Unlocking Early-Stage Financing for SDG Partnerships

Chapter 1


We are interested in commercially driven partnerships—that is, partnerships with transformative ambition that aim to affect market systems through profit-generating models. These partnerships are struggling to meet their potential, becoming mired in the “missing middle”—the transitory period in which they have outgrown grant funding but are still too early-stage for commercial investment. In this chapter, we set the stage by defining partnerships and their funding environments, and by laying out key knowledge gaps.


1.1 Background

This report aims to help commercially driven partnerships, grant funders, and investors more effectively drive transformative Sustainable Development Goal (SDG) action by highlighting new approaches to finance. It is a follow-on publication to A Time for Transformative Partnerships, a World Resources Institute (WRI) report that identified the key success factors of transformative partnerships A partnership working to make changes that are systemic, long term and sustained, and disruptive of the status quo, such that they align with the SDGs and Paris Agreement goals (Li et al. 2020). Also referred to as partnerships with transformative ambition or transformative potential. (Li et al. 2020). This report is coauthored with the Global Impact Investing Network (GIIN), a prominent champion of impact investing that provides infrastructure, activities, education, and research to accelerate the development of a coherent impact investing industry, as well as with Partnering for Green Growth and the Global Goals 2030 (P4G), the global partnership accelerator.

With an estimated US$4.2 trillion required annually to finance the work still needed to achieve the SDGs in developing countries (OECD 2020, 2021b), it is urgent that we rethink conventional approaches to development finance. Even with the myriad of admirable initiatives driving progress towards the SDGs— for instance, the global population without access to electricity has declined by over 30 percent in the last decade—advancement in this “Decade of Action” has slowed without sufficient funding to address the SDGs at a sufficient level of scale and pace of impact (Sun et al. 2021; UNCTAD 202>0; UNSG 2019).

This financing gap is being exacerbated by the COVID-19 pandemic. In 2020 alone, international private sector investment in developing and transitioning the economy fell by one-third (UNCTAD 2020), and the protracted and pervasive nature of the pandemic suggests that relief will not come easily.

To find the required finance and move beyond the status quo, innovative approaches are necessary, especially in developing countries. Traditional approaches to development grants alone are insufficient, and opportunities provided by private sector finance—for instance, when used in conjunction with public sources—are now recognized as essential for bringing forth innovative, transformative solutions (Tan 2019; Türkelli 2021). The global community recognizes this as well, with SDG 17 noting that governments A governing body, agency, or ministry at the national, regional, or state level. Governments can act as public sector funders or investors for partnerships. can catalyze finance and innovation by partnering with private sector partners. Although partnerships are considered to be critical, definitions vary widely. During more than three years of research, our team’s understanding of partnerships has evolved. Initially viewed as a formal construct between multiple stakeholders, we have adopted a looser definition of partnerships throughout this report—that is, an informal or formal, voluntary collaboration between parties whereby stakeholders agree to share resources, accountability, risks, leadership, and benefits to meet a specific SDG-related objective (UN DESA 2015).

Securing scaled funding has been a perpetual challenge for partnerships that seek to drive the systemic, sustained transformation needed to address the SDGs (Li et al. 2020; World Economic Forum 2019). Research suggests that such partnerships often have trouble moving past their predominantly grant-based start-up and early growth phases to commerciality because they struggle to attract next-stage investment from more commercially minded investors (Runde et al. 2019; World Economic Forum 2019).

And it is not that this capital is lacking. Institutional investors alone, for example, hold $100 trillion in assets globally (OECD 2021a). Even just 4 percent of these assets would be sufficient to fill the SDG financing gap if channeled towards viable investments that address development goals. And despite COVID-19, 72 percent of investors have noted that they plan to either maintain or increase the volume of capital dedicated to impact investing Investment that prioritizes positive social and environmental benefits in addition to financial return. (Hand et al. 2020).

The challenge is in mobilizing these investments. Private sector financing has traditionally not been aligned with the SDGs or low-emissions, climate-resilient development pathways (OECD 2020) over concerns such as high deal-transaction costs, smaller ticket sizes The amount of grant or investment provided in one funding round. that erode profit margins, maturity mismatch, emerging untested technologies, specific country risks, and local currency volatility (Convergence 2020b; Gornitzka and Wilson 2020). Additionally, emerging countries are often underfinanced compared to developed countries.

