Finance

The search for a new funding model for the world’s entrepreneurs: Harvard Business Review

Harvard Business Review /

Entrepreneurship seems to have become the silver bullet for a job-scarce, unemployment-saddled global economy still struggling to shake off a severe recession. Around the world, leaders talk about how startups can create new jobs and lift regions out of poverty. But many entrepreneurs – particularly those in the world’s toughest economies – are still battling to secure the cash they need to launch and run their own businesses.

 

In low-income countries, according to World Bank data cited in a recent paper by the consulting firm Dalberg, 43% of businesses with between 20 and 99 employees say that access to finance is a major constraint. In 2010, the White House called this gap between the demand and supply of finance for small and medium enterprises a “market failure … (and) a serious constraint on efforts to promote strong and sustainable global recovery”.

This finance crunch means many businesses can’t access the capital they require to expand and create the jobs that policymakers so desperately seek. This is particularly true for women entrepreneurs, who rarely hold land in their own names and often have a shorter history in business than men. Both of these factors make lending to women a greater risk in the eyes of most banks, despite the fact that there is no notable gap between men’s and women’s productivity when all other factors are equal. This funding deficit results in lost productivity and potential as businesses that have the customers to grow find they have few dollars to invest in the equipment or talent that expansion requires.

Yet, with private and public players joining hands, innovative new solutions are emerging.

Standing before a brown swathe of land cut into rectangular ditches for a World Bank-funded project just outside Liberia’s capital city of Monrovia, George Howard is a beneficiary of one such innovation.

“For me, it has been a problem of finance until LEDFC,” he says, referring to the Liberian Enterprise Development Finance Co, which offers much-needed loans to small Liberian-owned businesses. The US government’s Overseas Private Investment Corp has pledged $20 million in funding over five years to small- and medium-sized enterprises, through LEDFC. The Robert L Johnson Foundation is contributing $3 million to this fund.

“The effort got off to a rocky start, with few firms taking up the loans, but has since begun to offer more support services for entrepreneurs alongside slightly less stringent lending standards. These changes have led to entrepreneurs like Howard receiving the cash they need to achieve their dreams.

“I don’t care how much is in your head, if there is no money in your pocket and your bank account is empty, nothing will go anywhere,” Howard says. “For now, my business is much better, but it all boils down to finance.”

In December, Goldman Sachs, whose 10,000 Women program trains female entrepreneurs around the world, announced a partnership with the Danish government to provide loan guarantees to qualified program graduates through Tanzania’s CRDB Bank. The goal is “to develop sustainable banking products which are more accessible for qualified candidates and women in general.” The program is expected to expand from Tanzania to other countries later this year.

And at Harvard, the Kennedy School of Government’s Entrepreneurial Finance Lab is examining whether “psychometric screening tools” that judge for “entrepreneurial ability” and “honesty” could, when paired with sales contracts, convince more banks to lend to entrepreneurs. Further research is under way now.

Even nongovernmental organisations, hardly usual allies for the private sector, are joining the wave of support for small business. In January, Oxfam announced it would team with the asset manager Symbiotics to launch the Small Enterprise Impact Investment Fund. The goal is to raise $100 million over three years from development banks, commercial banks and high-net-worth investors. Oxfam hopes to create 100,000 “good quality jobs” in five years. The focus at the outset will be on agriculture and women’s empowerment, with Kenya, Uganda, Tanzania and Francophone West Africa part of the early pipeline.

“We wanted to do this because we recognise that small enterprises are a very significant engine for development; they create employment, which tends to be more sustainable and better paid than you would find in the more informal microfinance sector,” says Nicholas Colloff, the director of strategy and innovation at Oxfam.

A decade ago, Oxfam never would have dreamed of raising money from wealthy donors to create its own fund. But times have changed. Supporting small business – now more than ever before – is seen as a development imperative.

“Private finance or a blend of private and public finance has a role to play – a very clear role in social development – and if we can channel some of that money to what we call ‘impact investing,’ that is a very good thing to do,” says Colloff.

Some microfinance organisations are also moving out of the purely micro and toward larger lending. The San Francisco-based non-profit Kiva, which allows individuals to make microloans as small as $25, is talking to partner microfinance institutions about supporting their SME growth and exploring ways to back agricultural co-operatives seeking bigger dollars.

Kiva even plans to begin crowdsourcing SME loans in the range of $50,000 this spring. The goal, according to the organisation’s leaders, is to offer SME owners even greater amounts of support – as high as $200,000 – once they have a sense of lenders’ reactions.

“Moving into the SME space represents an incredible opportunity to help channel capital to businesses that are creating new jobs, building communities and invigorating local economies,” says Kiva’s vice-president for marketing and communications, Beth Kuenstler.

And for entrepreneurs like Howard – and the millions of women and men in emerging economies – that opportunity can’t be seized soon enough.

Gayle Tzemach Lemmon is the author of the New York Times best-seller The Dressmaker of Khair Khana, which tells the true story of a girl whose business supported her family under the Taliban. A fellow at the Council on Foreign Relations, she is a graduate of Harvard Business School.

© Harvard Business Review. Stop publishing May 18, 2012.
This article first appeared on LeadingCompany.

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