TechnoServe Sees Sector Growth Through Refinement
Just two years ago, Chabruma Luhwavi, CEO of Hai Cocoa in Tanzania, was exporting between five and 10 tons of cocoa a year, with limited access to outside markets. This fall, his company has sealed a deal to sell more than 1,000 tons.
What was the difference maker for Luhwavi? In short, it was the middlemen.
Sure, it’s easy to disparage the role of the “middlemen” or “middlewomen” in developed economies. But in financing the Middle of Africa, where a confluence of small and medium enterprises (SMEs) often without a clear route to investors, customers and a supportive value chain behind them, the middlemen and women aren’t just an inevitable cost of doing business – they’re a necessity to doing business in the first place.
Simon Winter, Senior Vice President of Development at TechnoServe – one of the cornerstone BoP institutions in the world and an associate partner of NextBillion – recently provided an update on the organization in a video interview with Bob Kennedy, Executive Director of the William Davidson Institute, which you can find here. (Please note, this video works well in Internet Explorer, Firefox and Safari browsers, but stalls in Google Chrome). Speaking at a WDI Lecture at the University of Michigan Ross School of Business, Winter explained that while Hai Cocoa was a pilot project for TechnoServe’s East Africa Accelerator, it illustrates the impact for both value chain assistance and entrepreneurial mentoring across Africa.
In 2009, TechnoServe notes that it worked with 2,140 business worldwide to achieve $189 million in total sales. With 900 employees, 850 of whom work in 23 countries evenly split between Africa, Latin America and India, TechnoServe has focused on two core areas: improving the value chain and engaging entrepreneurs both before, and well after, they’ve launched an SME.
The value chain initiative links input suppliers to farmers to buyers of products to the processors to the ultimate end market. Most of the farmers TechnoServe works with are in the 2-4 acre size, but together, depending on the commodity, their combined numbers can exceed thousands of acres. What has discernibly changed over the last decade is the interest among multinational companies in participating in that value chain – and those transactions have moved well beyond a minor gesture as part of a corporate good citizenship portfolio.
“We now have a much more receptive audience when we talk to a Coca-Cola or we talk to a Cargill or Cadbury-Kraft, or any organization that wants to buy agricultural produce somewhere in that value chain about why it makes sense investing time, financing, or in-kind resources,” said Winter, who also is responsible for managing and incubating innovative programs, including in India, Europe and for capital access for SMEs. Previously, he was Regional Director for Africa.
Meanwhile, TechnoServe’s entrepreneurial programs have evolved significantly in the last few years by adding youth training/mentoring programs and after-care of SMEs following their participation in a business plan competition. And the group has strong evidence of progress.
At the end of last year, TechnoServe conducted an impact assessment of its Central American competitions. It compared those businesses that were very close, but ultimately not selected to participate in the competitions, versus those that were chosen to join the program. The contrast was startling: a 146% additional increase in sales in the two years following the competition for startups that ultimately made the cut versus those that didn’t.
“It really proved that these interventions worked,” Winter said. “So if we can have systematic ways of training these entrepreneurs … banks should have an interest and financiers should have an interest. Because this stuff works.”
Despite the global economic downturn, “We’re starting to see in the first half of this year some growth in terms of the amount of money being sought (for SME financing) in emerging markets,” Winter said.
In general, banks still find many agricultural SMEs too risky for loans, considering their lack of collateral, limited capacity and the inherent high-risk potential agricultural investing. But there are signs of encouragement among other financial sources. In 2009, 6% of all emerging market private equity fundraising amounts were directed toward SMEs, according to recent data from Dalberg. In the first half of 2010, 11% of fundraising amounts are SME focused. What’s more, $3.5 billion in funds is currently being raised among 34 SME funds in Africa, Winter said.
“At the end of the day this is only going to happen if you build trust (between the lender and entrepreneur),” Winter said. “We need more successes, we need more people who are engaging in the process … That may seem like wish-making, but that’s exactly what’s happened in advanced economies.”