The Case for Shifting the Way Social Enterprise Support Is Funded

Social enterprises are paving the way towards a more equitable and sustainable future, and an entire ecosystem has developed around them to mobilize the business development support they need to succeed. Quality business development support is proven to accelerate enterprise growth in emerging markets — increasing incomes, employment, and resilience. 

For that reason, most of the funding from donors and corporate sponsors is directed at the delivery of business development support to the entrepreneurs themselves, with little attention being paid to the organizations that actually facilitate that delivery. These facilitators are known as enterprise support organizations, or ESOs.

According to the new ‘Sustain Impact’ report commissioned by Argidus, that’s a big missed opportunity. After speaking with over 40 participants (including leading ESOs like Alterna, Impact Hub, and TechnoServe), Argidius found that enterprise support organizations themselves are tremendous drivers of impact at scale. However, their potential isn’t being fully realized due to outdated funding practices—but with small tweaks to their approach, funders can unlock the potential of both social enterprises and the organizations that support them to drive unprecedented impact at the ecosystem level. 

To understand how, check out our recap of the report’s key findings below:

The Status Quo: Stifled Potential

Enterprise support organizations can significantly accelerate small and medium enterprises, but they only receive a fraction of donor support. According to the report, “Despite the substantial evidence demonstrating the efficacy of business development services, it represents a mere 13.3% of the over US$10 billion in private sector development funding directed towards bolstering small and medium enterprises in low and middle income countries. The majority of these funds are used to facilitate access to finance.” 

It’s worth lingering on this for a moment to point out what a big miss it is to allocate this already modest percentage mainly to financing support. Business development support - delivered by ESOs - is what helps entrepreneurs build business models that are actually fundable. In the early stages of growth (also known as the pioneer gap) non-financial support and capacity-building is needed most. Focusing on getting enterprises access to capital at this stage is premature.

When funding is allocated to the ESOs delivering the business development services (we’ll call them BD services for the rest of this article), it’s often done in the form of prescriptive program funding, with little scope for the ESOs delivering the services to become stronger and more effective through the process. 

Here’s why that’s a problem: 

• ESO’s ability to innovate depends on the team's quality and stability, governance and financial foundations, systems and processes. Only a handful of donors allocate funding to address gaps/opportunities in organizational development.

• ESO development is overlooked or disregarded, or viewed as replaceable or interchangeable tools rather than integral parts of the ecosystem that supports growing enterprises.

But this problem is also a clear opportunity. According to the report, “ESO growth, when healthy and balanced, builds more responsive and resilient BD services infrastructure. This translates into improvements in the support for small and medium enterprises, who attract both talent and investment as they grow, which in turn strengthens the ecosystem. This feeds back to ESOs, if they can build the capacity to secure larger contracts and engage diverse partners, enabling their transition into more strategic intermediary roles.”

The good news is that it's possible to course correct relatively easily. By taking the organizational development of ESOs into consideration, donors and corporate partners can turn the vicious cycle into a virtuous one to unleash this potential for true systemic change.

A Better Alternative: TechnoServe Case Study

To illustrate how crucial funding support of organizational development is for growth, let’s look at the growth pathway of an ESO already achieving impact at scale: TechnoServe. 

TechnoServe is a non-profit headquartered in the USA that designs and delivers business development

programs globally. It primarily relies on project funding and non-restricted donations, as well as support from philanthropic foundations. Let’s take a look at its growth pathway, and the role of donors along the way:

When first starting out, TechnoServe earned a reputation in the ESO space for its focus on cost-effectiveness in their projects. It grew significantly as a result, and learned through the experience of expanding quickly that systems and processes were critical enablers of scale.

As its reputation and funding grew, TechnoServe increasingly focused on building robust measurement systems, and continued to improve processes and support to keep pace with the organization’s rapid growth.

As TechnoServe matured, the organization was restructured to shift from being highly decentralized to a centralized entrepreneurship practice. The development of this entrepreneurship practice was catalyzed by organizational development funds from Argidius, which allowed them to scale the impact of their work by improving knowledge systems and ROI of programs, increasing funds raised, and proactively contributing to new knowledge for the broader entrepreneur-development community and ecosystem.

Now, TechnoServe supports over 14,000 entrepreneurs per year, and has grown its entrepreneurship practice annual income from $10 to $40 million in addition to doubling the average impact return on investment. Their programs continue to innovate around the use of technology and market-systems development approaches. The Swedish International Cooperative Development Agency enabled them to test, improve, and scale this market-systems approach by funding a pilot in Mozambique. 

There are a few reasons why this example is important:

1. It illustrates that donor support focused on organizational development is critical for the growth of ESOs.

2. It demonstrates that ESO development is a pathway to scaling the impact of social entrepreneurs receiving their support, as it improves services, increases sustainability of key supporters, and strengthens the broader impact ecosystem.