Despite a growing interest in impact investing (Convergence 2020b; Godeke and Briaud 2020; Lewis et al. 2016), hesitancy remains over the early-stage nature of partnerships with transformative SDG ambitions (OECD and UNCDF 2019). Therefore, once they have exhausted available public sector funding, partnerships are frequently mired in the “missing middle”—a term that assumes many interpretations but, for the purposes of this report, describes the transitory period in which a partnership is too large, too close to commercialization, and/or too mature for the comfort level of grant funding but is also too small and immature for commercial investment. In assessing the partnerships that participated in our research, the missing middle is the $3–$5 million investment gap that partnerships need to overcome between early-stage funding (which is anything under $2 million) and investments from development finance institutions The investment arm of a donor government that focuses on engaging the private sector to mobilize sustainable investment. DFIs are affiliated with donor governments but operate independently (Crishna Morgado and Lasfargues 2017). (DFIs) or other mid- and large-ticket investors (which start around $10 million). For more on partnership funding stages and the missing middle, see the “Stages of the partnership funding journey” later in this chapter.

1.1.1 Setting the stage

We pause here to focus on three concepts that are germane to understanding this report: partnerships, grant funders and investors, and the partnership funding environment.


We are interested in partnerships that have transformative ambition and are commercially driven.

  • Transformative ambition: These partnerships are working to make changes that are systemic, long term and sustained, and disruptive of the status quo, such that they align with the SDGs (Li et al. 2020).
  • Commercially driven: These are partnerships with transformative ambition that aim to affect market systems through profit-generating models.

These are a few of the common business models we have observed among partnerships with these two qualities:

  • New business venture partnerships that seek to launch and scale a new commercial product, service, or business model. New business venture partnerships seek to create new markets or systematically change existing markets to better align with the SDGs.
  • Financial instrument A type of commercially driven partnership that seeks to tackle investment barriers through the development of financial instruments such as funds, bonds, or insurance instruments that help catalyze funding to riskier markets and/or de-risk investment to advance the SDGs. partnerships that seek to tackle investment barriers through new funding mechanisms such as guarantees A financing mechanism in which a third party, typically a philanthropy or donor government, compensates investors if a company defaults. Also referred to as a first-loss guarantee. or insurance instruments that help to catalyze funding to riskier markets and/or de-risk investment that could be geared to advancing the SDGs.
  • Project developer A type of commercially driven partnership that seeks to advance innovative business ideas or create a pipeline of investable projects or initiatives. Project developers often aim to help governments, businesses, and other entities make sustainability a core part of their operations by aligning their standards of practice or commitments. partnerships that seek to advance innovative business ideas or create a pipeline of investable projects or initiatives. Project developers often aim to help governments, businesses, and other entities make sustainability a core part of their operations by aligning them on standards of practice or commitments.

Throughout this paper, we consider a “partnership” to be both commercially driven and have transformative SDG ambition.

Grant funders and investors

Partnerships receive capital from grant funders and investors, collectively referred to as financiers. Here, we discuss seven types of grant funders and investors framed through the lens of public, private, and philanthropic funders. A mission-driven organization with a mandate to advance social or environmental well-being. These organizations can be part of the public or private sector and include CSOs, nonprofits, and family and corporate foundations.

Public sector grant funders or investors A funder or investor that is accountable to donors, governments, or taxpayers. Public sector actors have a mandate to work for the greater public good. are accountable to donors, governments, or relevant taxpayers and have a mandate to work for the greater public good. Public sector funding is often available for the earlier stage of an engagement and can serve as a risk mitigator to catalyze the transformative ambitions of a partnership. It can also provide sustainable, long-term support; offer flexible investment terms; and be patient. Most importantly, these financiers typically expect some positive environmental, social, or economic impact as a consequence of their funding. Read more about how these financiers work with partnerships in Chapter 3.

