Unlocking Early-Stage Financing for SDG Partnerships

Chapter 4

Driving Impact: Recommendations and Conclusions

While SDG impact is the driving priority for partnerships and funders, achieving that impact is not easy, and our research indicates that it is often complicated by other funder priorities. There are several actions that partnerships and funders can both take, however, which can guide them on the path to true SDG impact.


Through this report, we aim to help commercially driven partnerships graduate from grant funding and secure commercial investment by encouraging partnerships, funders, and investors 
to try new approaches of financing to accelerate transformative SDG action.

Chapter 2 discussed the challenges partnerships face along their funding journey, particularly when they get to Stage 2, and illustrated how best-in-class partnerships are starting to overcome these challenges. Chapter 3 identified new financing approaches offered by grant funders and investors, which can help partnerships more easily access returnable investment. In this chapter, we reflect on what this means for the problem at large—that commercially driven partnerships are finding it difficult to secure financing after initial grant funding in Stage 1.

We find that partnerships struggle to get appropriate investment because funders and investors prioritize their own concerns—such as political capital, reputation, and risk—over achieving and demonstrating true impact. This complicates their ability to provide the optimum financing to support partnerships in accelerating the SDGs. Likewise, commercially driven partnerships struggle to demonstrate impact, partially because it is difficult to attract financing to scale but also because it is not easy to adopt the best practices recognized as important for partnerships to drive transformative change (the latter of which are the key partnership success factors described at the end of Chapter 2). All of this inhibits the path to impact.

We do not fault any grant funders or investors for this. Stakeholders provide the capital, so they have the right to set the stipulations. However, such arrangements end up emphasizing the needs of the financiers and not the needs of the partnerships and the SDGs they are seeking to advance.

We provide four recommendations to help partnerships, grant funders, and investors address the challenge of the missing middle. These recommendations should help partnerships better navigate Stage 2 funding. We provide specific guidance and examples by major stakeholders: partnerships, philanthropies/foundations/CSOs, donor governments, DFIs, and private investors.

4.1 Recommendation 1:
Grant Funders and Investors Should Adopt Approaches to Financing That Stretch beyond Their Comfort Level

By taking new approaches to financing, grant funders and investors can create more financing opportunities for partnerships. Chapter 3 discussed several ways in which grant funders and investors are already better accommodating early-stage, commercially driven ventures. Financiers should do more of each of the following:

  • Philanthropies, CSOs, and donor governments should increase the proportion of their disbursed funding that is dedicated to catalytic structures. For example, if they currently do not participate in any catalytic capital arrangements, they should aim to pilot one new engagement during a set period of time. Or, if they already have had success with catalytic capital, they should consider building a dedicated program like the Swiss Re Foundation or join existing groups, such as the MacArthur Foundation’s Catalytic Capital Consortium.
  • Donor governments should expand their toolkit of financial instruments in a way that will crowd in private investment; for example, as a first-loss guarantor or insurer or as a founding member of a coinvestment fund. They should take on more risk, especially if they do not have the expectation to receive returns. For example, they can set up catalytic capital programs like USAID’s DIV, which, as mentioned in Chapter 3, only provides grants to more high-risk initiatives in emerging economies.
  • DFIs should expand to new approaches for pipeline development and investment; for example, by establishing end-to-end facilities and early-stage ventures. To help overcome the perceived lack of investable projects, DFIs should set up end-to-end facilities that develop projects from early-stage ideas to investable business opportunities. By doing so, DFIs are also able to influence project preparation outcomes to fit their desired impact goals. Additionally, they should support partnerships in funding Stage 2 through early-stage ventures, which can meet partnerships at a smaller ticket size.
  • Funders should collaborate in “impact chains.” Financiers can provide investment over the different funding stages that they are typically involved with (e.g., donor governments at Stage 1, private investors at Stage 4), but through a coordinated approach. Leadership of such impact chains can be driven by any funder, who would be responsible for approaching others to join.
  • Private sector investors should pilot a reduction of their ticket size. Investors need to overcome the risk perceptions discussed in Chapter 3. As a first step, they can pilot smaller investments to partnerships. In this way, they can truly assess if their perception of risk actually matches reality and make even larger investments as appropriate.

4.2 Recommendation 2:
Funders and Investors Should Be More Open in How They Make Investment Decisions and More Flexible with Their Funding Requirements

If funders and investors can streamline their eligibility and reporting requirements, they can enable partnerships to have greater freedom to achieve proof of concept. This is a win-win for both partnerships and their financiers. Partnerships are not beholden to trying to satisfy numerous criteria—or, at least, they are not as restricted in whom they can seek funding from—freeing them up to fully pursue their commercial aims in a strategic manner. Financiers, on the other hand, set themselves up to fund partnerships with greater potential for impact. The following are some suggestions for stakeholder actions:

  • Collaborate with other financiers to align reporting metrics and processes. Several interviewees commented that in terms of reporting burden, grant funders that are aligned in a given SDG area and/or region could better collaborate to develop a standardized reporting approach or system such that partnerships that layer grants do not have to report to multiple entities with multiple reporting frameworks. Collaboration can also help grant funders and investors understand ways in which they can increase reporting flexibility while still meeting their organizational mandates.
  • Reduce process and timeline complexities. Partnerships have noted that some transaction processes can be complex and unpredictable, and trying to manage through these can distract them from their commercial endeavors. But if grant funders and investors streamline their processes, partnerships can focus on accelerating the SDGs and attaining the impact desired by all.
  • Focus on funding strong teams that have demonstrated a good understanding of the issue they are trying to transform. If key initiative selection and performance metrics are narrowly focused on overall funding released or other traditional metrics, it can narrow financiers’ views of what is bankable or what will drive impact. Grant funders and investors should expand their initiative selection process and metrics to focus more broadly on strong teams, ideas, and processes.

