NextBillion - A WDI Publication

Note: The Dutch Good Growth Fund (DGGF), managed by Triple Jump, along with Investisseurs & Partneraires (I&P) published comprehensive research in early 2025 based on data they’ve collected over the past 10 years, aiming to shed light on what makes SME finance work across emerging markets — and in Africa in particular. This is the second article in a series on NextBillion, sharing key findings from this research: You can read the first article here.

Over the past decade, DGGF has played a catalytic role in backing primarily first-time SME finance providers across emerging and frontier markets through its fund of funds and seed capital investments, committing more than €400 million to SME risk capital providers across 55 countries. I&P’s 2025 report exploring the current SME fund investment landscape in Africa found that SME fund managers are increasingly developing innovative solutions to overcome difficult market constraints. In this report, DGGF dove deep into their portfolio data, sharing the outcomes of their in-depth analysis, complemented by interviews with SME finance providers and their investors operating across emerging markets. This research revealed pathways that could enable first-time SME risk capital providers to move from concept to first investments, and showed how catalytic capital has enabled others to build lasting models.

Below, we reveal the success factors behind the first-time SME risk capital providers who have managed to reach “first close” or achieve the minimum size for long-term viability. Our goal is to offer practical insights for local SME finance providers, their investors — and ecosystem enablers supporting the next generation of emerging market SME financiers.

Four pathways to reach minimum viable size

Across the DGGF portfolio, the timelines for reaching minimum viable size have varied considerably, but a number of common challenges have emerged: limited track records, high perceived risk and a lack of operational runway before formal investor commitments materialize. How an SME finance provider finances and structures its journey to being able to deploy capital has direct implications for the vehicle’s eventual shape, timeline, governance and resilience. As explained in this short report, four dominant models emerge: bootstrapping, seed-funding, early support from cornerstone investors and spinouts from existing institutions. While these paths are not mutually exclusive, they reflect significant strategic choices related to how to resource and position a vehicle during its formation.

Bootstrapping is perhaps the most demanding route. It requires relying on personal savings, revenue from advisory work or other parallel income to cover setup costs and staff salaries. The upside is full ownership and control over the fund’s strategy and identity. This approach also demonstrates to prospective investors that the fund has some “skin in the game.” However, the trade-off is the time bootstrapping takes: It often requires more than two years to reach minimum viable size, with small teams juggling operational work and fundraising efforts. From the DGGF portfolio, 66% of (partly) bootstrapped fund managers were ultimately successful in raising follow-on funds, including firms like Asia Business Builders.

The seed funding model provides high-risk funding dedicated to building a track record, with potential technical assistance to support the professionalization of the fund managers — i.e., helping them to build their team, structure the fund, establish effective decision-making and reporting processes, etc. This enables teams to dedicate their time fully to fundraising, pipeline development and first investments, along with organizational design. This approach has proven highly effective, as it enables fund managers to build the vehicle more deliberately: assembling a core team, refining the investment thesis and engaging potential investors with a more credible, fully-formed model. In several cases across DGGF’s seed capital portfolio (including firms like Vakayi Capital), early-stage support proved pivotal, offering space to develop contextually relevant strategies and lay the foundation for long-term operational resilience. To date, around 37% of seed capital investees “graduated” to follow-on investment from other market players, and the average leverage effect — i.e., the additional capital mobilized by DGGF — is estimated at approximately 8x.

A third pathway is characterized by early backing from cornerstone investors, typically institutional, strategic or commercial partners who contribute not only funding but often staff time, governance input and/or reputational support. As observed across the DGGF portfolio, these early partnerships (exemplified by firms like Inside Capital) frequently lead to more rapid professionalization, clearer governance structures and enhanced credibility with other investors. However, early investors typically expect significant influence. Pursuing this pathway requires funds to manage expectations, negotiate alignment carefully and have clear governance structures from the outset.

Finally, some funds emerge as spinouts from existing investment platforms, financial institutions or corporate structures. These teams typically benefit from inherited systems, established networks and, very importantly, partial or full track records. For investors, the familiarity of the spinout team and their institutional backing reduces perceived risk, especially when the parent platform has a recognizable footprint or reputation in the market. Successfully managing a spinout requires both operational autonomy and strategic clarity, along with a clearly articulated value proposition that reassures investors that the fund is not just a continuation of the parent platform, but a distinct, investable entity in its own right — as seen in firms like Omnivore.

