Gazelles among the elephants and lions - MSMEs carve out space to grow

19-Nov-2019

Micro, Small and Medium-sized Enterprises (MSMEs) are the heartbeat of Africa’s economies. They represent 95% of all firms and generate more than 80% of new jobs on the continent each year. Africa’s labour force is expected to grow by 1 billion between 2016 and 2063. To keep those people working, almost 1.7 million jobs need to be created each month across the continent. MSMEs will play a crucial role in creating decent jobs and reducing inequality and poverty.

One obstacle, however, is lack of access to loans. Too often, MSMEs and start-up ventures cite problems accessing financial support and capital as their biggest hurdle to growth. In a traditional banking environment, it’s clear why financial institutions can perceive high-growth potential companies – or gazelles – as being too risky given their fledging status, lack of track record and collateral security.

Generally, small and medium-sized enterprises in Sub-Saharan Africa lack financial support. The total credit gap is estimated to be over $80 billion. African start-ups and MSMEs face retrogressive barriers, chief among them access to affordable finance, markets and business development services. Traditional banking models have left millions of potential MSMEs behind. The situation is worse for gazelles, and yet studies show that they hold the greatest potential for creating decent jobs for millions of unemployed youth in Africa. In a world where lions and elephants dominate, gazelles need to be supported to grow and thrive; ensuring they keep the ecosystem in balance and feed into the value chain of larger companies. 

To close the finance gap, Africa needs a paradigm shift in financial institutions’ approach to MSMEs. The issue was high on the agenda at last week’s Africa Investment Forum (AIF) in Johannesburg, a multi-stakeholder transactional marketplace conceived by the African Development Bank, aimed at raising capital, advancing projects to the bankable stage, and accelerating financial closure of deals.

“The Africa Investment Forum has created a space for the active participation of growth-oriented SMEs and their potential investors. After all, SMEs represent the majority of businesses, largely spend and plough back earnings into the communities they serve and hence they contribute significantly to equitable growth, job creation and social development in Africa,” said Tapera J. Muzira, Coordinator, Jobs for Youth in Africa Strategy, African Development Bank Group.

Building on the 2018 Africa Investment Forum session in which the 2018 AIF Agriculture, Energy, and Technology SMEs were awarded after pitching to a group of investors, this year’s AIF again carved out space for gazelles. In the midst of a fully transactional platform and a marketplace meant for pension funds, sovereign wealth funds and other institutional investors looking to invest in large projects across Africa, 16 selected SMEs had the opportunity to meet investors suitable for their size, stage, and sector.

Through nominations from VC4A, Business Africa, 22 on Sloane, Fondation Jeunesse Numerique, and AIF’s own road shows, these thoroughly vetted, high-growth potential, and investment-ready entrepreneurial ventures showcased their businesses to investors during the 2019 AIF Market Days Entrepreneurial Ventures Showcase. Operating in health, education, agriculture, energy and technology, the ventures from nine different countries were looking to raise between $250,000 and $5 million as equity and/or debt.

With the support of Private Equity Support as a strategic  partner, all 16 finalists took part in an investor readiness workshop prior to AIF, ensuring that every entrepreneur put their best foot forward when meeting with venture capitalists, private equity firms, and angel investors.

"Investor Readiness involved engaging these AIF entrepreneurs to critically analyze their growth paths, from an investor point of view. Understanding their likely growth trajectories and the resources required for key milestones assists to identify the right type of capital and the right investor for them," said Diana Gichaga, Managing Partner of Private Equity Support.

In addition to its aim of carving out space for MSMEs – the showcase directly addressed barriers to growth for these enterprises by connecting early stage ventures and Africa’s fastest growing companies with investors, mentorship and entrepreneurship ecosystem partners during the Forum. Moreover, investors looking to grow their funds had an opportunity to meet with institutional financiers.

One of the entrepreneurs, Saulo Gomes Montrond, Founder of Green Studio in Cape Verde, said: "Being chosen by the African Development Bank to take part at Africa Investment Forum 2019 in South Africa has proven to be a game changer in my pursuit for partners and investors. I have learned so much during the Investor Readiness training and the opportunity to pitch during the Forum put me in contact with so many potential investors and partners. Now I'm negotiating a Term Sheet with a private equity firm that I met during the forum”.