Examples of public sector grant funders and investors include the following:

  • Donor governments: Any government agency or ministry providing development aid funding, such as the U.S. Agency for International Development (USAID), as well as associated programs such as USAID’s Development Innovation Ventures (DIV). Donor governments predominantly provide grant funding to partnerships, but they also may provide equity or debt An obligation that requires one party, the debtor, to pay money or another agreed-upon value to another party. investment. Funding from these donor governments is typically geared towards start-up or pilot projects.
  • DFIs: These are essentially the investment arm of a donor government, such as FMO, the Dutch entrepreneurial development bank. DFIs are affiliated with donor governments, but they operate independently and may partner with private sector actors such as commercial banks. DFIs focus on engaging the private sector in order to mobilize sustainable development investments. Unlike donor government funding, DFI investment targets more established projects with existing operational and investment track records. DFIs typically function as self-sustaining institutions and source funding from development funds and government guarantees (Crishna Morgado and Lasfargues 2017).
  • Multilateral development banks An organization with donor or member countries that finances economic development in emerging economies. Examples of MDBs include the World Bank and the Inter-American Development Bank (ITA n.d.). (MDBs): Organizations that have donor or member countries that finance economic development in emerging economies. Examples of MDBs include the World Bank and Inter-American Development Bank (ITA n.d.). Although MDBs work in similar space to DFIs, such as the African Development Bank, this report will focus predominantly on the role of DFIs because partnerships in our sample had more contact with this group.

Private sector grant funders or investors An investment party that is accountable to individual owners or managers and may require a market-rate financial return on investment. Private sector investors include financial intermediaries, institutional investors, and individual investors. are accountable to individual owners or managers. These actors may require a market-rate financial return on investment that may or may not include social elements. Regardless of their impact return expectations, environmental and social factors are primarily considered in risk-return analysis because they may materially (and negatively) affect the financial outcomes for the investor.

Examples of private sector grant funders and investors include the following:

  • Financial intermediaries: These early-stage venture funds, private equity and debt funds, private family offices, angel investors, and friends and family raise capital from other types of private investors, institutional investors, or other sources. For the purposes of this report, these parties will be referred to as early-stage private sector investors.
  • Institutional investors:1 These large financial institutions, such as insurance companies and sovereign wealth funds, invest either directly into companies or through financial intermediaries. Because they often provide capital to financial intermediaries, they influence where a venture fund, for example, invests.
  • Financial institutions. These businesses, such as commercial banks, investment banks, and credit unions, provide financial services or facilitate monetary transactions.

Philanthropic grant funders or investors are mission-driven organizations that can be part of the public or private sector. They include civil society organizations A nonprofit or NGO. CSOs can range from small community organizations to large international groups. Also known as an NGO. (CSOs), nongovernmental organizations (NGOs), and nonprofits as well as family or corporate foundations and charities. Most commonly, philanthropic organizations work as grant funders, but they can also provide catalytic capital as investment.

Stages of the partnership funding journey

The following section illustrates the four main stages of the partnership funding journey (Figure 1). The stages reflect our interpretation of the types of funding that partnerships may seek as they progress towards commerciality, based on how the funding cycle is discussed in existing research (Alibhai et al. 2017; Runde et al. 2019) as well as our primary research, which involved a survey of 66 partnerships. Common funding structures noted for each stage are not exhaustive and will depend on partnership organizational structure, financial goal, or other partnership-specific circumstances. Box 1 provides an overview of key financing terms referenced below, including catalytic finance, blended finance The use of public sector funding to mobilize private sector investment in sustainable development (Convergence 2021; OECD DAC n.d.). , and impact investing.

Figure 1 | Funding Stages

Note: DFI = development finance institution.

Source: Authors, adapted from 2021 The Partnering Institute analysis for Partnering for Green Growth and the Global Goals 2030.

Stage 1: Partnerships in the first funding stage tend to be start-ups or in their early growth phases. Stage 1 funding typically comprises grant funding, founder equity, or small-ticket investment from impact investors and platforms. Investors at this stage are often impact oriented and comfortable with a high risk-return ratio and long return timeline (Alibhai et al. 2017). Funding from philanthropies and donor governments in Stage 1 may be particularly attractive to new partnerships because their return expectations may be more flexible than private sector investors. Stage 1 funding was the easiest to secure for partnerships in our sample: 46 partnerships surveyed had at least one round of funding under $2 million, and 31 partnerships received multiple grant or investment rounds at this ticket size.

