Jhpiego, Villgro Africa and Grand Challenges Canada have partnered to explore the factors underpinning the financial sustainability of digital health organizations in low- and middle-income settings, particularly in Africa. Fifty-five organizations representing a mix of for-profits and not-for-profits with different business models and at different stages of maturity responded to a digital survey.
The findings were sobering: the overall picture was one of financial fragility, with roughly 3 in 4 organizations reporting financial runway of under a year and negative or tight working capital. Less than 1 in 4 organizations had capital available to invest in growth.
Many high-level organizational characteristics such as legal structure, leadership background, and earned income share did not predict greater financial stability.
Instead, organizations cited the importance of trusted customers, fiscal discipline, managing receivables, and diversification. Recurring, predictable revenue streams, even if small, were associated with longer financial runway. Government contracts were rare overall, and were not associated with longer runway. While 96% of respondents identified as social impact organizations, almost half described making trade-offs between social impact and financial returns.
We sat down with Temie Giwa-Tubosun of LifeBank, Folake Owodunni of Emergency Response Africa, and Pulkit Aggrwal of Grand Challenges Canada to explore what those tensions look like in practice.
This conversation has been condensed and edited for clarity.
Folake: Initially we found that individuals were actually the easiest set of customers to acquire. You run some ads, you convert some sales…it was attractive in the sense that it did not require a lot from us as a business. We could be small and serve them.
But we very quickly saw that the cost of acquisition far outweighed the revenue that you could get from those individual transactions.
That pushed us to lay the foundation for moving toward a business-to-business model, or reaching individuals through businesses. For us, that meant having a stronger operational base and meeting certain regulatory requirements so that we could service corporations. That has continued to serve us for the long haul.
Temie: At LifeBank, we started with a commercial model (revenue-paying private institutions) to build the foundation of a business and raise capital that allows us to scale.
For the first four years of the business, we really focused on the pure commercial play and rejected grant capital. We raised venture capital before we started looking to scale to the impact market. I think that foundation, that discipline, made our operational efficiencies stronger. Our commercial model allowed us to have a foundation we can come back to when the government market is not as liquid as we want it to be, or when there is an inevitable change in grant processes.
Folake: One of our early expectations was that, at the end of the day, we were going to need to work with government. In order to truly scale, government was a critical part of that.
We spent probably about two-and-a-half years piloting and engaging with government. Engaging means generating evidence, communicating that, advising, supporting. All of that pointed in the direction of: ultimately government is going to be the payer, or a major payer, for this service – but that didn’t happen.
If you have not been particularly experienced with working with government before founding a company, you don’t necessarily have the skills to appropriately cost what it takes to serve that type of transaction, or to secure the working capital you need to manage the payment risks.
Government offers scale and impact, but I would say they’re a better channel than customer in your early days.
Temie: We all come to this work because of our commitment to impact, our commitment to our community, our commitment to solving this problem at scale.
I think anyone who’s innovating understands that, getting to scale, you are going to have to work with government.
When you do, you have to listen to their procurement cycles. You have to build with that procurement cycle in your mind. You have to understand the politics of what they need to do and you have to be patient to get on the formal budget.
Working with government guarantees scale, but has its own significant pitfalls.
One of the smartest ways to build a more robust business is to diversify, diversify, diversify. Even diversifying in terms of the type of product that you’re operating, the type of market that you’re operating. It’s not even enough to be in one country; you must be in multiple countries … having that diversified market helps you improve the core business.
Folake: The cost of a standard ambulance is maybe US$60. The reality is there are many people who simply cannot afford it. However you swing it, it is unaffordable to many.
We know what we’re committed to from an impact perspective, but much as we want to continue to be in that space and serve, we have to find who can pay, and who can pay consistently. So we’ve tried to say – is there a different way to do it that does not rely on the traditional model of ambulance services? That’s where the innovation comes into play.
For us, that has looked like: can we leverage individuals in communities and train them, and have maybe not the same effect, but a similar effect? Rapid transportation, timely first aid, but at a much lower cost?
Where it can be possible is when we actually innovate on the model of service delivery to make it cheaper and closer to what people can afford.
Pulkit: From a funder perspective we do recognize that there are certain areas where the customer will not be able to pay, and that’s where the greatest need for innovation is. We try and solve for it by deploying blended instruments.
For example, for a US $500,000 ticket size, we can do a 50% grant and a 50% debt or equity instrument. The grant instrument can go toward catering to underserved, underreached populations, and the debt or equity portion can go toward serving paying customers.
