We often hear about the need for good ideas for business and innovation to be “scalable”. That means to be able to go from a small, initial start-up situation to operating at a larger scale, sufficient to generate reliable ongoing returns for investors, which will make the business model “investable”, or at least capable of sustaining operations, salaries, and profits for owners or shareholders.
Scaling can be about market reach and revenues; it can also be a question of resolving mismatch of scale—between wealthier entities, used to operating in larger numbers, and smaller-scale concerns, which may not be able to achieve large volume or revenues anytime soon. Such smaller-scale operations also may have a different motive altogether. For instance, municipal governments may support community markets and micro-scale food businesses, not to generate profits but to make food more available to people within their jurisdiction.
For large-scale commercial enterprise, ‘efficiency’ is generally considered to hinge on limiting operational unit costs (the much-touted ‘economy of scale’), getting to more “lean” budgeting and logistics, and eliminating intermediaries. The problem with this is that more value chains, localities, and start-ups are in need of better-resourced, more competitive intermediaries, than are in need to shrinking the service and product options available to them. Local economies also benefit from and become more “investable” when there are more diverse capable actors competing to perform well and add value.
For businesses trying to add capacity and increase scale and reach, more investment in talent and productive capacity is a major priority. For such businesses, one cannot qualify as an investor if one is not willing to invest in the people, the purpose of the business, and its operational health and future growth trajectory. Investing to reduce costs and extract profits is, for growing businesses, the opposite of constructive investment and so inefficient and counterproductive.
A diverse group of investors, operators, and beneficiaries can see important benefits by aligning interests. A small business that improves quality of life, experience, safety, and opportunity locally can help a municipal government support local innovation and access, and investors can leverage that wider value creation to support rapid scaling, growth, and market reach.
This matrix of aligned, interacting, and compounding interests and benefits is a key piece of the sustainable business and investment puzzle. Including stakeholders and consumers in the equation, so their values, interests, and leverage can be added to accelerate the scaling process can have the effect of ensuring more diverse, nuanced, and locally rooted benefits can also be achieved.
That multiple-benefits approach creates a more solid foundation for scaling beyond local context and for making the hidden value added more visible to other stakeholders and beneficiaries in other contexts. It is important to make this approach less conceptual and more concrete, however.
Cooperative de-risking (CDR) is a means of reducing risk to each of the actors in a value chain, by optimizing the flow of resources and maximizing the non-financial benefits they produce collectively. CDR measures allow public-sector incentives—including tax credits, subsidies, cooperative public-private investment arrangements, infrastructure and public services, financial regulations and clean production credits, or green-labeled financial instruments—to boost capacity, revenues, and market reach for smaller-scale innovators.
This allows clean, sustainable, resilience-building value chains to develop more fully and withstand corrosive market pressures. Smaller-scale innovators having market-shaping leverage and the ability to scale through cooperative de-risking and co-investment approaches means the whole economy is better primed to innovate, transform, upgrade existing systems, and reduce risks related to climate, nature, inequality, and resource depletion.
Major policy-making and market-shaping institutions are just beginning to understand how many of the necessary ingredients of a healthy, clean economy have been withheld due to prevailing industrial standards and practices. One of the missing pieces we believe needs attention, first of all, is the bias among large-scale corporate and financial actors against investing in small-scale locally rooted value-creators.
Some argue AI will help resolve this barrier, by allowing large value-chain operators to achieve the effects of integration while distributing value and productivity across a more complex, more diversified landscape of smaller outside service providers. Some highly focused AI systems might allow for better computation of integrated and holistic risk and resilience value, and might make complex balance sheets easier to manage, but the human insight that makes substantive innovation possible, with real practical benefits in diverse contexts, must not be discounted.
Start-up incubators, emphasizing the role of micro-, small-, and medium-sized enterprises (MSMEs) could play a crucial role in the fast-moving climate-sensitive innovation landscape. Cooperative de-risking and co-investment platforms should reinforce and extend the work of such value-building partnership engines.
On our way to establishing the fully functional AVTR metric, Active Value will begin to examine the role of cities, food systems, and consumer-friendly finance in making this CDR rapid-scaling revolution possible.
