Maximising challenge fund management efficiency

Before diving into the wider topics I mentioned in my previous post, I wanted to return to the practical realities of managing the investment project pipeline. (Note to self: Probably this is the kind of practical issue this blog should be focusing on anyway, it is just that I cannot keep quiet about the other stuff...)

So, this is a very practical post which I hope may be of some interest to anyone who is facing the same resource pressures to maximise project management value for money (the efficiency dimension) in a challenge fund project. It is about how we are managing the ABIF project pipeline.

It seemed to us that the critical success factor in terms of managing the pipeline (working with an applicant from an idea through to concept note and finally to full proposal and grant) was the ability of the ABIF team to focus time and effort on the most promising ideas from the very start. Given that we had less than two months between recruiting the ABIF team and the first deadline for concept notes (none of my colleagues having prior experience in M4P or challenge funds), and that our entire team comprises just 5 people who need to sleep occasionally, we have had to be fairly ruthless in achieving that focus! The issue we had to tackle was how to focus without compromising on the eventual outcome.

Hamayoon Shaheem, Deputy Fund Manager speaking at AISA launch

Achieving a broad initial outreach through effective marketing was an essential pre-condition of this focus if the key value-added of the challenge fund competitive approach (open to a large population and producing quality applications) was to be realised. To get this outreach:

1. We have worked with and through local strategic partnerships (in particular with the Afghan Investment Support Agency - AISA - and the Afghan Chamber of Commerce and Industry) to leverage their networks and media contacts;
2. We followed up on earlier provincial visits by making presentations in Herat, Jalalabad, Mazar and Kandahar; and
3. We have also made sector specific presentations (for example through the Ministry of Mines, at an event addressed by the Minister that attracted something like 200 mining enterprise owners).

ABIF Ministry of Mines presentation to potential investors

However, having made those initial contacts with potential applicants, we wanted to strike a manageable balance between giving a fair hearing to all and focusing on the most promising contacts. This required a rapid attrition rate in the early stages of the application process (even before concept notes are submitted). Some might say that this sounds like picking winners, but this is not the case, some of our most promising contacts are with competing firms from the same sector.

To be clear, attrition in the application process (drop out at whatever stage) might be due to any number of factors; it does not necessarily equate to rejection. Broad categories of reasons include:

1. The applicant or the project are ineligible for ABIF support (this would be the same as rejection); or
2. The idea needs significant further development before it can be worked up into a competitive concept note (this may result in a decision to work with the potential applicant over a longer period of time with the objective of receiving a concept note in a subsequent round); or
3. The idea is very promising, but even with grant support the applicant may not have the managerial or the financial capacity to deliver (this may result in us acting as a relationship broker to introduce the applicant to a potential consortium partner),

To manage this rapid attrition approach effectively required that we had some shared and objective measures that we could use consistently within the team. To this end, we developed an internal management tool "What makes a good project for ABIF?", which comprised two elements:

1. A definition and explanation of the key factors that we needed to see in an idea (either ready formed or with an obvious potential to be formed), under the headings - conveniently, 3 Ps - of project (the investment project), partner (the applicant) and people (the impact on our target beneficiaries); and
2. An internal questionnaire of specific points that the team could use as a mental checklist to guide their discussions at the initial contact stage.

This tool allowed us to identify the most promising ideas, what we call our "stars". To follow through on this, we instituted a weekly Deal Prediction Report (DPR). In the DPR, at this early stage each of the ABIF Fund Analysts reports on the number of contacts made and their prediction of the likely number of concept notes and (most importantly) the stars that they have identified. In the future the DPR will allow us to track the pipeline all the way through to grant agreements.

To ensure that this pipeline reporting is reasonably realistic and consistent across the portfolio, we introduced a very simple template by which each of the star predictions could be justified.

Obviously, these tools will be refined as we go into future rounds, but they have already proved to be invaluable in terms of managing our time and effort over the past few weeks. From broad guesses and subjective judgment, we have now moved (as the first deadline approaches next week) to a situation where we are reasonably confident that we know how many potentially fundable concept notes that we will receive. This evolution has undoubtedly been helped by having very clear and very transparent eligibility and assessment criteria, so that fund management team and potential applicant alike are working within a well defined framework.

