social goals in corporate finance has further opened pathways for the private sector to engage in development work. Impact investing, blended finance, and private sector engagement have become increasingly common approaches to structuring development interventions.
The 2024 Financing for Sustainable Development Report estimates that financing to achieve the sustainable development goals (SDG) is short by at least $2.5 trillion annually, the increased investment and funding are very much welcome. However, these new funders come with a new set of design principles that deserve closer scrutiny.
*1. https://sdg.iisd.org/news/annual-sdg-financing-gaps-measured-in-trillions-fsdr-2024
What Changes?
1. Focus on Impact Indicators
Melinda French Gates went on TV a couple of months ago to demonstrate the AI-assisted portable ultrasound device they are testing in Kenya. This solution enables midwives, with a couple of hours of video training, to carry out antenatal ultrasound screening for expectant mothers in low-resource settings. Timely screening plus a good referral system can drastically reduce the risk of maternal deaths.
This is the model of digital solutions in development. Technology that overcomes barriers of language and expertise. A design that removes the inefficiencies of funding training programs. It also directly targets the impact indicator (maternal mortality) and creates a solution for it.
This focus on impact indicators altered the decision-making in terms of picking which solutions to support.
“Solution A can bring about N% change in SDG2a for X amount of dollars spent.”
2. Emphasis on Scale
The proposal templates for most innovation funds include the question – “How will you reach your first million people?” This is the social impact version of defining your go-to-market strategy.
Impact investing may have a specific social goal it supports, but there are still expected returns. In tech startups, returns occur once a massive pool of users is established and the fees collected from them more than cover the initial capital outlay needed to build the solution.
The same expectations are now laid upon entrepreneurs who work in difficult environments, and who develop unique solutions grounded in the problems of their context.
3. Risk Appetite
When I think of the characteristics of the startups we have funded, what they have in common is they are headed by established founders with very high potential for success. Even as a startup, the founders are backed by a very successful business already and have a history of raising money from private investors. Whereas the decision points for selection used to revolve around “Can they deliver on the outputs they promised?” and “Can they manage finances in compliance with our rules?”, my new KPIs mean I am also concerned about “Are they investable?”
*2 https://www.youtube.com/watch?v=9lH9zMaSOeU
Who Gets Left Out?
1. Ecosystem Builders
A recent article from one non-profit leader described what went through during the selection process for the recipients of Mackenzie Scott’s very generous and unrestricted million-dollar grant. That non-profit works with other non-profits to build their non-profit management systems, like the work of MzN. Several of their client non-profits were awarded the grant, while they were not.
This will become more common as a non-profit’s value is pegged against impact indicators. Critical players who provide support services like capacity building, systems development, community building, or data sharing will be devalued because their contributions are difficult to peg against impact.
2. Locally-Led and Grassroots Organizations
Some of the most cost-effective solutions I have come across were from grassroots organizations that worked within the resources available in their communities. From early warning systems that relied on different local triggers or tapping the local babaylan (priestess) as health care promoters in the village, there is a whole range of solutions that will likely never scale.
Despite its ability to reduce pain points or to improve living conditions, these solutions will have a difficult time getting funding.
3. Organizations that Lack Tech Capacity
In the current funding landscape, technology is often viewed as the golden key to solving complex development challenges. However, not all organizations, particularly those at the grassroots level, possess the technical capacity to integrate sophisticated technological solutions into their work. These organizations might be deeply embedded in their communities and have a strong understanding of local needs, yet they could lack the resources, expertise, or infrastructure to adopt and maintain digital tools or platforms.
As a result, these organizations will be sidelined in favor of tech-savvy startups or larger NGOs that can demonstrate an ability to leverage technology at scale. This trend risks creating a divide where the most innovative solutions are only those that are tech-based, while equally effective but less technologically driven approaches are overlooked.
4. Long-Term Processes
Development work often requires long-term, patient processes that involve gradual community engagement, trust-building, and the slow but steady implementation of programs that address root causes rather than just symptoms. However, the current funding environment, with its emphasis on rapid scalability and measurable short-term impact, tends to favor projects that promise quick results over those that require sustained efforts over time.
Long-term processes, such as community-based participatory research, capacity building, or social norm change, do not lend themselves easily to the metrics-driven approach. These processes are often iterative, non-linear, and deeply context-specific, making them difficult to quantify in terms of immediate impact or return on investment.
In summary, the current trends in development funding may inadvertently marginalize organizations that lack technological capacity and devalue long-term, process-driven approaches, even though these elements are vital for achieving true and lasting impact. This shift underscores the need for a more balanced approach that recognizes and supports the diverse methods and capacities of organizations working towards social change.