NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Day 1 of SoCap09, and I was already conflicted. Sonal Shah’s keynote address had ended and there I stood as 800 folks milled about, trying to decide: which of these awesome panels should I choose – and, by association, which will I have to miss? Fortunately for me, I knew Shital would attend the fantastic Ag Finance panel, while Jocelyn was headed over to learn about Disruptive Innovation. So I took off for SME Finance in Developing Countries…and I’m glad I did.

The panel featured ANDE’s Randall Kempner, Lemelson’s Julia Novy-Hildesley, CGD’s John Simon and IFC’s Dan Runde as moderator. Dan did a great job setting the stage, noting that 97% of all emerging markets jobs are created by small and medium enterprises (SMEs) – a staggering statistic. With this in mind, the IFC has a SME Venture Fund (PDF) up and running for 8 key countries (Sierra Leone, Liberia, Democratic Republic of Congo, Central African Republic, Yemen, Bangladesh, Nepal and Bhutan). They also support the Grassroots Business Fund (which spun out of the IFC) and publish the SME Toolkit, which has 4 million visitors every year. It’s good to see the big boys like IFC focusing on small and medium enterprises – a welcome change from the multilaterals’ focus on big, often extractive, industries.

If you think the IFC is doing a lot to support SMEs, you should check out ANDE – the Aspen Network for Development Entrepreneurs. Long-time NextBillion readers have heard this before – ANDE supports the ecosystem around small and medium enterprise development, from funders to intermediaries to partners/experts and everyone in between. Randall Kempner, ANDE’s Executive Director, has had a busy year, during which he’s distilled 3 common challenges faced by most SMEs serving the poor in emerging markets:

1. Human capital – having the right staff, with the best skills and the most up-to-date information, is make-or-break. You can have a great business model, but if you can’t execute on it, you’re wasting your time.
2. Knowledge capital – specifically, being able to navigate the policy landscape and gain market access where subsidies, monopolists and corrupt local officials often stand in your way.
3. Money – of course! But SMEs in developing countries face special challenges, including artificially high interest rates (due to an overly cautious risk perception by most local banks) and the inability to access loans at all, most of the time (thanks to unrealistic collateral requirements.)

I’ll be interested in see how Randall, through ANDE, helps his members tackle these problems as we transition into 2010.

Julia Novy-Hildesley, meanwhile, sits in a similar but different seat – she runs the Lemelson Foundation, which has committed more than $140M to education, innovation and invention. Where does that intersect social enterprise and the base of the pyramid, you might ask? Answer: at the start-up phase. Lemelson sponsors the $500K Lemelson-MIT prize and also supports Ashoka and KickStart, both of whom are using innovation and invention to improve the lives of those living at the BoP.

During her remarks, Julia noted that joblessness leads to a lack of hope, and a lack of opportunity – so Lemelson funds startups, with the idea that innovation and invention beget jobs. In addition to Ashoka and KickStart, they’ve funded SELCO, first with a grant, then a loan guarantee, and finally with an equity investment. This flexibility and patient approach allows Lemelson to support an enterprise from its early stages (the grant to Selco was for R&D) to pre-profitability (loan guarantee) to growth (equity). They’ve also taken 1st loss positions in Calvert Foundation and D.Light Design. It’s good to see a foundation use its philanthropic power to add flexibility and patience to a capital market that often lacks those two key characteristics.

The final speaker was John Simon, currently a Visiting Fellow at the Center for Global Development but formerly the Executive VP at the Overseas Private Investment Corporation. While at OPIC, John worked to finance SMEs in conflict and post-conflict areas – Afghanistan, Sierra Leone, Pakistan, Liberia, etc. Talk about a tough business environment – but he offered some important lessons that are applicable to conflict and non-conflict BoP markets.

First, business development services – technical assistance to the inside-the-beltway crowd – is paramount. In Liberia, for example, OPIC facilitated funding for 8 promising enterprises. 7 of the 8 failed within a year. A later round of investment, coupled with business mentoring and operational advice, saw 7 of 8 companies succeed. In short: the money alone won’t cut it.

Second, when investing in SMEs in developing countries, it’s key to understand your exit options from the start. Unlike in developed markets, there aren’t as many oppotunities for public offerings – so you’re looking at conversion options, promoter buy-back, or sale to a private holder. Knowing the potential exit market when you first invest is key, according to Simon.

Overall, the panel was an important line in the sand, demonstrating that SME finance in developing countries IS possible, and that the sector is beginning to distill some how-to’s (and how-not-to’s) as it grows. I’m glad I went – and I’m glad I managed to get there early – the room was packed. Among the audience, I noticed ISFC’s David Kyle, Microvest’s Gil Crawford, UNDP’s Sabha Sobhani, Ushahidi’s Erik Hersman, Salesforce’s Steve Wright and many, many more.