And so that I can't just make this up afterwards and say, "I told you so", our current prediction is that from more than 600 initial contacts, we will receive between 10 and 20 concept notes that could (subject to budget constraints) be approved and developed as full proposals.

Of course, if this is way out, I will be able to come up with all sorts of reasons that justify the variance! But this is a reasonable estimate that we can back up with some sort of assessment right now...

What all of this means is that our pipeline ratios (for the first round) should look something like this:

1. Concept note to initial contact: The total number of concept notes is an important indicator of how relevant and accessible the competition is perceived to be by potential investors, so we hope to achieve a ratio of something more than one eligible concept note that broadly fits our strategic objectives for every 10 registered potential applicants (but given the time-frame of the first round, this may be way out).
2. Star concept notes received to star concept notes predicted: As this prediction has been at the heart of our pipeline management approach, I hope that this ratio will be close to one received for every one predicted, certainly it would be disappointing if a significant proportion of our stars failed to materialise.
3. Concept notes approved to star concept notes predicted: Again this ratio should be close to, or hopefully even above one to one. Maybe we will be pleasantly surprised by some unexpected quality concept notes which should supplement our predicted stars to push this ratio up a little bit.

Again, this kind of prediction is probably a bit dangerous (especially when we have no prior experience on which it is based), but I really do want to have a record of what we thought would happen against which we can compare what actually did happen... no making it up after the fact!

The plan is that these 10 or 20 (or whatever it turns out to be) star concept notes will be provisionally short-listed (subject to any immediate clarifications and due diligence) and we will then work with them over the next 2-3 months to develop full proposals in the second part of the application process. We hope that by applying this rigorous (sounds nicer than ruthless) early pre-screening and concept note assessment process, we can be confident that short-listed applications stand a very good chance of making it through to securing a grant.

Because of the constraints I mentioned earlier, we simply cannot afford to dedicate time and resources on ideas that do not have a realistic potential of being able to make it all the way through to grants. While other funds appear to have the resources to approve many more concepts than they make grants, this would not work for ABIF.

Given that this is such a new team and it is the first round, I have no doubt that our predictive capacity will improve in future rounds, but at least we have had some rational approach to managing our pipeline from the outset with the intention of maximising efficiency. The guiding principle being that we should reach as wide as possible, but then focus our efforts as early and as narrowly as possible. So, coming back to the attrition process, to put it into a rather crude graphic, we are aiming for something like the shape of triangle B, rather than that of triangle A.

Profiles illustrating different pipeline attrition rates

The only vague comparator that we have in Afghanistan is the ill-fated and now-dissolved ACAP Partners managed Afghanistan Renewal Fund. This was a US$20 million attempt to set up a private equity fund. The fund operated for about 3 or 4 years, and had identified 164 potential projects shortly before it was closed in 2006. Of these 164 potential projects, 27 reached pre-prospect stage and 12 reached prospect status. In the end, none went any further and the fund closed without making a single investment.

Of course ABIF is a grant provider, rather than an equity fund, but the ACAP Partners' experience is nevertheless indicative of the kind of problems we could face.

Anyway, this is how we are managing our pipeline. I hope that we will achieve the kind of ratios mentioned above, and most of all I hope that this approach will not mean that we miss opportunities that would have come good with a bit more nurturing. In other words, we should end up with broadly the same kind of outcome (the size of the top segment of the pyramid) whether the ABIF pipeline profile was more like triangle A or triangle B, it is just that it would much less efficient if we followed the type B approach.

In mitigation of concerns that we are focusing too aggressively, it has to be remembered that this is just the first round, and that attrition really is not the same as rejection. Once we have got through the first deadline and we have had a chance to do a real life assessment of the concept notes, that will be the time to look at those that didn't make the cut and identify any that would benefit from support with a view to bringing them back in a future round.