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Leadership and Innovative

Financing for SMEs

Exploring the missing middle and the present possibilities for

accessing finance in developed and emerging economies

INTERNATIONAL DEVELOPMENT EXCHANGE (IDEX)

INSIGHT

Written by:

Orji Austin N.

October 2014

Foreword by:

Aparajita Agrawal

Director - Sankalp Forum, Intellecap

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Foreword

As entrepreneurship is hailed as one of the most exciting trends of our generation, I am

pleased to write these few words to this interesting and insightful report that Austin Orji has

put together as part of his IDEX Fellowship with Intellecap.

Austin‟s report here is an interesting one on two counts – firstly since it aims to bridge the

spectrum of innovations in SME financing that we have witnessed in the past decade or so

across the world. The second feature that I think is quite unique is his emphasis on

leadership and how that is nearly a make-or-break factor for SMEs worldwide.

I am sure that you would appreciate this report even more once you know that author/

researcher behind this endeavour is still very new to the SME space and hence this is a

product of his resilience and labour with very limited guidance and resources at his disposal.

Finally, by all means share your feedback and your perspectives so that the author can

continue to make this research better and more insightful to practitioners.

Aparajita Agrawal Director - Sankalp Forum, Intellecap

Preface Leadership and access to finance are fundamental requirements to the success of every

business venture. The need for innovation in SME financial access is the major driver of this

project.

As part of my endeavour to add to the social enterprise space and the business world at

large during my programme with International Development Exchange IDEX, this publication

was inspired by my interaction with both Indian and African enterprises. This material is

intended to inspire entrepreneurs and investors to close the leadership gap as well as open

themselves to new channels of financial access, driven by innovation, as shared in this

publication. The outcome will be transformational for those who will act on these insights.

Exerpts and hand-outs from this publication will be made available in global forums like:

World Economic Forum, World Islamic Economic Forum WIEF, Sankalp Global Summit and

many more enterpreneurship platforms that are working towards entrepreneurship

development globally.

I want to appreciate the Intellecap Impact Investment (I3N) Team working in India and Africa,

of which I am part - as of the time of this publication - for their shared knowledge. My

gratitude to Dr. Stanley, Betty Tezera, Rahel Chakola, Ravina Kothari, Daren Lobo and

Aparajita Agrawal for their priceless input towards the actualization of this publication.

Orji Austin N.

Chief Inspirational Officer (CIO)– EAST Initiative

Member Intellecap Impact Investment Network

Orjiaustin.kennedy@gmail.com

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Contents Foreword ................................................................................................................................................. 2

Preface .................................................................................................................................................... 2

Executive Summary ................................................................................................................................. 4

Overview ............................................................................................................................................. 4

Why SMEs? ......................................................................................................................................... 4

The Wave of Innovation ...................................................................................................................... 5

Methodology ....................................................................................................................................... 5

The Need for Innovation in SME Financing ............................................................................................. 6

Limitations of Traditional Financing Methods to SMEs ...................................................................... 6

The Wave of Innovative Financing for SMEs ........................................................................................... 8

Online Financing ................................................................................................................................. 8

Mobile Financing ................................................................................................................................. 9

Crowd Funding .................................................................................................................................. 11

Supply Chain Financing ..................................................................................................................... 12

Impact Investing ................................................................................................................................ 13

The Gap in Leadership: Business or People Who Should Invest In What? .......................................... 16

Annexure ............................................................................................................................................... 19

References Used for this Study ......................................................................................................... 19

Internal Survey .................................................................................................................................. 20

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57% 33%

10%

Distribution of Funding sources

Personal Savings Family/Friends Others

Executive Summary Overview The role of SMEs in the growth and stability of nations cannot be over-emphasized. The

Small and Medium Enterprise sector is the best description of local people providing local

solutions for local market, with a fraction of this solution getting to the global market place.

Most of the businesses have shown great potential for scale but access to finance and a

huge leadership gap remain the primary barriers in developing economies. Growth is a

natural consequence of a healthy organization but leadership is the heart.

Why SMEs? The World Bank estimates that SMEs contribute an average 51.5% of GDP in high income

countries but only 15.6% in low income countries. In India, 48.8 million SMEs employ close

to 40% of India's workforce but contribute only 17% to GDP. 2.2million of these SMEs are

owned by women.

In Nigeria, there are a total of 17.28 million SMEs in the country out of which 17.26 million

are micro enterprises valued at less than N5 million ($32000) .

