Ashoka Changemakers’ G-20 SME Finance Challenge: A Missed Opportunity?

When our global leaders congregated in Toronto in June 2010 for the G-20 Summit, despite countless reports, damaged storefronts, burning cars and congested police stations, were not the only outcomes.

Shortly after the circus left town, the Ashoka Changemakers’ G-20 SME Finance Challenge was launched – a unique competition to crowdsource the most novel models of bridging the gap between public and private sources of financing for small and medium sized enterprises (SMEs). During the G-20 gathering, Prime Minister Stephen Harper pledged $20M on behalf of Canada to scale up the top 15 winning submissions.

Traditionally, the financing needs of SMEs have been wedged between two extremes, microfinance (1-10 employees; $0-$5,000), which supports smaller companies, and commercial financing (250+ employees; $2,000,000+), which supports larger companies. This has led to enlisting the term “the missing middle” (See Figure 1).

Figure 1: The Missing Middle
Source: “Releasing the potential of Africa’s Youth: Report of the Africa Commission,” Ministry of Foreign Affairs of Denmark, May 2009. (available here)

Despite this gap, SMEs are said to be the main drivers of innovation and competition, globally accounting for 99% of all businesses, and 40-50% of a country’s GDP. Many SMEs, however, are fraught with severe constraints including limited access to markets, skills, technology and capital, in addition to underdeveloped infrastructure and political systems in low and middle-income countries. Recognition of these challenges has led to increased promotion of SME support as a method for economic and sustainable development. The G-20 SME Finance Challenge is one example amongst many.

Acumen Fund, the non-profit social venture capital fund, with offices in New York, Kenya, Pakistan and India, is another example. The firm invests debt and equity capital into social purpose SMEs tackling health, water, agriculture, housing and energy challenges at the base of the pyramid. Investments are generally made in the $500 K – $3 M range, hitting that missing middle source of capital for promising enterprises.

The Ashoka Changemaker’s G-20 SME Finance Challenge could be criticized for not focusing on innovations in directing capital towards social purpose SMEs, as opposed to all types of SMEs. If that’s the case, then Harper’s acknowledgment of the missing middle may be coupled with a missed opportunity to advance the field of social enterprise financing and social entrepreneurship more broadly.

In an economy with finite resources, tensions between groups who have identified themselves as fundamentally different are bound to proliferate. However, it is the recognition of similarities that brings us closer to real collaboration. The growth of SMEs leads to increased job creation, and communities with disposable income, who can then access affordable goods and services that address basic needs. In parallel, social enterprises create businesses that make goods and services related to basic needs more affordable and accessible, with an implicit reliance on low-income consumers with disposable income. Inevitably, traditional SMEs and social purpose SMEs meet at a juncture, unsuspectingly as each other’s lifeline.

Moving forward, shifting the argument from us vs. them, to us and them, will truly allow for innovative ideas to flourish. Competitions like the G-20 SME Challenge, therefore, should recognize financing models that help social enterprises as well as traditional SMEs scale their operations.

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