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 a (WB) Test new modalities for providing risk financing to early-stage companies.
Indicator: The launch of new seed finance facilities by InfoDev, and the financing of several promising startups and new firms with growth potential.
Baseline: Limited instruments to support early-stage financing
Target: InfoDevâs early stage financing facilities are operational and are providing capital to promising entrepreneurs, firms and startups.
Timeline: FY15
The progress is in line with the spirit of the recommendation. As the management comments indicate these initiatives take time to develop and to be in operation. IEG suggests management to provide number and $ value of capitals provided through the funds in next year's update.
Growing exploration and development of start-up and early-stage finance models continues to be a priority for the WBG, through the I&E unit within the T&C GP, as well as F&M GP. Key areas of focus include the development of seed and early-stage funds, developing local angel networks, and testing novel financing mechanisms and models for start-ups and early-stage firms. Kenya Climate Ventures, a pioneering early-stage investment company developed by the I&E unit's infoDev program, has made two investments in high potential clean technology ventures and is looking to increase its portfolio in FY18. It has established strong partnerships with investors and intermediary organizations for deal sourcing and co-investment. Design of a similar fund in Ghana and fund manager selection has been completed and the infoDev program expects to launch the fund in FY18. The infoDev program's angel investing network in the Caribbean has accelerated the development of an angel investing eco-system in the region through a new investment facilitation program. The infoDev program is testing two innovative financing mechanism pilots in South Africa: (1) enabling fund managers to invest in early-stage clean-tech firms through "Green Outcomes Fund" where concessional funding is enabled based on environmentally sustainable outcomes of investments and (2) enabling credit for early-stage clean technology firms using an online lending platform. These activities in Kenya, Ghana, South Africa, and the Caribbean are embedded within broader activity around local innovation and entrepreneurship ecosystems. While such activities are providing valuable "on-the-ground" lessons, these initiatives need to be undertaken over a wider spectrum of regional/country context over an extended period of time to allow for the development of validated and replicable approaches.
Last year's MAR included new initiatives undertaken by Infodev included Kenya climate change fund, Caribbean angel investment facilitation fund ,Kenya crowd fund and Croatia Venture Capital. The most recent management update indicates that there has been a couple more new pilots such as South Africa crowd fund and Ghana climate change. It is not clear to what extent these funds have started their investment activities. The next step will be to see to what extent these initiatives will be able to provide capital to entrepreneurs and performance of these risk these financing modalities.
Growing exploration and development of start-up and early-stage finance models continues to be a priority for the WBG, through the I&E unit within the T&C GP, as well as F&M GP. Key areas of focus include the development of seed and early stage funds, co-investment funds, developing local angel networks, and testing crowd-funding and other forms of technology enabled finance. The I&E unt's infoDev program launched a clean-tech seed/early- stage investing facility in Kenya that is testing and developing a new model for high potential clean-tech-start-ups and early-stage firms in country. The facility has commenced its investment activities which will accelerate in the coming year. A similar fund is also being developed in Ghana, with a late FY17 objective. The infoDev program has also spearheaded the development of the Caribbean's first angel investing networks, and will accelerate the development of an angel investing eco-system in the region through a new investment facilitation program. Testing on crowdfunding continues with pilots in South Africa and the Caribbean. These activities are embedded within broader activity around local innovation and entrepreneurship ecosystems. While such activities are providing valuable "on-the-ground" lessons, such initiatives need to be undertaken over a wider spectrum of regional/country context over an extended period of time to allow for the development of validated and replicable approaches.
Infodev has a series of early stage finance pilot initiatives underway, including the following:
ï§ The Kenyan Climate Change Fund (2016-2018))
ï§ The Caribbean angel investment activity (Amount of private capital leveraged: $1.2M, # of investments made by private investors: 10ï§
The Caribbean Investment Facilitation Project (size, planned number of investments, timeframe)
ï§ Other risk finance related activity - e.g. the work on crowd funding in Kenya
Separately, WB is supporting Croatia through Innovation and Entrepreneurship Venture Capital Project (P152130). This project incorporates an integrated model including a venture capital co-investment facility, an angel co-investment facility and capacity building for angel investors and entrepreneurs.
Exploration of early stage risk finance models continues to occur across WBG and a number of different models are being assessed, tested and developed. For instance, T&C ECA developed a $25m lending project for Croatia involving the development of an angel co-investment fund, a venture capital co-investment fund and integrated TA around building an early state financing ecosystem within Croatia. The project has been approved by the Board. Infodev continues to develop innovative finance approaches in support of its projects. These include exploring crowdfunding models in Kenya and the Caribbean, developing guidelines for angel investment networks, developing angel investment networks and co-financing models in the Caribbean, and launching the Kenya Climate Investment early stage fund. This activity is embedded within broader activity around local innovation and entrepreneurship ecosystems. However the evidence base for these types of interventions globally is slim, and improving it remains a focus of ongoing research activity within T&C.
Separately F&M GP have also launched the WBG SME Finance Community of Practice which will explore best practice and building WBG capacity and evidence in a range of potentially financial instruments.
The assessment of SME policy within WBG (which was in response to the IEG report) has highlighted the improtance of SME financing, and its recommendations can be expected to address key areas of knowledge gaps and how and who should seek to address them.