According to a 2012 survey by SME Development Agency of Nigeria and NBS(National

Bureau of Statistics), the sources of capital for the enterprises are predominantly personal

savings, representing 84.6 % for micro enterprises and 54.4% for small and medium

enterprises thus buttressing small businesses‟ inability to access credit from financial

intermediaries.

In emerging economies, though

SMEs are under-represented and

stifled by tough regulatory climates

among other challenges, a critical

missing ingredient is often capital.

This publication investigates:

1. The need for both human

capital development and

financial capital access for

SMEs.

2. The new wave of innovation

in SME financing in both

developed and emerging

economies through access

enablers.

The growing concern on the inability of SME holders to differentiate between ownership and

leadership of their businesses have exposed investors to increased level of risk as the

entrepreneurs get caught up with the enthusiasm to raise finances without a corresponding

leadership ability to absorb responsibility and the change that will come with the anticipated

growth.

Distribution of enterprises sources of funding in Africa and

Asia

Source: Internal Survey, Included in the Annexure

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Entrepreneurs are therefore advised not to stop at identifying and adopting one of the

various innovative financial systems in this publication, but to get to the end of the

publication where emphasis have been laid on the challenges that come with growth and

scale of businesses. These are challenges which every entrepreneur must prepare for

before taking money from an investor or loan from a bank.

The Wave of Innovation From deploying funds through different peer2peer lending systems to revolutionizing the way

financial data is collected in developed and emerging economies with leverage on the

possibilities offered by the internet, some of this companies used as case studies are

providing access to financial services to millions of SMEs in Asia, Europe, Africa and

America.

Alipay, as a case study for online financial module, leveraged on over 60 billion

transaction platform of the Chinese e-comerce giant Alibaba, to deploy over $2 billion

worth of finance to SMEs through Alipay, as at 2012.

M-Pesa, an innovation coming out from East Africa, believed that the 5 billion mobile

phone users in the world are bankable, and have already done it with 20 million users

in Kenya, with an additional launch of a new company to focus on mobile lending.

This innovation will undoubtedly be among the future of SME financing, especially in

Africa.

Crowdcube, an equity crowd funding platform, is re-engineering systems of raising

equity with companies generating as much as 1 million euros through this platform.

All of these innovative financial access platforms for SMEs, and many more discussed in this

publication, are indications for the present possibilities for the missing middle (SMEs) as well

as a clear pointer to everyone interested in business and it‟s financing on where the future is

headed.

Methodology This research was carried out with the following methods:

Drawing insights from experts that have previously worked in this field.

Survey and interviews with SMEs working across Africa and Asia.

On-sight and online interactions with players and experts in the field.

In conclusion, this publication seeks to clearly advice entrepreneurs that while finance

remains one of their business necessities, energy should not only be dispensed seeking for

finance but rather in seeking for capital in totality, which includes both finance and the right

human capital because an organization cannot grow beyond its leadership. The earlier

investors also learn from this, the lesser the risk they will have to deal with in differentiating

between potential success and failure.

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The Need for Innovation in SME Financing

In the World Bank's "World Business Environment Survey" (WBES) of more than 10,000

firms in 80 countries, SMEs worldwide on average named financing constraints as the

second most severe obstacle to their growth, while large firms on average placed finance

only fourth. Firms in Central and Eastern Europe and Africa were most likely to cite finance

as their most severe constraint, followed by those in South Asia and Latin America. World

Bank research emphasizes that SMEs are far more likely than larger firms to be held back

by financial constraints.

In our internal survey, SMEs identified the different needs as shown below, with the priority

in terms of percentages:

It is however important to note that the problem of limited financial access to SMEs is as a

result of some of the following challenges:

o Unfavourable macroeconomic environments.

o Administrative barriers and red tape by government.

o Poor managerial skills.

o Lack of basic financial records and book keeping skills.

o Lack of collateral for SME holders.

o Limited range of suitable products from banks.

o Securitization.

o Poor access to financial data/computerized system.

o High cost of undertaking SME financing by banks, leading to high interest rate.

Limitations of Traditional Financing Methods to SMEs Traditional long-term bank financing is generally inaccessible to small and medium sized

enterprises because of the lack of collateral which in most of the developing countries,

render movable assets unusable for the purposes of accessing credit.

