To overcome the systemic lack of capital in many developing markets and enhance innovation Sida uses Challenge Funds to finance entrepreneurs that have a strong commitment to drive sustainable development.
A Challenge Fund is an instrument that Sida uses to finance entrepreneurs and innovators that want to contribute to economic, environmental and social sustainability in the developing world. Sida finances various Challenge Funds with different regional and thematic priorities so that development can reach as many people as possible.
Why do we use Challenge Funds?
Because of low investment many people living in poverty suffer a lack of productive work and goods that would help them improve their livelihoods. The private sector is a large source of innovation, employment and growth that has the potential to positively affect the situation for people in low and middle income countries. Due to the high level of uncertainty and risk associated with developing markets it is often hard for entrepreneurs to access credit or investments.
Challenge Funds are mostly aimed at entrepreneurs that lack the capital to start up their business or to scale a small project or business venture into a larger one. Sida wants to give social businesses a chance to try their ideas and innovations. By taking some of the initial risk via investments through a Challenge Fund, Sida can enable social businesses to become self-sustaining.
Who is eligible for funding?
A Challenge Fund is aimed at small social enterprises that are just starting out or that want to expand to a new market. Focus is often placed upon the innovative aspects of a sustainable and responsible business idea; for example introducing a new technology in a market that enables higher productivity or more environmentally sustainable production.
From Sida’s perspective one of the reasons for working with Challenge Funds is to discover innovative and unconventional solutions to development issues. A Challenge Fund therefore accepts a higher level of risk in investment than most other investors would.
How does it work?
Challenge Funds use competition between applicants to identify the best solution to a pre-defined development problem, for instance, to increase productivity in agriculture or innovations to support democracy and better governance.
Most Challenge Funds announce a “call for proposals” where entrepreneurs can apply for funding. Applicants must have a business that has positive impact on sustainable development. The entrepreneurs that have applied are assessed against each other and the businesses that best fills a number of pre-set criteria are given a grant to implement their ideas. While applicants usually have to adhere to certain criteria, they are given freedom in designing their solutions.
Sida supports a wide spectrum of Challenge Funds with different focus and set-ups. Some has a regional focus, for example African Enterprise Challenge Fund that supports businesses in Sub-Saharan Africa. Other Challenge Funds have a thematic focus, as in the case of Making All Voices Count where support is offered to entrepreneurs innovating for better governance through the use of information and communication technology (ICT).
Many Challenge Funds also offer additional services to grantees, such as technical assistance, that strengthen the capacity of entrepreneurs to take their business innovations even further.
Challenge Funds supported by Sida