A new trend is sweeping the globe, the advent of the challenge fund which invites social entrepreneurs who are pitching for funding in a competition space. From Barloworld’s Mbewu programme which will see R30 million awarded to social innovators who face off in “The Big Pitch” through to SAB’s Social Innovation Award which has invested R44 million to support 144 entrepreneurs, pitch funding has grown in scope since first coming onto the scene in the late 90s.

The Swedish International Development Cooperation Agency (SIDA) defines a challenge fund as ‘a financing mechanism to allocate (donor) funds for specific purposes using competition among organisations as the lead principle’.

For many years now funders and the private sector have run pitching competitions where they give away money, often accompanied by a place in an accelerator or mentorship programme to innovative social entrepreneurs and organisations with creative solutions to development problems.

The benefits of challenge funding is clear for funders; these high-profile funds, that focus on technological innovation often attract a lot of media attention and provide a mechanism for funders to contain their costs.

Claudia Pompa in a report titled Understanding Challenge Funds published by ODI suggests that challenge funds present several opportunities:

A transparent and competitive process for the allocation of public funds
Local solutions to local problems with responsibility for choice devolved to where the impact would be most felt
An opportunity for capacity building
A stimulus for innovation and risk-taking that also provides motivation to disseminate good practices and promote replicability
A partnership approach that includes co-funding of projects, and sharing of skills and experience.

Experts suggest that challenge funds create an open, competitive application process, which provides applicants with a one-off, limited-duration grant to overcome the uncertainties that inhibit innovation, research and development, investment and new approaches. The goal is to produce a large pool of intelligent and unconventional solutions to longstanding problems in development by tapping the ingenuity of private enterprises.

But the benefits for social entrepreneurs are up for debate. Many experts believe that challenge funding is exclusionary, limiting access for those more marginalised innovators who don’t meet the often complex eligibility criteria that includes matched funding, financial solvency and being operational for some time. Others argue that that the process is onerous and that it doesn’t provide a level-playing field, favouring those with business expertise, skills and capacity and outstanding communication and presentation skills.

Historically challenge funds have focused on innovation and technology, as these sectors lend themselves more to challenge fund principles but critics suggest this limits access by worthy organisations whose work does not rely on innovation and technology but none-the-less offer quality local solutions to local problems.

But perhaps the most concerning issue with challenge funding is the decided lack of evidence to support the long-term impact of these initiatives. Much is made of the disbursement of funding and the pitch process but seldom are results and impact communicated, leaving some wondering what happened to the money and the visionary innovators they unearthed.

Some challenge funds do provide evidence that they achieve their key goals but sustainable impact is questionable. Even back in 2013, the OECD found that there is no conclusive evidence that challenge funds generate systemic change, and this poses a risk in the future of challenge funds.

Some even go so far as to suggest that challenge funds don’t align with the spirit of corporate social investment and that often organisations funded are not truly developmental in nature.

Despite these serious concerns, challenge funding may be appropriate in specific settings and in these cases challenge funds should seek to:

Be demand driven, creating solutions to real problems
Focus on a specific region or area to improve the challenges of systemic change
Have clear and achievable objectives and impact and a clear log-frame to link activities to outcomes
Simplify reporting and focus on pre-agreed targets and outcomes and take into account grantees/investees existing reporting practices
Be viewed as a complementary mechanism to other donor activities
Define innovation through local measures that are locally relevant
Identify ways to reduce the fund management costs to allocate more money to winners
Take a more flexible approach to funding to respond to the specific needs of applicants
Allocate sufficient time and budget to communicating the funds results

To read more about trends affecting the social/impact investment and development sectors and the role that innovation has to play in disrupting, growing and fast tracking the sector towards greater sustainability, download Next Generation’s Disruption with Impact report here.