development contributions

In Strategy 2030, FMO has set an ambitious goal for market creation to develop unbankable opportunities into bankable projects. While this systematic and ambitious goal is new, it does build on our existing skillset.

This strategic study completed by Dalberg Development Advisers, set out to review development contribution interventions between 2018 to 2022 across three of the public funds managed by FMO to identify what we need to change and what we can build on to achieve our market creation ambition.  

Much of these development contributions portfolios are deployed in the form of technical assistance to investee companies. However, we have also implemented a broader range of interventions that, in some cases, are linked to market creation. We conducted in-depth analyses of 18 interventions with the strongest links to market creation. Data was collected through interviews with FMO staff and an online survey among grantees, supplemented with grantee interviews for four case studies to identify insights from FMO’s experience. Additionally, insights were triangulated against those of our peers to weed out what type of market creation interventions are scalable across the sector, and which may be FMO-specific.

What can we build on? Four effective intervention types where we have good experience.

Out of the 18 interventions selected for deep dives, half of them resulted in at least one bankable project. Through comparing the successful and unsuccessful interventions, the strategic study identified four intervention types that led to success more frequently.

Project types:

1. Venture and project acceleration | Funding the initial stages or development of an early-stage, higher-risk project either through direct support or through intermediaries.
2. Enhancing product lines | Funding a company to research, test, pilot and/or launch a new product or service possibly in a new market.
3. Piloting new investment models | Funding a pilot for a new type of investment vehicle or instrument, often in a role new to FMO.
4. Setting and promoting standards | Coordinating and supporting organizations to adopt and implement standards of quality and/or sustainability.

In the peer comparison, all four types identified in the study as leading to success were also observed to be successful outside of FMO. However, setting and promoting ESG standards stood out as a particular strength for FMO, with the organization being recognized as a leader by its peers in this regard.

What needs to change? A strategic ambition requires strategic focus and space to innovate.

While we have had experience with interventions that resulted in bankable projects, this has been a byproduct of our focus at the time. Our ambition on doing market creation at scale will require changes beyond simply growing areas where we have experience.

1. Start with the strategy | With a new strategic focus on market creation, we have an opportunity to create a portfolio of programs that allows meaningful and deliberate change at greater scale. For FMO and any other investors wanting to make a significant contribution to market creation, an investor needs to be systematic in selecting themes, markets and barriers to focus on. Sourcing and implementation need to follow these strategic selections. Following an ad hoc approach where you fund any intervention with a link to market creation will not have the large-scale, ambitious effect desired. While it may lead to isolated bankable projects, it will not add up to the scale required by the impact sector.
2. Create space for innovation | While building on areas of strength is useful, to do market creation well will require continuously creating space to try new things. What is established and working well can be an anchor part of a market creation portfolio, but FMO will need to keep trying things, specifically more ambitious interventions. This could include running multiple interventions in a single value chain simultaneously or sequentially. Ensuring that the portfolio is managed so that there is a clear innovation test bed will require intent, commitment and creativity.

Throughout the strategic study, there was close collaboration with colleagues in FMO who are building the market creation strategy for the organization. This led to insights useful for FMO, and in sharing these insights, hopefully they will be useful to our fellow development finance institutions and impact investors with ambitions to contribute to market creation.