4.3 Recommendation 3:
Investors Should Be More Transparent and Increase Their Accountability to Better Optimize Impact

Investors may find it hard to prioritize impact over other concerns partially because impact is difficult and expensive to measure and manage. The special section on IMM in Chapter 3 highlighted leading IMM challenges as well as leading IMM tools and frameworks to help improve investor IMM. The following are some suggestions for investors based on this review:

  • Investors should adopt generally accepted impact measurement systems and impact principles. Alignment by investors on impact performance measurement systems (e.g., IRIS+) and impact principles (e.g., IFC’s Operating Principles for Impact Management) will build consistency and a better understanding of relative market performance. By analyzing and comparing the impact outputs in a standardized way using generally accepted systems and principles, investors will have evidence of which contributions work best for the missing middle problem and which require adjustment; this will enable investors to assess how they stack up to peers and to the impact challenge they seek to address. Better still, with this evidence, investors may take mitigating action early enough in the life of the investment for an improved result. Ultimately, adoption of generally accepted measurement systems and impact principles builds recognition of the business value and importance of impact investment for partnerships.
  • Investors should publicly report on their impact performance. Although the recent report by BlueMark (2022) acknowledged the cost of reporting and the lack of impact performance reporting guidance or formats available to investors, investors can begin adopting best practices, including making reports publicly available and reporting consistently on some common quantitative and qualitative information, such as the following (BlueMark 2022):
    • The fund’s impact objectives and targets at the portfolio and individual investment level
    • The impact performance of each investment and aggregate impact tied to standardized metrics (e.g., IRIS+), including both positive and negative and intended and unintended impacts; performance should be described relative to the investor’s targets, relative to external benchmarks such as the SDGs, and over time
    • The impact measurement and management frameworks the investor is using
    • Lessons learned from the investor’s experience and impact risks
    • An overview of early-stage financing opportunities and eligibility criteria to allow partnerships to better identify financing opportunities.
    • A description of stakeholders standing to gain from investments and qualitative information on these stakeholders’ perspectives to validate impact performance analysis
  • Investors verify and/or audit their impact performance to improve credibility. Given that only half of impact investors publicly report and conduct third-party audits, there is a clear need for investors to better demonstrate how they are addressing the missing middle challenge, their social and environmental performance, and their financial performance. Although such verification may add a layer of cost and potentially reduce margins for investors, this should be balanced by the significant reputational value to be derived from the rigor of verification. More than ever, investors’ impact claims are under increasing scrutiny by regulators and the general public at large. Further value can be achieved from the learnings that inevitably arise from verification and audit processes to improve investment systems and processes. Investors can lean on impact verifiers such as BlueMark; their own auditors, who are increasingly including these approaches in their procedures as a value add; independent consultants; disclosure guidance by groups such as the Task Force on Climate-related Financial Disclosures; and impact practice standards and certification schemes such as those established by the UNDP.

4.4 Recommendation 4:
Partnerships Should Focus on Building a High-Quality Funder and Incubation Network

Partnerships also have a role to play in demonstrating that they have the potential for impact. As discussed in Chapter 2, our case study partnerships were generally able to overcome and work around common financing challenges. Their ability to build a high-quality network—whether it be via funder, adviser, or mentor—set them up to find returnable investment. They were also particularly strategic in how they set out on their partnership journey. These characteristics echo the key success factors from our first report on partnerships, A Time for Transformative Change. Partnerships can take these specific actions:

  • Secure one or two long-term funders or sponsors that are willing to provide flexible catalytic capital with a low reporting burden. Often these anchor funders provide multiple rounds of funding and connect partnerships with investors within their circle.
  • Collaborate with partnership accelerators, incubation programs, or platforms. Partnerships should work with platforms for mentorship and networking as well as technical and financial assistance. A good place to start is connecting with those mentioned in this report. Even if a particular platform may not be the best fit, platforms can suggest other programs in their ecosystem.
  • Focus on other key partnership success factors. Partnerships can take specific actions to develop a business plan that includes a strategy to secure investment, build a strong team, and be intentional about understanding the SDG challenge so that they can properly adapt their implementation strategy over time.

4.5 Concluding Comments

We hope this report has highlighted that each stakeholder group—partnerships, grant funders, and investors—has a role to play in addressing the challenge of the missing middle. Prioritizing other matters over impact has prevented grant funders and investors from providing the type of financing most supportive of commercially driven partnerships—financing that is flexible, transparent, and innovative. And without proper financing, partnerships are mired in the missing middle, unable to advance their transformative ambitions. Partnerships, too, have a role to play by better following key partnership success factors to better equip themselves to seek returnable investment.

There is great potential for partnerships to serve as vehicles for mobilizing the private financing needed to achieve the SDGs. Tapping into private financing is one of the top priorities for the global community, and one that will likely remain of great importance. As next steps, it will be important to follow commercially driven partnerships—both those featured in our report and others in the greater development community—and track how they are doing in their journeys to seek returnable investment, especially because transformation is a process that takes time. More work should be done as well to encourage grant funders and investors to adopt many of the catalytic approaches mentioned in this report, such as advisory support or consultation.

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