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Challenge Funds

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.  

What is a Challenge Fund?

Sida uses Challenge Funds 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. The funds should always address a key development issue which otherwise is not addressed by market forces. Challenge Funds can also be used to stimulate and support innovations in research and the civil society, for example by investing in local knowledge to improve governance, transparency, rights and access to services or to strengthen peoples’ voice and influence.

Why is there a need for 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/sustainable 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/sustainable businesses to become self-sustaining.

Who is eligible for funding?

A Challenge Fund is aimed at small social/sustainable 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.

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

Water and Enegy for food (WE4F)
WE4F supports innovations and mobilizes capital to produce more food with less water and energy in the agricultural and food sector in developing countries. The challenge fund focuses in particular on benefiting women and people living in poverty while at the same time promoting sustainable use of natural resources and strengthened biodiversity. WE4F is based on lessons learned from the previous challenge funds Securing Water for Food (SWFF) and Powering Agriculture (PAEGC) and is funded by Sida, USAID, the Netherlands, BMZ / GIZ and the EU Commission.

Innovations Against Poverty 2 (IAP2) 
IAP2 aims at suporting sustainable innovations and business models that benefits people living in poverty, focusing on the sectors agriculture, wash, energy and ICT. The initiative is financed by Sida and carried out by SNV Netherlands Development Organisation together with Inclusive Business Sweden and BoP Innovation Center.

Global Innovation Fund (GIF)
Global Innovation Fund wants to contribute to large-scale solutions that gives millions of people the opportunity to grow their quality of life. GIF has a flexible approach to achieve this and is open to all types of innovators in all sectors. Financed by Sida together with DFID, USAID, Omidyar Network, Australian Aid and South Africa’s Department for Science and Technology.

Sustainability and Resilience (SaR)
Aims at strengthening research and institutional capacity in low and middle-income countries to deal with the challenges posed by environmental and climate change. Financed by Sida together with Swedish Research Council, Formas and Forte.

African Enterprise Challenge Fund (AECF)
AECF aims to facilitate pro-poor growth and poverty alleviation in Africa by supporting innovative commercial businesses in the agribusiness, renewable energy and adaptation to climate change technology sectors with the aim of reducing rural poverty. Financed by Sida together with Australia, Canada, CGAP, Denmark, IFAD, the Netherlands and the UK.

Ocean Innovation Challenge
OIC supports pilot initiatives with innovative solutions that accelerate the progress on SDG14 for sustainable oceans. The solutions will to for example restoration of oceans and coasts, protection that sustains livelihoods and positive changes in the management of both ocean and land-based resources. OIC is funded by Sida, Norad and UNDP is implementers.

GSMA Innovation Fund for Climate Resilience and Adaptation
The GSMA IF helps accelerate the testing, adoption and scalability of digital innovations that enable the world’s most vulnerable populations to adapt, anticipate and absorb the negative impacts of climate change. The fund is managed by the GSMA Mobile for Development and is financed by Sida and the FCDO.

Updated: January 11, 2021