Across these pathways, DGGF has been deploying catalytic capital, supporting emerging market SME finance providers’ efforts to reach minimum viable size and achieve long-term viability.

Four types of catalytic capital instruments

The Catalytic Capital Consortium defines catalytic capital as a “vital form of impact investment that addresses … critical capital gaps — offering financing that accepts disproportionate risk and/or concessionary returns relative to a conventional investment in order to generate positive impact and enable third-party investment that otherwise would not be possible.” Within the DGGF portfolio, catalytic capital was applied through four primary functional lenses — de-risking, return enhancement, capacity building and proof-of-concept — as explored in this short report and outlined below.

De-risking instruments absorb specific financial or operational risks, thereby increasing the likelihood of participation by other investors. These include equity (under entrepreneur-friendly conditions), subordinated positions and targeted investments in high-risk markets. Within DGGF’s fund portfolio, early support given to SME finance providers operating in fragile states or with untested strategies often took this form, as exemplified by Ankur Capital. In practice, the effectiveness of these tools depends not only on the amount of risk absorbed, but also on how transparently and clearly the risk-sharing arrangements are explained to prospective investors. Several DGGF investees noted that clear alignment of interest and appropriate risk-sharing structures were more persuasive to investors than first-loss guarantees.

Return enhancement instruments include mechanisms like subordinated return distribution or capped upside on catalytic positions. In several cases (like for XSML), DGGF structures its commitments to offer senior investors the potential for higher returns relative to their risk. The goal is to improve the fund’s attractiveness in the eyes of commercial capital, without undermining its profitability for fund managers — and therefore reducing their incentive to continue operating the fund over the long-term. To that end, clear structuring and a transparent investment strategy with realistic outcomes for both financial and impact performance are essential conditions for effectiveness.

Alongside capital, DGGF provides technical assistance and business development support, to help emerging SME finance providers achieve operational readiness and improve performance. The pairing of capital and capacity building often falls outside the scope of what traditional investors are willing to finance, yet they are critical in the formative stages of an SME finance provider. Follow-up investment patterns suggest that the use of capacity building interventions has positive correlation with subsequent performance. The ability to fund pipeline development, conduct early diligence and set up compliant structures has been established as a key differentiator — as was the case with Oasis Capital.

Proof-of-concept instruments play a significant role during the initial phases, when SME funds explore new strategies or geographies. For example, DGGF uses flexible structures that go beyond the straight debt or equity approaches common in developed markets, adapting their models to local realities: This enables them to make early anchor investments in local SME finance providers that lack track records but show strong potential, as seen with Alive. Several of those investments highlight the value of early flexible capital that can be deployed to cover setup costs, fund structuring and pipeline development. These investments are sometimes designed to mirror fund managers’ local investment strategy — even if it diverges from industry standards in terms of the fund’s duration or structure. In practice, the effectiveness of proof-of-concept capital is enhanced when accompanied by validation from credible partners.

However, as pointed out by Marianne in our previous NextBillion article, these models are becoming increasingly difficult to replicate. In the current funding climate, the availability of catalytic capital is declining — and that is the core reason we’re exploring these learnings publicly. There are two goals motivating us to share reliable data about the ways market players — both SME finance providers and their investors — have innovated to overcome market constraints across emerging markets over the past decade. One is to demonstrate how these innovations have contributed to deploying sustainable models of SME financing in emerging economies, gradually helping to build a more diverse SME finance ecosystem in these markets. The other is to invite our peers, partners and new players to engage with us and collaborate beyond each transaction to provoke systemic change in the SME finance sector in emerging markets. So please reach out, and stay tuned for the third article in this series, which will be published in the coming months.

Julia Kho is a Knowledge Manager at Triple Jump; Marianne Vidal-Marin is the Director of I&P Ecosystems, the knowledge hub of Investisseurs & Partenaires (I&P).

Photo credit: Thithawat_s