7%

9%

10%

5%

12%

14%

17%

19%

2%

5%

Factors that would influence the success of the business

Business Skills of employees

Management Skills of employees

Skills in using technology

Favourable market conditions

Clear vision for the business

Planning (strategic/business)

Family/moral support

Revenue generation

Good working relationships withbusiness partners

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The high cost associated with due diligence leads to commercial banks continuing to focus

on lending to large, established businesses and multi-national corporations.

Venture capital ups are often not an option as would-be financiers refer to the lack of

opportunities to take equity positions in small - and medium-sized businesses at rates of

return justifying the risks involved as unreasonable.

Most VCs, realizing that a lot of fund seeking SMEs do not have the potential to become

another Microsoft, display reluctance in financing such businesses.

Angel Investors express serious concerns with exit, as many of such investor‟s feel stuck in

the businesses that they invest in as a result of undeveloped secondary market.

Micro Finance Institutions lack the bandwidth and required skills to scale-up to meet the

financial needs of these SMEs.

The SME sector thus, remains the missing middle and financial access remain limited. As

the above mentioned financial options continue to play their little role in providing access to

finance for the SMEs, a new wave of innovation is spreading across the developed and

developing economies as part of efforts to fill the financial gaps in SME financing.

29%

57%

14%

Number of years of operation among enterprise

5 to 10 years

Less than 5years

More than 10years

Result from our survey of enterprises showing the ticket size of funds required and the number 0f year in

operation.

22%

57%

21%

Financial Requirements of SMEs

Upto USD 100,000

USD 100,000 to 1Million

Above USD 1Million

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“If the banks do not

change, we will change the

bank”

- Jack Ma

Co-founder of Alibaba

The Wave of Innovative Financing for SMEs 1. Online Financing

2. Mobile Financing

3. Crowd-Funding

4. Supply Chain Financing (Reverse Factorial)

5. Impact Investing

Online Financing

Case study Alipay/Alibaba

In 2004, only 1% of Chinese citizens had credit

cards. This was because consumers grew wary of

being fleeced by local businesses and individuals.

To allay that fear, in 2010, the giant Chinese e-

commerce platform launched Alipay and

developed a payment model that holds the

payment in a dedicated account until the customer

confirms that the purchased goods have been delivered and were as advertised. That simple

wrinkle set a dormant Internet payment market on fire, and the total value of online

transactions swelled from nearly nothing in 2008 to around RMB 4 trillion ($660 billion) in

2012, according to Credit Suisse.

Initially, it offered working capital advances upto $82,000 in 30 days but today it offers larger

ticket sizes with the option of a group of 3 SMEs standing in for each other as guarantors. As

at 2012, in about 2years, Alipay had made available loans worth some $2.09 billion.

Analysts predict that total online payment transactions could quadruple from 2012 levels to

RMB 16 trillion ($2.64 trillion) by 2016 giving the online lending system a limitless growth

potential.

Alibaba has also acquired interests in three small loan companies and launched an online

market place for insurance products. The company‟s boldest move came with the June 2013

launch of a money market fund called “Yu‟EBao”, which literally translates to “leftover

treasure.” As of January 15, 2014, the fund had around RMB 250 billion ($41 billion) in

assets under management, and some 49 million accounts.

Last year, Alibaba co-founder Jack Ma made a profound statement: “If the banks don‟t

change, we‟ll change the banks”, that statement is fast becoming a reality in China.

Amazon Lending which was secretly launched in 2012 to offer funding to some of its large

sellers is already offering advances up to $800,000 with interest rate of between 1%-13% a

year.

Independent operators like Atlanta based Kabbage, founded in 2009 have started offering

lending services to amazon and ebay sellers by getting their consent to access real-time

data in e-commerce accounts such as PayPal and UPS shipping account.

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There are 5 billion mobile phone

subscribers who represent

opportunity to bank the unbanked

compared to

2.2 billion bank account holders

Kabbage provides advances between $500 and $50,000 at an interest rate of (2-7) % in

30days and 10-18% within ½ a year period. In 2013 it launched its services in the UK after

making 80,000 advances in the US.

Mobile Financing

Case Study: M-Pesa

In many parts of Africa, unlike those of

developed economies like America where

the ICT age was primarily driven by PCs,

emerging nations did catch up with the ICT

revolution through the proliferation of mobile

phones. High adoption of mobile phones in

Africa has led to the growth of mobile payment systems with a growing possibility to explode

mobile lending as well.