  • Ticket size: <$2 million
  • Primary funders: philanthropies, donor governments, platforms (i.e., P4G), early-stage venture capital (VC), and impact investors
  • Common funding structures: grants, equity The value of shares issued in a company. , convertible debt A loan or debt obligation that is paid with equity or stocks in a company. Also known as a convertible note or convertible loan. , concessional finance Below-market-rate finance provided by major financial institutions (e.g., development banks) to advance sustainable development. Concessional finance is not tied to a specific funding structure but typically comes in the form of debt, grants, or equity (WBG 2021).
  • Partnership activities: ideation, research and development, establishing proof of concept, launching pilots/prototypes, working to create an enabling environment for launch

Stage 2: This is the missing middle, a stage defined by risks that cannot still be fully resolved or mitigated and thus require financing/investment solutions that are innovative. Partnerships seeking Stage 2 funding are often too large, too close to commercialization, and/or too mature for the comfort level of grant funders, but they are also too small and immature for commercial investment. Partnerships in this stage have not been operational for long enough to establish the track record DFIs are looking for or may not have all enabling conditions in place to operate successfully (Hornberger et al. 2020). In Stage 2, catalytic capital and blended finance arrangements can be particularly helpful to partnerships working to scale operations and crowd in private investment. Only six partnerships—less than 10 percent of our sample—received funding over $5 million, illustrating how challenging it can be to transition out of Stage 1 funding.

  • Ticket size: $3–$9 million
  • Funders: because the missing middle is “missing” funders, there are no primary funders; funders would just be any financiers willing to provide catalytic capital
  • Common funding structures: grants, blended finance, other catalytic capital
  • Partnership activities: working to scale, refining and strengthening internal processes and governance, establishing a track record of profitability

Box 1 | Defining Catalytic Capital, Blended Finance, and Impact Investing

  • Catalytic capital is central to innovative financing. Taking the form of grant, debt, equity, or guarantees, it is patient, risk tolerant, concessionary, and flexible in ways that differ from conventional investments. It can help to bridge the missing middle and prove new and innovative concepts, particularly in developing countries.a As a tool to overcome the missing middle, one dollar of risk-tolerant catalytic capital can help mobilize four to five dollars from other sources.b
  • Blended finance is typically the use of catalytic capital from public or philanthropic sector financing sources to increase private sector investment in developing countries to realize the Sustainable Development Goals.c In effect, public sector financiers participate alongside private sector financiers to structure an investment. Both types of financiers have different risk and return tolerances, but their collaboration catalyzes investment to fill the missing middle—an opportunity that the private investor might not have entered into were it not for the blending to mitigate risk (perceived or real).
  • Impact investing intentionally moves beyond positive financial returns to generate positive and measurable social and environmental impacts.d Investors—and how they manage their capital, set timing and terms of investments, and engage with stakeholders—are critical to impact investing. The GIIN has defined four core characteristics of impact investing:e
    • Intentionality: Impact investing is marked by an intention to contribute to measurable social or environmental benefit. Impact investors aim to solve problems and address opportunities. This is at the heart of what differentiates impact investing from other investment approaches which may incorporate impact considerations.
    • Use Evidence and Impact Data in Impact Design: Investments cannot be designed on hunches, and impact investing needs to use evidence and data where available to drive intelligent investment data that will be useful in contributing to social and environmental benefits.
    • Manage Impact Performance: Impact investing comes with a specific intention and necessitates that investments be managed towards that intention. This includes having feedback loops in place and communicating performance information to support others in the investment chain to manage towards impact.
    • Contribute to the Growth of the Industry: Investors with credible impact investing practices use shared industry terms, conventions, and indicators for describing their impact strategies, goals, and performance. They also share learnings where possible to enable others to learn from their experience as to what actually contributes to social and environmental benefit.

Sources: a. MacArthur Foundation n.d.; b. Convergence 2018; c. Convergence 2021; d. Hand et al. 2020; e. GIIN n.d.a.

Stage 3: Partnerships at this stage are profitable or have a clear path to profitability in the near future, with an established customer base or market segment. Investors at this stage are looking for a 5–10 year track record of operational success and invest at higher ticket sizes than investors in Stages 1 and 2. The threshold for receiving investment at this level tends to be too high for many partnerships given their business development and size—only five partnerships in our sample received funding over $15 million.

