The Progression Model is at the heart of the Dutch entrepreneurial development bank (FMO)’s Strategy 2030 Pioneer-Develop-Scale, where FMO provides long-term commitment to its customers, supporting the growth of their business with four different funding steps.
The Dutch entrepreneurial development bank’s progression model
Abstract
Reaching commercial sustainability in blended finance investments is challenging due to various constraints that hinder the transition by investees from reliance on public, concessional funding to commercial, market-driven funding. These constraints can be economic, institutional, social, or environmental in nature. Applying an investment strategy that explicitly focuses on progression from public, concessional funding to commercial funding can help address the constraints and increase the likelihood that development initiatives reach commercial sustainability.
The Progression Model is at the heart of the Dutch entrepreneurial development bank (FMO)’s Strategy 2030 Pioneer-Develop-Scale, where FMO provides long-term commitment to its customers, supporting the growth of their business with four different funding steps. Throughout this journey, FMO provides not only financing, but also technical assistance and capability support on environmental, social, and governance (ESG) topics.
The first phase of the model starts with market creation, providing support for early-stage businesses to become viable and investment-ready for DFIs/IFIs and other impact investors.
The second phase provides support through FMO’s public funds, i.e., high-risk loans funded by public sources to help businesses develop further.
In the third phase, as businesses develop, more established companies can receive funding from FMO’s balance sheet.
The fourth and final phase, business models have matured sufficiently to attract commercial investors to co-invest in the businesses alongside FMO.
With each phase, businesses grow stronger, and investment risks decrease as the businesses expand and enhance their governance structure, as well as environmental and social management systems (ESMS).
Source: FMO.
An evaluation of FMO’s Progression Model undertaken in 2024 found that at least 62 out of 230 customers in the study had progressed from public funds to FMO’s balance sheet, while at least 18 customers had progressed further to receive commercial funding. Factors that were found to influence progression included market stability (economic and socio-political), alongside customer factors like track record, governance quality, and green operations. Also, more progression was found amongst customers that operated in the financial sector and in Asian countries.
In addition, the evaluation pointed to the impact of non-financial services in supporting business growth and attracting non-concessional investments. These services included:
Strategic support and networks.
Technical assistance and capacity development: Strengthened governance, improving ESG management systems, and implementing climate-relevant practices made businesses more attractive to DFIs and private investors.
Market level action: Driving sector-wide progress by setting standards in areas like credit ratings and ESG performance. Stronger industry benchmarks help businesses mature and move up the value chain.
Evidence from the evaluation suggest that FMO’s investment strategy and various forms of financial or non-financial support helps progression the most when tailored to customer’s market and customer context.
Blended finance is only temporarily deployed in a market with the purpose of enabling access to commercial finance and hereby making further blended finance redundant. Applying a progression model with the explicit intention of graduating investees from public funding to DFI balance sheet funding, and further towards commercial finance as quickly as possible, helps ensure that development initiatives may become financially sustainable and scalable, with more likelihood of achieving sustainable, long-term impact. The FMO Progression Model is a simplified model of a more complex reality yet helps to tailor support to the customer’s context and the market situation can inspire providers of development finance.
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