Table 1: percentage of mobile phone users in African countries Source: Gallup Survey

Rank Country Mobile Phone Users (%)

1 South Africa 84

2 Nigeria 71

3 Botswana 62

4 Ghana 59

5 Kenya 56

6 Uganda 52

7 Senegal 46

M-Pesa, an East Africa based mobile payment solution, is today leading the world in mobile

financial systems with over 20 million users. It has become the story of M-money

acceptance in Africa.

Paying for a taxi ride using your mobile phone is easier in Nairobi than it is in New York,

thanks to M-Pesa. Launched in 2007 by Safaricom, the country‟s largest mobile-network

operator, it is now used by the equivalent of more than two-thirds of the adult population in

Kenya. 25% of the country‟s gross national product flows through M-Pesa and people now

transfer cash using their phones, making it by far the most successful scheme of its type on

earth.

M-Pesa was originally designed as a system to allow microfinance-loan repayments to be

made through mobile phones, reducing the costs associated with handling cash as well as

lower interest rates for borrowers. It was subsequently broadened to become a general M-

money-transfer scheme.

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How it Works

Once you have signed up, you pay money into your M-Pesa account by handing cash to

one of Safaricom‟s 40,000 agents (typically in a corner shop selling airtime), then your

account gets credited. You cash out by visiting another agent who checks that you have

sufficient fund before debiting your account and handing over the cash. You can also

transfer money to others using a menu on your phone, making it quick, safe and easy to

transact. The regulator's initial decision to allow the scheme to proceed on an experimental

basis, without formal approval was positively leveraged to increase reach. M-Pesa was

used to transfer money to people trapped in Nairobi's slums during the countries conflict

period, making Kenyans to regard M-Pesa as a safer place to store their money than the

banks.

M-Pesa has since been extended to offer various loan products and can also be used to

disburse salaries or pay bills in Kenya under the brand M-Shwari.

M-Shwari is a partnership between Vodafone, Safaricom and Commercial Bank of Africa

(CBA) whose T24 R12 core banking system supports the processing of electronic loan and

bank account transactions made through the M-Pesa platform.

Across Africa, it is expected that the current basic banking services will be replaced by this

new trends. At the Sibos conference, Simon Freemantle, senior economist at Standard

Bank, told a session that it is expected that 400 million deposit accounts will be opened

over the next 10 years.

Safaricom customers can apply for loans, provided by CBA, directly through the M-Pesa

menu on their phone. If successful, the loan money is sent by CBA to the customer‟s M-

Pesa account immediately highlighting the convenience and simplicity of M-Shwari. This

resulted in 2.15 million new CBA accounts opened in 3 months.

The system is connected to a Government of Kenya database to enable real-time

verification during customer enrolment, and uses a credit score algorithm based on their

credit history as well as usage of Safaricom products, to determine a customer‟s loan

eligibility and maximum loan amount.

“Our involvement advances two of our most important corporate objectives: firstly, to be at

the forefront of technology innovation in the financial services industry and, secondly, to

advance technology as a means of lowering costs and making banking services more

accessible”, said David Arnott, CEO at Temenos

M-Pesa has also expanded to other countries like India and is starting to do well in

countries like Tanzania and Afghanistan.

Some other companies experimenting with M-money lending include:

Kabbage has developed iPhone and Android apps to enable small businesses to apply for

funds on mobile devices, and access their accounts via their iPhone or Android devices, as

well.

Sarah Eyres, co-owner of a yarn store, told The Washington Post her story of how, when a

shipment was delayed, she needed to buy 200 pounds of yarn to get her through the

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“Crowdcube is a contributing factor to

making banks obsolete and the impact

could be revolutionary”

- Policy Maker at Bank of England

Holiday shopping season and she used $3,500 from Kabbage to do it in 7minutes with her

mobile phone.

CUNA Mutual Group, a Madison, Wisconsin insurance company that supplies financial

products and services to many credit unions, also offers a mobile version of its

Loanliner.com system that credit unions can extend to their members.

Peer to peer lending is also converging with mobile. This new trend is due to speculation

that peer to peer lending will gain ground compared to traditional bank loans as a viable

option for small business funding.

Prosper.com, a peer-to-peer lending group has already included mobile lending, through

their app which enables investors select business listings they would like to lend to and

even enable them transfer the funds from a mobile device.

Crowd Funding

Case Study: CrowdCube

In developed economies, new sources of debt and

equity funding are beginning to gain popularity via

the crowd funding platforms. Individual investors

pool their money together online to support a

business or project. The flexibility associated with

this system allows as little as £10 in ticket size in

return for a small stake, other monetary reward or perk.

