It’s time to solve the ‘Missing Middle’ in global development

Congress should pass FIGDA to help innovative social entrepreneurs scale solutions to the world's hardest problems.

Dear Unlock Aid Community — 

You’ve heard us say this before, but it bears repeating: If the U.S. government is serious about tackling the litany of complex global problems we face — from meeting climate targets by 2030 to tackling emerging public health crises to strengthening democracies abroad — foreign aid donors need to make more bets on innovative startups and social enterprises.

Right now is a critical moment. Bipartisan legislation called the Fostering Innovation in Global Development Act (FIGDA) in the U.S. House of Representatives would authorize millions annually to create an end-to-end innovation funding pipeline at USAID for identifying and scaling proven solutions. This would be a game changer in helping USAID support social innovators. 

For too long, government contracts have gone to the same small group of large corporations while ambitious new approaches are overlooked. One big problem is the government doesn’t know how to work with bootstrapping young enterprises. We’ve seen this not just in the context of global development, but across government agencies.

Eric Lipton of The New York Times recently reported on a handful of young tech companies struggling through the Pentagon’s procurement bureaucracy despite the fact their drones and satellites are already battle-tested in Ukraine. While a small example, it’s an allegory of a systemic problem: lethargy, extreme risk aversion, and an entrenched elite of contractors makes the United States dangerously slow to embrace innovative solutions to hard problems. Many government officials aren’t attuned to the challenges that social enterprises face, and the bureaucracy is not designed to help them succeed. FIGDA may help change that.

Entrepreneurs tell us the biggest problem they experience is the “Valley of Death” or the “Missing Middle.” All startups — even the best funded — go through this treacherous interim period between securing early-stage capital and turning a profit. The vast majority of startups close their doors before exiting this phase.

The “Missing Middle” is especially relevant in the world of global development. While philanthropists and socially-minded investors have been the primary sources of funding for these kinds of organizations at their early stages, in many sectors it is only public institutions that have the kind of resources needed to bring social enterprises’ impact to larger scale.

The status quo: socially-minded startups depend on philanthropy and impact investors

Over the past decade, philanthropists and investors have provided early-stage funding to hundreds of the world’s most impactful social enterprises that work in frontier markets. For example:

• Drinkwell, based in Bangladesh, helps water utilities in megacities like Dhaka provide 100% of its citizens with access to clean water via Water ATMs powered with filtration technology for those who lack access to piped water connections;
  

• mPedigree, founded in Ghana and operating on three continents and in a dozen countries, helps millions of people every day to choose genuine medicines and consumer products over their counterfeit and substandard versions with just the tap of a phone, saving lives and money. More than three billion products have been authenticated and upwards of 250 million lives have been impacted so far;
  

• Zipline, founded in California and operating in five African countries, builds on-demand logistics systems that use autonomous drones to overcome challenges of infrastructure, weather, and insecurity to deliver medical supplies. The Rwandan government partnered with Zipline to optimize its blood supply chain, leading to an 88 percent reduction in maternal mortality.

While global development is awash in philanthropic and private dollars that fund innovators at the $100,000 or $250,000 levels, there are virtually no funders that systematically provide social enterprises with larger levels of funding to scale their impact. 

As a result, we’ve heard numerous cases of social entrepreneurs receiving enough private capital to launch but not enough to scale. They’ve either had to dilute or diversify their offerings or risk closing shop. When that happens, deep research and insights are lost, and funders lose their reason for providing startup funding to begin with.

High-income country donors have the resources to help good ideas scale in ways that philanthropy and outside investors do not.

The solution: The U.S. can scale up innovative startups with federal aid dollars

High-income country donors contribute more than $185 billion in official development assistance annually. If they committed even 1-2% of this funding to bring to scale proven global development innovations, this would rapidly accelerate our ability to achieve the SDGs by 2030. As the world’s largest donor and the largest buyer of many products and services in many of the world’s least-developed countries, the United States has an especially important role to play. 

Nearly every major global development donor has an innovation program. Gavi has Infuse, for example. Some agencies, like USAID, have a variety of innovation programs, including the agency’s Development Innovation Ventures (DIV) unit and its Global Health Bureau’s Center for Impact and Innovation (CII).

These innovation programs tend to deliver outsized returns on investment and are among the best points of entry for social enterprises to work with donors. However, they tend to be small, and are not seen as core to the donors’ operations. These innovation labs also often provide startup funding, but not scale-up funding.

However, if public donors developed a process to identify scalable solutions that come out of these early-stage programs and dedicated the requisite funding to scale up the best among them, we could see enormous social returns. In addition to scaling funding for the organizations in their own portfolios, donors could also scale up the most impactful enterprises seeded by their other trusted partners, including those incubated by other donors and government agencies, philanthropies, universities, and private sector players.

This would require some culture shift, as we’ve heard stories from coalition members that investors often refuse to back organizations that want to work with public donors because the government is not seen as a reliable partner. But the government has the capacity — where philanthropy and private investors often don’t — to scale funding for impactful organizations, and with a few early, big successes can burnish its reputation as a critical partner. 

Passing FIGDA: a first step in the right direction 

The U.S. can start by passing the bipartisan Fostering Innovation in Global Development Act (FIGDA), introduced by Rep. Joaquin Castro (D-TX) and Rep. Young Kim’s (R-CA). Here’s how USAID Administrator Power described the potential of this legislation (click the image to watch):

FIGDA would be an important first step in bringing innovation to USAID procurement processes and, more broadly, modernizing how the government sources solutions to hard problems. FIGDA creates a repeatable method for the government to help innovators scale their impact. Creating a systematized pathway to scale proven innovations, like the SBIR program does at NASA, will galvanize social entrepreneurs around the world and give us a fighting chance to solve societal challenges within increasingly narrow timeframes.

Over the coming months, we’ll be on Capitol Hill rallying support for this important bill, but we need your help. If your social enterprise has struggled through the “Missing Middle” we want to hear your story so we can begin to spread awareness on the importance of scale-up funding for proven innovations for the world’s hardest challenges.

There is much work left to do to improve foreign aid delivery, but together we can make significant progress by getting this bill across the finish line. By making a commitment to scale funding for the most effective innovations in global development, the Biden-Harris Administration can signal that it is serious about achieving the SDGs by the end of this decade.

To progress,

Unlock Aid

P.S. In case you missed it, the columnist Matt Yglesias also recently wrote about ways to reform foreign aid (and mentioned Unlock Aid!). He made the case that, if the government committed to scale funding for proven and highly cost-effective global development innovations, this would crowd-in more outside capital to incubate and test new ideas. Read more here.