Last Friday, the G-20 Summit being held in Seoul, Korea was brought to a close. Just a short 5 months ago, Toronto played host to our global leaders, where amongst other decisions, Canadian Prime Minister Stephen Harper committed $20M to an Ashoka’s Changemakers Challenge to advance available funding mechanisms for SMEs in emerging markets.

In my previous post, I discussed the significance of SME’s in stimulating innovation and job creation, and yet often being the bearer of the “missing middle” financing gap found between microfinance and commercial financing in emerging and developing economies.

Since that discussion, much has changed, at least in terms of scope. The challenge received upwards of 350 entries, and after rounds of short-listing, the top 14 winning ideas, and 3 public favorites, were awarded and recognized at the G-20 last week. If that wasn’t enough, Canada, Korea, the U.S. and the Inter-American Development Bank pledged an additional $528 M USD, over 25 times the original $20M, and launched the SME Finance Innovation Fund. 

To say that the missing middle is on its way to being found would be an understatement.  The sheer size of the commitment, combined by the level of influence of these key global leaders is monumental to unlocking financing in support of entrepreneurship as a primary economic development strategy for emerging and developing countries. If successful, we can only hope other countries will jump on board and continue to lead this movement by example. 

Funding will be provided to winners based on individual requirements, and will include a blend of grants for technical assistance or capacity-building, risk sharing or first-loss capital, mezzanine capital, and investment capital. 

While the chosen winners vary in terms of geographical focus, institutional status, the size and instrument of financing provided, they converge on one common goal: to support entrepreneurs excluded from traditional financing due to a lack of collateral and/or financial intermediaries. Together, they represent different approaches to the needs across the lifecycle of an entrepreneur and systems that support entrepreneurs. I have categorized the winners into four main areas: access to capital, funding new ideas, funding existing ideas, and support services for investors and funds, and provide a snapshot of some of the organizations. 

• Access: BiD Network is an online platform that connects emerging markets entrepreneurs with investors, in addition to facilitating matchmaking services between both parties. The private foundation charges a 2% fee for matching services, and maintains a database of over 250 partner funds.  
• New:  Aavishkaar, a social venture capital firm based in India, provides equity investments upwards of $350K to early stage social enterprises, with the aim of attracting mainstream capital. In addition, they often lend bridge loans between $20-$100K to their portfolio companies to tide them over if working capital falls short.  Similarly, non-profit organization, Root Capital, based in the U.S. has pioneered a financing mechanism to support small-scale producers in rural areas in developing countries, by using future sales and purchase orders with buyers (e.g. starbucks) as collateral. When product is delivered, buyers pay the principal + interest directly to Root Capital, lending to the organizations 99% repayment rate. 
• Existing:  Equity for Africa Ltd. And The East African Rural Enterprise Facility (EAREF; Managed by Grassroots Business Fund) provides loans to agribusiness and manufacturing enterprises to purchase equipment and machinery needed to accelerate growth. 
• Support: MFX Solutions, a for-profit organization based in the U.S, supports microfinance lenders, especially in high-risk markets such as Sub-Saharan Africa, with hedging instruments to manage their currency risk, enabling them to provide more funding.  Likewise, the Entrepreneurial Finance Lab has developed a methodology to predict an entrepreneurs credit risk and upside potential, with the same accuracy as traditional credit scoring models, but without requiring collateral. 

Barefoot Power, an organization that designs and manufacturers products such as LED lights to reduce the use of kerosene developed a distribution model that particularly interested me. The “venture debt model,” allows SME’s to gain access to 4-6 month loans of approximately $200K to purchase products, and then, extend that credit to “micro-entrepreneurs” to sell products in the community.  

All in all, I am thoroughly impressed with the outcome of the G20 SME Finance Challenge. It has illustrated that a little creativity can go a long way to changing paradigms such as access to capital, and that financing mechanisms clearly do not come in one shape or size. I look forward to keeping abreast of these organizations as they scale, extend their reach, and influence new models of social financing. As Ashoka says, this story is in motion. 

Photo Credit: http://www.changemakers.com/en-us/node/84851

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