Crowdcube is an equity-based crowd funding platform that offers people equity in unlisted

UK registered businesses in exchange for stakes. This was developed as an alternative to

institution lenders and VCs. Start-ups use Crowdcube platform to raise business finance.

Established by Darren Westlake and Luke Lang, it was in February 2013 authorised by the

Financial Conduct Authority (FCA). This company, which is today just like the size of Google

a decade and a half ago, has a massive growth potential for the future.

With Crowdcube, anyone can invest money in a business and get equity in that business.

UK registered companies can showcase their business and investment potential to

thousands of micro-investors by uploading a video pitch with images and supporting

documents. Macro and micro investors can invest in any business of their choice for as little

as £10 upward.

Crowdcube operates on the "All or Nothing" model. When a pitch reaches its fund target, the

business receives the funding raised, if it doesn't reach the fund requirement target, all the

funds raised are returned to the investors who committed funds during the fund raising and

no money is charged the investor or entrepreneur. Only companies with successful fund

raising (company that „reached their fund raising target) are charged a 5% commission.

Some of the beneficiaries of this platform include companies like The Rushmore Group,

which successfully raised £1 million in November 2011 and Escape the City another

company that successfully raised £600,000 in 2012.

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In a $400 billion market for SCF only

5% is financed by this SCF model

- As per the International Finance

Corporation research prior to setting

up of the Global Trade Supplier

Finance Programme

Crowdcube just launched a new venture fund known as Crowdcube Venture Funds.

Launched on January 28, 2014 by Crowdcube, the product has experienced significant

demand. This investment service allows individuals a passive approach towards investing

in small companies by allowing a professional entity to manage the investment decisions.

With strategic partnership with Strathtay Ventures, a firm with over 15 year‟s experience in

working with small businesses. A unique benefit of crowdcube venture funds is the tax

benefit of the EIS and SEIS tax relief opportunities, with minimum investment for

participation of £2500.00. Strathtay‟s stated objective is to deliver profitable exits by the

end of a 5 year period. Returns greater than 7% will be split 80:20, with investors receiving

the larger portion.

Exit, which is continually the challenge of angels and other SME investors, is reasonably

addressed by Crowdfunding ability to create a secondary market which has proved liquid so

far.

Seedrs UK crowd fund provider has raised the largest equity crowd funding round ever - just

over £2.5 million. Seedrs gives all investors voting right/shares in the companies they invest

in, companies deal with one shareholder rather than a large number of shareholders that

could arise from equity crowd funding through a system of nomination. A one-off fee of 7.5%

from successfully funded start-ups which covers all legal and administrative costs is charged

at the end of a successful round. Also a success fee from investors of 7.5% of their profits as

a result of their investment is also charged to cover day-to-day management of shares and

on-going investor protection

Kick-starter, a US based leading crowd funding platform raised $480 million in 2013.

Though the models of these platforms are slightly different, their ability to take a business

pitch from an entrepreneur and turn it into investment is a common similarity.

Supply Chain Financing

Case study: Nafin in Mexico

SCF is a short term financing system that

provides working capital both for SME

suppliers and large corporations. However,

the innovation seen with this system is the

“reverse factoring” widely adopted by most

developing economies to provide access to

finance for SMEs in the supply chain.

How It Works

On approval of an invoice for a supply by a large company, the supplier, in this case SMEs

can access funds from financiers to provide the goods/service as approved on the invoice,

leveraging on the credibility of the larger company rather than their own credit rating.

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SCF is a total win-win financial system both for the buyer (big corporations), the seller

(SMEs) and the bank/financier

The seller gets access to working capital from the bank without collateral, after concluding

negotiations with the buyer and getting an approved invoice for the supply, which is then

presented to the bank and accessed based on the credit rating of the large company/buyer.

The buyer saves working capital funds by spreading the payment of goods across a period

of time (3-6) months rather than doing a one-time payment on supply of the product.

The bank/financier mitigates risk by leveraging on the credit worthiness of the larger

company at the end of the supply chain.

Despite this excellent system of SCF, there has been very little application of this system.

Comparatively, on a global scale, SCF accounts for 4% of global market value. A recent

research by UK based Demica, indicated that leading banks in SME financing, record about

(30-40) % growth, with countries like India and China having the greatest growth potential in

SCF.

NAFIN: The Cadenas Productivas Program as supported by national financier in Mexico is

one of the most adopted implementation of SCF reverse factoring.