The revenue generated from paying customers can ultimately be used for cross-subsidizing non-paying customers, or customers who are in most need of those services.
We encourage innovators to think about different types of revenue lines, if possible. Grant capital is available for them to test and validate those pathways.
Temie: In designing your business, a lot of times we founders pay a lot of attention to the product. We innovate around the product.
What is really critical is that you must actually innovate within your business model. You must test business model assumptions. You must create something agile that allows you to drive impact and returns for capital at the same time. That makes you attractive to funders looking for a more blended, dual bottom-line organization.
A lot of us focus on product-market fit, but I think sometimes you have to do business model-market fit.
Pulkit: When we’re looking for early stage innovations trying to demonstrate proof of concept, or generate evidence to show that an innovation works in a limited clinical or non-clinical setting, we deploy grants. I think grants make most sense.
When you’re serving underserved populations that don’t have the ability to pay for a service, and that doesn’t produce revenue in the near term for an organization, a grant or catalytic capital is really helpful.
When an organization has passed proof of concept, generated the evidence, and knows there’s a paying customer or revenue-generating options, we can explore other types of instruments in collaboration with the organization.
It depends on the customer or area the organization is targeting, but also the organization’s level of maturity. There’s a need for grants. There’s a utility for grants. But that’s not the be-all, end-all. You need to be able to look for other types of capital as well.
Temie: I really believe that starting on the commercial side will give you the confidence you need to build a business. There is something so clear about somebody willing to hand over revenue to you in order to get value back.
When you start with grants, you might not learn good habits when that massive amount of capital enters your business. You could also get to a position where you’re not quite sure whether your business model fits the market, or whether your product is actually valuable.
I always advise: start with the business model first. Iron out the business model, build that self-confidence and discipline, and then scale and expand and build relationships with organizations who are happy to pay on behalf of last-mile customers or bottom-of-the-pyramid customers who can’t afford to pay out of pocket.
When you start with that self-confidence, even when you get meetings with funders, you can push back a little bit, because you have the facts and you have that self-confidence.
I think that’s what gives payers the confidence in your capacity to actually build and scale. When you start with the business model first, you have a better chance of actually scaling well.
Folake: I agree 100%. The Bible says, "love covers over a multitude of sins," but money also covers over a multitude of sins! When you have a bunch of cash in the bank, it’s very easy to do all of the wrong things and not know it.
There is one case to be made for grants at an early stage: very specifically, when you’re doing something truly innovative and there’s really not a lot of evidence as to whether it can work. You’re taking a grant for the specific purpose of generating that evidence.
Pulkit: Innovators need to really understand who is going to pay for impact at scale. What is the payer interested in? What are the impact indicators they are willing to buy at scale?
As a funder, we recognize that if an innovation is serving a greatest area of need in global health, and there’s no paying customer, then we are doing that initial seeding and market-shaping work. That’s where philanthropic capital is okay, and we are willing to underwrite that risk.
But eventually we want to see some traction over the course of the funding period, or in 18 to 24 months, which will give us enough signals to say: yes, this is working, and this is getting traction, for us to consider reinvestment.
Innovators and organizations need to continuously try to test, innovate, try different business models and approaches, and then see what works for them in the medium to long term.
Folake: What we’ve learned, and we’re still learning, is how to simplify.
If you had to sum it up in a sentence, what is the value that you are creating? Who is most likely to buy that value? What is the problem that you’re solving? What is the price that you’ve put on that? How much are they actually paying?
One of the challenges that impact-focused businesses often have is that we tend to lead with the impact in those conversations. There’s a lot of good there, but depending on who you’re talking to, that may not necessarily be enough.
Being able to start with a simple story that clearly shows the value and how that value gets paid for, and then show how that creates impact and will ultimately scale, has been one of the hardest but also most valuable lessons.
Temie: One of the critical insights that I have come to learn is that you have to trust your market and you have to trust what they’re telling you.
Those of us with dual bottom-lines, we are technically orphans – sometimes we’re too impact-first for pure-play business capital, and sometimes our business models offend organizations who write checks for grants.
We’re orphans in that we don’t have a natural home. What that means is that ultimately your home is your market. Your customers. They are the ones who are going to dictate the terms of this relationship. Listening to your customers is your primary duty, and building for them.
Watch the full webinar on YouTube here.
Jackson Mwatha is the Head of Investments and Transaction Services at Villgro Africa. Joanne Peter is Director of the Innovation Hub at Jhpiego.