How to Help Enterprise Support Organizations Grow

When we talk about growth, we’re not just talking about quantitative increases like the number of programs, enterprises, or team members. It goes deeper than that, to include deepening engagement, broadening operations, and disseminating skills and knowledge. As the report explains, “Common output metrics, often centered around service delivery quantification, inadequately capture these dimensions of growth. Thus, understanding the complexity and intricacies of ESO growth is essential to recognizing how they can be best supported.”

ESO growth relies on improvement across multiple dimensions. The report classifies these into four central areas of organizational development: products and services, people and culture, governance and finance, and systems and processes. The chart below explores each in more details:

As the report explains, “Each of the organizational development dimensions is connected to the others, and has the ability to either stimulate or constrain development in the other dimensions. This dynamic creates a self-reinforcing cycle, making it hugely important.”

The bottom line is: when funders focus only on the visible dimensions of ESO growth, they are neglecting the less visible but equally important dimensions that underpin their work. By drawing on lessons from cases like TechnoServe, donors and corporate sponsors can see the value, principles, and mechanics of engaging in organizational development as part of their BD service funding strategies. 

Practical Recommendations for Funders of Business Development Services

To make the most of BD services funding, funders need to support ESOs to grow, not just deliver programs. The recommendations outlined in the report “encourage a shift towards more open dialogue, responsive support, collaborative strategizing, and flexible funding. No matter what your situation, there are many simple ways of shifting program funding practices to create more scope for organizational development, and to support ecosystem strengthening.”

To guide that process, the report includes a simple framework that reflects five steps of donor partner engagement:

We explore recommendations for each step in more detail below:

Step 1: Orienting

At this stage, funders should make ESO development an integral part of their private sector development strategies, and ensure all BD services engagements contribute towards that goal. They can do that by:

• Integrating ESO development into BD services funding

• Rethinking sustainability for ESOs (ie diversified funding from multiple sources which reduces dependency on any single source or donor, greatly enhancing sustainability)

• Adopting a systemic, long-term perspective on ESO development

• Considering the role of ESOs in achieving long-term objectives

• Revisiting strategies and policies and set systemic objectives

• Enhancing coordination with other funders for added value

Step 2: Mapping

At this stage, funders should collaborate with local organizations to develop a shared understanding of the situation and priorities before determining the engagement approach. They can do that by:

• Enhancing collaboration and coordination at various levels

• Learning from, and with, partners to develop more localized strategies

• Investing in understanding both organization and ecosystem needs

• Exploring ESO partnerships that reflect constraints and objectives 

• Engaging ESOs as network builders and ecosystem strengthening partners

• Exploring complementary ESO partnerships with other funders

Step 3: Partnering

At this stage, funders should approach initial partner engagement and proposal development as a mutual learning opportunity to build knowledge and relationships. They can do this by:

• Engaging in more collaborative and iterative proposal development

• Creating impact through the process by providing feedback and offering practical guidance on improvements

• Exploring opportunities to support ESO growth in every engagement

• Conducting organizational assessments, or supporting self-assessment to help ESOs identify their needs for organizational development

• Integrating organizational development into contracts

Step 4: Implementing

At this stage, funders should expand the engagement through learning to enhance services and build delivery organizations. They can do this by:

• Bringing learning into focus, and considering including details in the contracts

• Engaging with ESO development

• Considering offering support beyond funding

• Building partnerships based on trust

• Adapting implementation and evaluation approaches

Step 5: Evaluating

At this stage, funders should encourage an open evaluation process between themselves, their partners, and even other donors to ensure continuous and systematic improvement. They can do this by:

• Engaging partners and other donors in reflections and evaluations

• Ensuring what was learned can be easily applied

• Looking for opportunities to contribute to the evidence base

• Strengthening the connection between evaluation and strategy

• Evaluating their own performance

In Conclusion

Because the organizational development dimensions of ESOs are interconnected, funders can play a significant role in creating a virtuous cycle of growth by changing their approach to include the ESO itself. Organizational development focused donor engagement creates outsized outcomes and reduces ESO dependency on any single source.

By taking the time to understand ESO development, know their influence and ability to perpetuate either a vicious or virtuous cycle, and taking action to go beyond delivering programs to supporting ESOs to grow, donors can make the most of their BD services funding while strengthening the entire impact ecosystem as a whole. 

All that being said, you don’t have to be a donor or funder to take an active role in strengthening the social enterprise support ecosystem. Whether you represent another ESO, are a professional interested in learning more about social impact, are in the process of growing your own social enterprise, or represent a socially responsible corporation, there's a place for you on the TRANSFORM Support Hub - we invite you to join us!