Closing the Early-Stage Financing Gap for Entrepreneurs
Picture your favorite startup company operating in the developing world. It might be selling solar lanterns to off-grid communities, providing transportation services for agricultural commodities, or perhaps operating a chain of grocery stores. Regardless of its sector or location, like any startup it probably did not follow a direct path to scale and success. It takes typically several years for startups to refine their business model, grow their customer base, and reach the break-even point (if they make it). For companies that operate in developing countries, however, this growth trajectory becomes even more challenging. The context in which they operate—where banks do not lend, talent is hard to recruit and retain, infrastructure is poor, and business regulations are cumbersome—slows down that growth trajectory even further.
There is a significant gap in early-stage financing available to entrepreneurs in emerging markets. Businesses that need between $20,000 to $250,000 struggle to find the capital they need. This deal size is far too large for microfinance institutions, but far smaller than multi-million dollar deals that private equity funds seek. And these businesses usually cannot meet the collateral requirements of their local banks’ small business lending operations. At this point in a business’ growth trajectory, the entrepreneur is typically stuck—they need cash to buy equipment, open a new location, or hire additional staff but can’t find the right financier.
From the investor’s perspective, investing $20,000 to $250,000 doesn’t make economic sense. The transaction costs on deals of this size are typically extremely high relative to the possible return. Investors lead investors to seek larger deals, with more established companies that are less risky and where projected returns are higher.
At the Aspen Network of Development Entrepreneurs (ANDE), this gap in early-stage financing is a challenge that many of our members are working to solve. As a network organization, we have seen many promising solutions emerge in the past few years from multiple geographies and sectors.
That is why we were excited when the Argidius Foundation asked ANDE to help them surface those emerging early-stage financing models and provide a space for experimentation and learning. The Argidius-ANDE Finance Challenge (AAFC) launched in 2012 with the goal of unlocking financing for “the most missing of the missing middle.” The competition was structured in two phases: the pilot phase awarded 200,000 euros to each of the five finalists. Those finalists spent 18 months testing their ideas, refining their models for unlocking capital, and implementing their approach in Central America or West Africa. These were either untested ideas or new implementing partners that Argidius might not have funded without the support of the AAFC. The AAFC provided a platform for experimentation that we believe was necessary in helping close the early-stage financing gap.
After 18 months, the Argidius Foundation selected a winner based on multiple criteria, including the sustainability and scalability of the financing model. This fall, I&P was awarded one million euros to expand its model to additional West African countries. While there was just one challenge winner, many of the finalists’ approaches still hold significant promise. From the development of alternative credit scoring to designing new deal structures, AAFC finalists are innovating to unlock capital in the toughest of markets.
What set I&P apart was their ability to hit the ground running in a new country and quickly mobilize local capital from Burkina Faso. Their model emphasizes not just relationship building with their investors, but the development of strong networks—among investors, entrepreneurs, and fund managers regionally. In places like Burkina Faso, where there is no culture of angel investing and enterprises cite access to finance as the most significant challenge they face, the development of this network is critical to strengthening the entrepreneurial ecosystem. At ANDE, we believe that these kinds of collaborations will be the key to unlocking capital for the “most missing” of the missing middle.