Entrepreneurship has the potential to transform society and spur dramatic social change. Yet in emerging markets across the world, entrepreneurs solving global problems struggle to get the early funding they need to get an idea off the ground. This is the “Pioneer Gap”.

Village Capital recently launched VilCap Communities, a new initiative to bridge this gap. We gathered the top investors, foundations, and institutions who are investing in the “rest of the world”, for a conversation in Amsterdam.This is Part Two in a three-part series on what we learned (read Part Onehere and Part Three here).

There’s an old saying, “The cobbler’s son has no shoes”.

As active investor Jim Sorenson recently reminded an audience of intermediary organizations working to close the “Pioneer Gap” in emerging markets, many of these organizations are pioneers themselves.

The hard truth is that business models that are effective for supporting entrepreneurs in the most advanced regions of the world simply don’t work in the regions that are still advancing.

Venture funds with a “two and twenty” fee structure. Accelerators that build companies up, only to flip them in two years for small equity stakes. Billion-dollar-plus funds with endowments to back them up. These ideas work in Silicon Valley, but they don’t always translate in developing countries.

Because of this, the accelerators, incubators and other organizations supporting “pioneer” entrepreneurs in developing countries are doubly brave: they support and invest in early-stage companies that others might overlook, and in the process they must create new and financially sound business models with sustainable revenue streams.

In Amsterdam, we gathered a number of these ecosystem leaders to discuss the various sources of capital available for intermediate organizations — and the benefits and drawbacks of each.

Philanthropic Capital

Philanthropic funding is one of the largest sources of support for intermediate organizations in non-traditional markets. A 2013 study that Village Capital conducted with the Aspen Network of Development Entrepreneurs, “Bridging the Pioneer Gap”, found that philanthropic grant dollars make up 53.5% of all budgets for accelerators and seed-stage entrepreneur support organizations.

When done right, philanthropic funding can allow entrepreneur support organizations to put the entrepreneur first. Aligned philanthropy can build intermediaries that have a realistic expectation of how the world works — most entrepreneurs do not have immediate potential to deliver massive financial returns in only a couple of years, even if they can build great businesses. Philanthropy can also incentivize teams to support entrepreneurs in more difficult places with the highest impact — Lahore or Jakarta, rather than San Francisco or Boulder.

There are downsides. At the VilCap Communities launch, we heard from accelerators who built entire strategies based on a particular philanthropist’s personal preferences, rather than areas of highest impact. Investors also noted that the cognitive dissonance of philanthropic support — non-profits supporting for-profit entrepreneurs — can create a negative market signal. Some accelerators and seed funds, hamstrung by compensation limits and non-profit incentive structures, struggle to attract and retain the best management teams. The ultimate loser is the entrepreneur.

Institutional and corporate partnerships

One major point of agreement among the leaders in Amsterdam: the more focused an accelerator, the better the results for the entrepreneur. Programs focused on specific sectors or regions have the added benefit of attracting another promising revenue stream: aligned corporate partnerships.

One participant reported that their funding from corporations exceeded private foundation grants, on average, with four times the dollars per commitment.. Afua Osei, the co-founder of She Leads Africa, primarily funds her programs in West Africa through robust partnerships with corporations attempting to reach women across the African continent.

These partnerships can be a win-win: corporations get access to innovation, outstanding engagement opportunities for employees, and terrific exposure, while entrepreneurs learn the standards that corporate partners aim for. Just like philanthropic dollars, though, corporate partnerships can go awry. Some entrepreneurs feel like corporations are not set up well to work with them, and that they care more about reputation than success. Meanwhile, some corporations feel like accelerators and entrepreneurs only want money, and not to set up their partner for success.

This mixed bag was reflected in the results of Emory GALI survey of 15 Village Capital programs. Corporate partnerships were aligned with some of Village Capital’s most successful programs, but also some of our least promising. Entrepreneurs reported that some corporate partnerships cared more about “reputational return” than “results,” and did not put the “entrepreneur first.”

Consulting revenue

In “Bridging the Pioneer Gap,” we identified that accelerator firms, on average, earn one dollar out of every seven from consulting revenue.Emerging Market Entrepreneurs, for example, established the first startup accelerator in Cambodia five years ago, and will be participating in VilCap Communities with a new startup accelerator in Myanmar, based in Yangon. EME’s primary revenue is through consulting: helping major organizations and institutions do business in new markets.

Entrepreneurs typically have the best new insights into what the market is demanding, what solutions will and will not work with customers, and ultimately where society is going. Large institutions pay blue-chip consulting firms quite a bit of money for insights that are far removed from what entrepreneurs know. If intermediaries collect the right knowledge and insights along the way, private sector actors would be willing to pay for superior intelligence. Consulting practices are increasingly common — and potentially lucrative — for intermediaries.

Yet if intermediaries are going to engage in consulting, they need to ensure that consulting is a managed practice that is distinct from entrepreneur support. One investor complained that an accelerator program he supported, due to the attractiveness of consulting revenue, had become a “job shop” — and the accelerator itself didn’t focus on how to help entrepreneurs nearly as much as how to monetize their insights.

Revenue from integrated ecosystem activities — from space to investment

Very often, accelerators are a “quarterback” for an ecosystem. But entrepreneurs need much more than just business assistance. All entrepreneurs need a space to work, and the Wennovation Hub in Nigeria and Pomona Impact in Central America rent shared office space as a reinforcing revenue model. All entrepreneurs need a network, and Kiwa in Ecuador uses revenue from one of Latin America’s largest entrepreneurship conferences as a core revenue model.

All entrepreneurs need assistance fundraising, and helping entrepreneurs raise follow-on financing is another way that ecosystem organizations can finance themselves. In “Bridging the Pioneer Gap,” 7.5% of accelerator revenue derived from closing successful investments.

Entrepreneur support organizations almost always need to support themselves with multiple revenue streams. Now more than ever, many are creating new opportunities to earn revenue with activities that tie closely to their accelerator work.

One “Proceed with Caution” business model… and one that groups should avoid

Proceed With Caution: Fees + Equity Support Business Model:

Perhaps the most common desire of accelerators and ecosystem organizations around the world is to raise their own fund. (And the single most common complaint of investors at the VilCap Communities gathering: “It seems like every intermediary wants to raise a fund.”)

But raising a fund isn’t a solution for an accelerator’s business model — it involves launching an entirely new business with its own complicated business models. This isn’t to say that accelerators shouldn’t raise funds; more specifically, entrepreneurship programs should only have funds if they are not expected to carry the business model for the whole organization, but have focused, disciplined management and specific expectations aligned with ecosystem support.

Avoid: Program fees from entrepreneurs!

We have consistently seen that programs who charge entrepreneur fees, while perhaps a logical revenue source (entrepreneurs will only appreciate the program, some say, if they pay for it), yield worse results. A flat program fee may help subsidize the cost of the program, but as “Bridging the Pioneer Gap” shows, it won’t cover the entire cost of the program — and it may filter out the best entrepreneurs.

. . .

But what about the supply of capital? In the next section, we’ll outline what’s holding investors back from closing the Pioneer Gap — and highlight ideas on how to fix it.

If you’ve read this far, you likely have ideas on how you can be involved too. Please write me at [email protected] with feedback; I would love to see how we can collaborate.