  • Ticket size: $10–$20 million
  • Primary funders: DFIs, VCs
  • Investment structure: equity, debt, blended finance
  • Partnership activities: working to build out operations by expanding to new customer segments or markets

Stage 4: Partnerships seeking Stage 4 funding are fully profitable and operational at a commercial scale. No partnerships in our sample had reached this funding stage at the time of our survey. Securing Stage 4 funding is very difficult, and there are few examples of multistakeholder partnerships with Stage 4 funding (e.g., Gavi, the Vaccine Alliance).

  • Ticket size: >$20 million
  • Primary funders: institutional investors, financial intermediaries
  • Investment structure: equity
  • Partnership activities: expanding operations or launching new products

1.2 Knowledge Gaps

The funding journey is tricky to navigate, especially at Stage 2, the missing middle. To better address what is still not understood around bridging the missing middle, we have identified three knowledge gaps. Two of them are in areas that have to date been unexplored, and the third one is a call for more evidence.

  1. What role do partnerships play in development financing? We have not seen financing research that specifically looks at the role of partnerships, despite SDG 17, which envisages the key role that partnerships can play in catalyzing private sector finance to meet the SDGs.
  2. How can grant funders mobilize private sector finance? Not much has been written about how grant funders (typically donor governments and philanthropies) can help partnerships overcome the missing middle, particularly in blended structures. But at the starting end of the financing journey, their influence is inevitable.
  3. What is the effectiveness of blended finance? If there were greater evidence of how blended finance is actually being used—how it is structured, executed, and, most importantly, performing—more funders could have greater confidence in entering blended finance arrangements themselves (Carney 2020; Convergence 2020b; Crishna Morgado and Lasfargues 2017; Development Initiatives 2019; Ellersiek 2018; OECD DAC 2018; Runde et al. 2019; Saarinen and Godfrey 2019).

To address these knowledge gaps, this report examines partnerships across select SDGs. We adopt P4G’s original SDGs of interest: SDG 2 (Zero Hunger), SDG 6 (Clean Water and Sanitation), SDG 7 (Affordable and Clean Energy), SDG 11 (Sustainable Cities and Communities), SDG 12 (Responsible Consumption and Production). Through a comprehensive survey and case study analysis of partnerships sourced from nine accelerator platforms (including P4G—more details in Appendix A), we follow partnerships in their journeys to find returnable investment and aim to answer the following research questions:

  • What challenges do partnerships face in their financing journeys on both the grant and investment side? (This addresses Knowledge Gaps 1 and 2.)
  • What partnership practices and characteristics might lead to greater financing success? (This addresses Knowledge Gap 1.)
  • What can grant funders and investors do differently to better catalyze finance? (This addresses Knowledge Gaps 2 and 3.)

We ultimately hope our research can help achieve the major systems transformations needed to meet the SDGs, such as aligning the world on a 1.5°C climate pathway in this Decade of Action. For partnerships, this means providing them with the confidence to seek long-term investment as they walk the path to self-sufficiency; for grant funders, this means providing the inspiration to approach early-stage funding with a refreshed light; and for private sector investors, this means dispelling hesitancies around the early-stage nature of SDG-focused partnerships.

1.3 Report Organization

This report is organized into three subsequent chapters. Our observations are framed through the view of partnerships, grant funders, and investors. In Chapter 2, we examine common financing challenges through a partnership lens, using results from our survey of 66 commercially driven partnerships. Most of these challenges occur at Stage 1 of the funding journey. We also discuss six best-in-class partnerships that have been able to overcome some of these challenges at different stages of their funding journeys.

In Chapter 3, we explore how different types of partnership funders—donor governments, philanthropy, DFIs, and private sector investors—are tackling these financing challenges in ways that can help partnerships secure Stage 2 funding and beyond. Here, too, we feature the rich insights of the GIIN.

Chapter 4 provides a summary of the themes drawn from our observations of partnerships, funders, and investors, alongside our recommended actions for all actors.

1.4 Report Methodology

The research in this report reflects findings from a comprehensive literature review; 35 interviews with senior leaders in government, foundations, private equity, DFIs, partnerships, and academia; and a survey of 66 commercially driven partnerships. The survey objective was to understand factors most frequently associated with partnerships that have successfully secured returnable investment, both from their perspective and that of their funders. More details are available in Appendices A–C.

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