Recommendation 2: The World Bank and IFC should assess, develop, test, and learn from alternative approaches to provide risk financing for early stage start-up firms that are at different stages of commercial growth.
This is a fruitful area for collaboration between World Bank and IFC, building on their respective comparative advantage.
The discussion of financing for early stage start-ups should not be done in isolation but embedded within an overall discussion of Bank Group support for innovation systems. Risk financing for early stage start-ups should consider systemic and long-term conditions that are required for financing entrepreneurs in different stages of maturity within innovation systems
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An incentive problem relating to innovation investments is that they are often risky, with uncertain outcomes. This inherent uncertainty of success results in limited financing. The Bank Group has provided financial support for early stage start-ups through venture capital funds as well as loans and grants to innovative and entrepreneurial companies and SMEs. World Bank financing support for start-ups has mainly focused on matching grants and a few projects have included venture capital funds. Relative to the Bank, IFC has invested more in venture capital funds and other private equity funds that focused on early-stage companies and innovative SMEs, providing them with equity capital as well as managerial expertise, market information, and other forms of technical assistance. World Bank Group financing for early stage start-ups has had mixed results and there is need for a more systematic assessment of performance drivers and obstacles.
WB: Agree. Further experimentation with early stage financing instruments is necessary and this will be further addressed in the context of the Strategic Framework. The forthcoming Early Stage Financing Facility, under Infodev's management will also help explore new financing mechanisms to support start-ups.
This coupled with a strengthened M&E framework, as proposed under recommendation 6, will allow learning from the impact of such risk financing instruments.
Moreover, the innovation financing module of the Innovation Policy Platform (IPP), discussed further under management response to recommendation 3, will serve to codify and disseminate experiences with early stage financing, whether funded by WBG projects or other sources.
The recent appointment of a director in IFC for Telecom, Media &Technology and early-stage investments will support strengthened capabilities in this area for the IFC.
Action 2 b (IFC): Enhance IFC's investment operations in early-stage technology companies.
Indicator: A reconfigured investment department named 'TMT and Venture Capital' that focuses on early-stage investments in these areas is fully operational.
Target: New department fully operational
Timeline: FY14
The TMT, Venture Capital & Funds department is fully operational and in place. IFC is investing in VCs since early 2000s. IFC started investing in IT sector, moved to cleantech in late 2000s, and in 2014,IFC has expanded its mandate to other priority sectors such as health, education and consumer internet through IFC Corporate Venture Platform. In 2016, according to IFc annual report, the IFC Global Emerging Markets Fund of Funds reached a close of approximately $400 million. The fund invests mainly in private equity funds that are focused on growth companies in various sectors across emerging and frontier markets.
IEG considers this action as complete, given that a new department was established in 2014 and investments in VCF focusing on early stage are increasing over the years.
IFC is investing in VCs since early 2000s. IFC started investing in IT sector, moved to cleantech in late 2000s, and last year ,in 2014,IFC has expanded its mandate to other priority sectors such as health, education and consumer internet through IFC Corporate Venture Platform. In addition in 2014IFC established the early stage investment program with $250m envelope. The program has 28 active deals (see the attached ppt). These are improvements to IFC's operations in early stage companies including technology ones. As IFC road map indicates "IFC has a successful record in investing in TMT, VC and Funds but remains underweight in these sectors". This implies that IFC has scope to enhance its focus in this area.
The TMT, Venture Capital & Funds department is fully operational and in place.
Mr. Atul Mehta is the Director of this department since late 2014.