On June 29th Frontier Incubators hosted their second event in a series of webinars, which aim to connect leaders from global accelerator and incubator programs with program managers who are seeking to serve entrepreneurs in the Asia-Pacific. This webinar explored the appropriateness of equity models for financing accelerators, the role of corporate sponsorship, and techniques for raising grant funds for incubator programs. Read on below for six key insights from the discussion from global leaders Fledge, Miller Center for Social Entrepreneurship, and Villgro.
The webinar opened with a discussion of when it is appropriate or beneficial to apply an equity model in the financing of accelerators. Luni from Fledge highlighted the difference between revenue based equity models and revenue share agreements, and outlined that benefits of the former financing strategy for their own accelerator, which operates globally across many different economic contexts. Luni explained, “we don’t believe that the highest purpose of starting a company is to exit.”
A revenue based equity model is where the incubator invests money, let’s say $100K for example for 5% equity, and is paid back via 4% of the revenue of the company being used to buy back the equity stake of the incubator until there is a 2X repayment of $200K. At the end of this process the incubator makes back the investment that they made into the company and the company has a clean balance sheet when it goes for additional investment.
Paul from Villgro explained that in the case of early-stage and prototype tech companies, revenue share agreements can be an appropriate model, but for investment in new products the process requires a different strategy. He described that when following the “long road” of hardware development, launch, and reinvestment, “waiting for a revenue share payout for 5–6 years does not make sense.” (Click to tweet) A revenue share model is one where the incubator receives 0.5%-2% of the revenue of a company for a set period of time. There is no equity exchanged in this model.
Pamela from Miller Center offered an alternative lens for viewing the relationship between equity and investor, and offered insight into the “Variable Payment Obligation/Venture Debt” model, innovated by her colleague John Kohler. Pamela explained “we are working with for-profits and not-for-profits who are all serving the poor. Everyone cares deeply about the communities they work in, some of them are family run businesses, so the idea of selling out to another organisation is anathema to them.” (Click to tweet). The Variable Payment Obligation is a combination of debt and equity. The key difference is that it is Free Cash Flow dependent. This means that if the company does not have enough cash in the bank, they do not make the payment on the debt that month. This is put in place to avoid the scenario where a company ends up going out of business to repay its loan obligations.
As Pamela succinctly described, corporate sponsorship dollars are “not short-term wins.” Corporate Social Responsibility (CSR) departments were viewed as having robust potential, but required long-term investment to ensure alignment between the corporation and social entrepreneurs in the accelerator/incubator program. Ragini from Villgro echoed this sentiment, and emphasised the need to examine the synergy between the corporation and entrepreneurs. Ragini explained how successful CSR partnerships provide corporations “access to the startup community and people doing the work.”
Paul outlined three types of grant makers that Villgro work with:
Paul emphasized the agility with which private foundations can respond to the needs of emerging accelerators and incubators. Paul championed the role of private foundations, and celebrated their capacity to engage in multi-year commitments. He explained, “private foundations — we love them!”
Both Ragini and Paul highlighted the importance of fostering relationships between funders and the programs they are supporting. Paul outlined the benefits of working with private-funders where connections with boards, rather than just program officers, was a tangible goal. He acknowledged the positive impact of “getting the opportunity to present to the boards. Getting them to come in country and spend time with your companies.” Similarly, in the context of corporate sponsorship, Ragini explained that the success of these relationships is predicated on consistent engagement including “seeing some of their team come in and contribute in the corporate sector/space.”
Pamela also highlighted a shift in the Miller Center’s model, where the organisation has begun to “partner with corporations to align with their business objectives.” She describes, “we are talking to high net worth individuals who understand that entrepreneurship is a path out of poverty and to mitigate climate change.”
The complexities of working with government was highlighted in the discussion, but these relationships were also acknowledged as offering rich rewards. Paul offered a roadmap for maximising the benefits of government funding: “you need to be patient, and stand patiently for the bureaucracy and plan ahead of time for the reporting — since that is so critical to the relationship.”
Pamela identified the opportunities for smaller more flexible bodies to partner with a larger organisations to share resources, particularly in relation to resouring the reporting on projects. She emphasised how it “can help to partner with someone who has the infrastructure to support that reporting process.” This sentiment was echoed by Luni, who identified how new opportunities emerged from partnerships, and highlighted the importance of developing and maintaining relationships with a variety of different organisations — including universities and foundations.
We hope the webinar series has sparked your interest in Frontier Incubators program.