This week’s Global Entrepreneurship Congress, which brings thousands of entrepreneurs, investors, researchers, and policymakers to Johannesburg, South Africa, is an opportunity to build on the momentum of the Sankalp Africa Forum and reaffirm the development community’s commitment to invest in Africa’s entrepreneurial ecosystem.
Sustainable entrepreneurship is a critical component of inclusive development. Entrepreneurs create jobs, drive local economic growth and strengthen supply chains. In Africa, small and growing businesses are responsible for nearly 80% of formal employment.
But this is also the “missing middle” of the African economy—small businesses that typically employ between five and 250 people—that still struggles to access the finance it needs grow. Increased private investment is one key to solving this problem. While impact investing remains nascent in Africa, more investors are beginning to see the potential for achieving both social and financial returns. A 2015 survey by JP Morgan reported that impact investors intended to increase their investments in sub-Saharan Africa more than any other geographic region.
Despite growing interest, investment in entrepreneurs and small and growing businesses only make up 0.7% of the $227 billion in total donor disbursements. And entrepreneurs aren’t just lacking seed-stage finance; attendees at Sankalp Africa continued to cite the need for greater talent recruitment support and affordable business-readiness services.
So how can the development community effectively support entrepreneurs in Africa?
At the U.S. Agency for International Development (USAID), we are working to “crowd in” private investment for early-stage enterprises in Africa that are addressing the continent’s development challenges with market-based solutions. Through tools like the Development Credit Authority (DCA) and programs like the Partnering to Accelerate Entrepreneurship (PACE) Initiative, USAID partners with entrepreneurs, intermediaries and investors to help overcome barriers to scale and unleash the power of entrepreneurship in the effort to end extreme poverty.
USAID’s DCA collaborates with impact investment funds to increase debt finance for early-stage enterprises, a barrier to scale that many entrepreneurs in Africa face. For example, DCA’s loan guarantee with the Acumen Fund facilitated MKopa Solar, a private clean energy company in Kenya, to receive much-needed debt financing. MKopa Solar enables low-income consumers to purchase solar home systems via a leasing system with pay-per-use payments made by mobile phone through a partnership with Mobile Ventures Kenya. However, it needed debt in order to scale up, and had very few options available. In 2012, with a focus on clean energy projects, the Acumen Fund extended a five-year loan with no collateral requirements to the upstart company, due in large part to the support from DCA. This financing enabled MKopa to scale up, as well as develop a credit history in order to attract future financing from commercial banks. Today, MKopa Solar has connected over 450,000 homes to affordable solar power.
Through the U.S. Global Development Lab, the Partnering to Accelerate Entrepreneurship Initiative builds partnerships to test new and innovative ways to invest in entrepreneurs. At Sankalp Africa, for example, many attendees mentioned a desire for more connections with local impact investors. USAID is partnering with Investisseurs et Partenaires to support the creation of impact investing funds in West Africa, a market underserved by larger investment firms. By supporting three locally funded and locally managed seed-stage impact investing funds in Senegal, Burkina Faso and Niger, we aim to unlock $5.6 million in investments and accelerate growth for 52 small businesses through start-up funding, mentoring and networking. Other PACE partners are investing in technical assistance to support the integration of small businesses into corporate supply chains in South Africa and using micro-franchising to create jobs that deliver affordable clean water to underserved urban populations in Uganda.
At USAID, we invest in strengthening the entrepreneurial ecosystem—from recruiting and retaining talent, to accessing seed-stage finance and affordable advising services. By supporting a business-enabling environment in Africa and providing entrepreneurs with the tools they need to succeed, USAID aims to encourage more private investment into a continent whose entrepreneurial spirit has incredible potential to drive sustainable development.