Flip the Incubator Model to achieve Greater Impact

By Lauren A. Burnhill @LaurenOPV

I mentioned a couple of weeks ago the incubator and business plan competition mantra of citing how many businesses were rejected in the process of selecting 10 potential winners. Seriously, is supporting 10 of 10,000 socially responsible investments the best model we’ve got?

I’ve been mulling over how to create a scaled model for supporting social enterprise and this post reflects my ‘stream of consciousness” thought process. This isn’t a model that’s ready to roll, but it could be a starting point for some interesting discussion. Or at least, that’s what I’m hoping!

Let’s assume that amongst the 9,990 “rejects” from a biz plan competition or incubator there are two types of businesses: potentially disruptive innovations that fail to capture the judges’ interest; and lifestyle businesses that may be innovative only in terms of the markets served. I’d guess that if we threw out all the wannabe disruptors, we’d still have 5,000 business opportunities from ventures where the owner is passionate about and understands his/her target market. Return prospects are probably low, but as long as they are positive, a sustainable local business can emerge.

Since we’re aiming for sustainable local impact rather than scale, let’s set a high survival rate as a KPI. Realistically speaking, we know not all of these businesses will survive. However, even if 25% of our 5,000 company portfolio goes under, we’ve lost 1,000 businesses, but 4,000 businesses are going concerns. If they each create three jobs apiece, that’s 12,000 jobs!

As I’ll reveal below, the Flip model actually creates far more than 12,000 jobs, but let’s step back for a big picture moment first. Returning to the “improving quality of life” value, if we’re going to finance lots of small lifestyle businesses, they won’t be able to use scale to lower costs – but we can! At the apex level, we have the volume to negotiate things like affordable group health care pools, pension savings products, materials purchasing, net zero (green) real estate options and so forth. If our portfolio companies are our “community”, we can bring this community into the global marketplace without requiring individual businesses to scale up beyond their comfort zone. The end of this post includes some examples of what I mean, but I’m going to assume conservatively that we create 10 new direct jobs in health, housing, finance and education for every 10,000 small business jobs created.

I’ve got another social return on my “Flip the Incubator” KPI list. As part of supporting these 5,000 portfolio companies, we’re going to have to organize advisory and consulting services through local universities, consulting firms, think tanks, business support and community development organizations. Instead of giving each company $10,000 as seed capital, let’s give them a small grant, say $1000 and also a credit of $2,500 that they can use for consulting and advisory support. That $12.5 million price tag is not only adding value to the 4,000 companies that survive, it is also supporting the knowledge and service organizations who are adding that value. Here I suspect we are not creating as many new jobs as we are stabilizing existing jobs. If each business served contributes to stabilizing 3 advisory-type jobs, that’s another 12,000 sustainable jobs coming out of this single cycle of the Flip model.

If we also “franchise” (i.e., make replicable) lifestyle businesses by documenting and delivering best practice information in accessible practical ways as part of our Flip learning cycle, our outreach and survival rates will improve over time. I can see some really innovative research being done so that towns and villages can have general stores, hair salons, health clinics, wellness services, someplace to eat and someplace that creates access to finance, distance health and tele-education. Since we won’t be stopping at 5,000 businesses but aiming to reach millions around the world, there should be good job creation prospects on the research and policy side of the industry too. At a 5% level of impact, 250 new positions would be created as part of this first flip.

I could go on. The 4,000 businesses that survive will buy goods and services from other businesses and the families of the business proprietors will more regularly consume a better basket of foods and services, making this a double home run. The businesses and the owner’s families are also paying taxes which creates a financial return to society and the economy, not just to investors. These contributions may be small, but if they are sustainable and stable, even low-growth businesses can play an important role.

Aside from the obvious benefit of financing large numbers of sustainable social enterprises, there’s sound financial theory behind this notion as well. Spreading risk – in terms of money, health or otherwise – across larger populations is known as diversification and it’s a proven risk management tool! We don’t want to mandate what the butcher, baker or candlestick maker should do, but we can create educational tools/opportunities and product offerings that make it easy and affordable for them to “do the right thing”. I sit on the Board of a regional microinsurance company called Paralife. Amongst other things, Paralife creates insurance products that large companies can offer to their small-scale suppliers and distributors either on a fee basis or as a loyalty reward.

One global corporate recently piloted a family protection insurance plan as a loyalty reward for the small store owners who sell its products. The post pilot survey results indicated that a super-majority of small store-owners placed a higher value on this family protection than they did on cash bonuses. In planning the ramp-up to cover more store owners, we discovered that many wanted to offer the family protection insurance to their own customers also. We’d figured that this was an opportunity for much further down the line, but we’d underestimated the value of family to our end clients. My point here is that while people aren’t always willing to do what’s best for them, when given reasonable and affordable options, many will in fact choose the right thing.

D.C. Central Kitchen’s “Healthy Corners” program also illustrates my point – it hasn’t been easy turning convenience stores in poor neighborhoods into “green grocers”, but this organization’s concerted efforts to bring healthy food into urban “food deserts” are beginning to produce desired outcomes.

Stay tuned! My next post will include two charts, one showing notional incubator job creation and the other showing Flip the Incubator job creation. Although my numbers include lots of assumptiions, I’ve tried to keep these conservative. My results are both positive (as of this iteration, roughly 36,000 Flip jobs created vs 2,450 via incubation) and negative (cost per job is lower in the incubation model). If you think you see flaws in the reasoning above, please post a comment!! The purpose of this exercise is to develop new and creative solutions, not to determine right or wrong. The world needs incubators, but I think that social enterprise and impact investment need other types of support as well.

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3 responses to “Flip the Incubator Model to achieve Greater Impact

  1. Hi Lauren,
    Great post and as we also run a incubator for social entrepreneurs (www.sparkher.org) I fully agree that not only does the model of incubators hardly achieve sustainability and in the case of socent is mostly grant-relied and therefore based on continued fundraising. We contemplated to apply the model used by technology incubator/ accelerators such as TechStars who charge fees or are based taking equity in the incubated ventures to achieve financial sustainability, but this is hardly possible for socent who have limited financial returns and are often structured as nonprofits therefore taking equity would pose a legal challenge.

    Technoserve applies an interesting model which identifies enterprises for capacity-building/ investment through a national competitions, however over the duration of the competition they provide trainings/ business plan support to the “9,990” business that don’t make it into the final cut, therefore not only benefiting the final 10, but creating a network among all participants and providing training to all participants.

    Looking forward to your next post!

    • Thanks for sharing your information and insights! The Technoserve model is intriguing. Do you know if there is every any follow-up with the companies that aren’t selected in national business plan competitions? Although you will rarely find me arguing for randomized control trials, it would be super interesting to see if the competition process support produced better long-term results vis-a-vis a group of similar enterprises that did not participate in the competition and had no external support/advice.

      BTW, love the Spark:Her.org approach, but note typo on Approach page (says Marco instead of Macro). What kind of reception are you getting in HK? Colleagues have mentioned that there isn’t much of an eco-system for early-stage investments, especially for social enterprise. They cite the classical dichotomy of giving money away to do good versus investing money to make more money, with the concept of investing money to do good AND make money being harder to communicate and finding less acceptance.

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