Weekly Roundup – 6/15/13: Keeping the spigot of funding flowing to SGBs
Looking over Impact Report 2012 by the Aspen Network of Development Entrepreneurs (ANDE), which zeros in on the state of small and growing businesses (SGBs) – particularly those with the potential for reducing poverty – I was reminded of the old idiom about the half-full (or half-empty) glass of water.
Your description of the presence or lack of water will determine whether you lean toward optimism or pessimism. But regardless of your particular inclination, here’s what we objectively know about SGBs: the water is not frozen. And in this metaphorical glass, it’s being increased by a steady trickle of drips from the spigot.
Small and growing businesses are defined as those having 5 to 250 employees. Those that provide “high-quality” or steady, full-time employment are considered uniquely important to poverty alleviation – and not just by ANDE. These businesses also tend to pay higher wages than micro-enterprises. In emerging markets, SGBs are in especially high demand. The International Labour Organisation projects the world will need 600 million new jobs by the end of the decade, according to the ANDE report, and SGBs could play a key role in providing them.
However, the small firms needed to produce those jobs tend to stay that way, as those in emerging markets face headwinds that their counterparts in developed economies do not. By providing capacity building and financial access, ANDE’s membership (representing 175 organizations) focuses some or all of its energy on removing those barriers.
Still, as an overall market for investment, SGBs, which typically require growth capital of US $20,000 to $2 million, remain largely untapped. That’s because their size generally means they’re too big for microfinance loans and too small for traditional private equity. Compared to private equity and microfinance, which raised $40.3 billion in 2012 and held $88.9 in gross loan portfolio in 2011, respectively, the SGB sector is an untapped middle market.
Still, the report does track some growth. Twenty-five SGB funds were launched in 2012, with the average target fund size estimated at $51 million. Thirty SGB funds reached a first close and had raised $413 million in committed capital. ANDE members represent a large chunk of that total. Last year, 32 ANDE member-managed funds invested $229 million; 40 member groups provided $95 million in capacity development or business development services to 13,000 SGBs; and 14 foundation members disbursed $129 million into the SGB ecosystem, according to the report.
Meanwhile, there are some signs that microfinance institutions, which lend mainly to individuals or micro-enterprises with less than five workers, are looking outside of their typical circles. More MFIs are designing new products for the next tier of businesses; in a survey of 300 MFIs from around the world, 70 percent planned to increase their small business portfolio.
The report recommends action on three fronts to boost investment in SGBs:
Startups: Only six percent of SGB funds focus on startups, that is, those seeking funding between $20,000-$100,000 – also known as the “Pioneer Gap.” This is where flexible capital can play a role, often in the form of philanthropic grants or debt instruments, with the understanding there will be lower rates of return.
Women-owned businesses: About 30 percent of all small and medium enterprises in emerging markets are owned by women. And that’s despite having higher barriers to financing and mentorship than men.
Agricultural businesses: Improving agricultural business ties to markets, which suffer as a result of unskilled managers or a lack of financing, is another key area for concentration. Indeed, as multinational companies rely more on smallholder farmers to respond to greater demand, the need for improved production at the local level has never been higher. According to a market assessment by Dalberg, agricultural social lending has the potential to grow from around $9 billion—$350 million of which is provided through social lenders—to $33 billion with a mix of short- and long-term financing.
The glass is half full, but we need to keep the spigot open.