This program created an online platform where SMEs that are accredited supliers to big

buyers and large companies, can offer their invoice for sale from a pull of financiers, and in

return access working capital immediately.

The Nafin SCF Programme, as at 2009 had attracted 445 big buyers to its platform and

more than 80,000 of their suppliers. It has advanced more than $60 billion to Mexican SMEs

with over 20 banks and financial institution lending through the Nafin Platform.

This model was reproduced on a global scale by IFC in 2010 through GTSF (global trade

supply financing) which was set up to advance finance to SME suppliers in developing

economies that have potential to sell to developed market as a $500 million initiative.

This initiative was inspired by IFC‟s findings that there are about $400 billion SME supply

from developing countries to some developed economies every year which could be

financed by SCF but only 5% of the said transaction is financed by SCF with a market gap of

95%.

Impact Investing

IntelleGrow Finance (IGF) Pvt Ltd

IGF is a registered Indian NBFC, founded

two years ago by Intellectual Capital

Advisory Services (Intellecap), with support

from Shell Foundation. Its priority sectors

for investment are modern energy,

agriculture supply chain, healthcare, water

& sanitation, education and financial

inclusion. IGF extends debt financing to early-stage companies with a turnover below Rs 50

“37% debt required by SMEs cannot be

serviced by existing institutions”

- Micro, Small and Medium Enterprise

Finance in India, IFC Report 2012

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crore (about $8 million) and a minimum of 12 months track record. Unlike traditional

collateral-based lenders like banks, debts offered are customised finance solutions using

flexible repayment schedules linked to viability of business and cash flows of the company,

thus, overcoming the challenge of collateral.

IGF has disbursed more than 60 loans, worth more than Rs 60 crore ($10 million) to SMEs

across India with $5 million raised by intellegrow with support from Omidyar Network. This

will propel IGF to reach 250 businesses with a record of about Rs 500 crore (about $80

million). Sanjib Jha CEO of Intellegrow is turning the 37% debt need by SMEs to an

opportunity. With Rs 100 crores already disbursed to the SME sector, the future of this

collateral-less loan model is looking very bright.

Acumen Fund

Acumen is a global non-profit venture fund launched in 2001. It fills the gap between

traditional capital markets and grant-based philanthropy by investing in enterprises that bring

critical goods and services in the fields of health, water, housing, and energy to low-income

markets. In addition to financial investment, Acumen Fund provides these enterprises with

talent, management support, technology, etc. Investment is made into companies with a 2-3

year operating history with an established business model and revenue stream. Investments

are in the $300,000 to $3 million range.

Acumen Fund generally takes a minority stake in its investments, typically between 10% and

33%. Acumen Fund‟s expected payback period is 5-7 years.

Grofin

Grofin is a specialist finance company that serves the needs of businesses. Its finance

solution includes business development making it a „one-stop-shop‟ for committed

entrepreneurs with viable business ideas – from start-ups, through all the phases of

business growth, up to and including established businesses that need up to a $1 million in

finance.

Business statistics worldwide reveal that the majority of business failures are a direct result

of management performance or the poor administration of financial activities. This is where

Grofin‟s expertise in business development plays an important role in growing and

maximizing the success of an entrepreneurial enterprise. Appropriate interventions and the

transfer of skills and knowledge enable more and more small and medium enterprises

(SMEs) to become successful.

E+Co

In 2000, Mona Mwanza a small electrical appliance shop in northern Tanzania began

discussions with E+Co about expanding its business to include selling solar home systems

to households and businesses in off-grid regions, as a substitute for kerosene lanterns.

E+Co helped the entrepreneur first develop a business plan and financing strategy, with a

follow-up of $50,000 working capital loan for 2years at 9% to acquire inventory. This loan

was repaid on time. E+Co followed up with another loan of $100,000 (2004) and $200,000

(2006) with an additional assistance in structuring the business expansion.

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The enterprise has scaled, with operations in multiple rural locations and has established a

new company, Zara Solar, focused exclusively on the sale and installation of solar systems.

Zara reaches 1000 new household and 6,000 people yearly. E+Co investment to date in the

company is a total of $350,000 enabling the company to reach 2500 households and 15,000

people with modern energy.

E+Co identified and jointly prepared a successful application with Zara Energy that earned

them an international award: the 2007 Ashden Award for Sustainable Energy, presented by

Al Gore.

In this case, E+Co acted where others, including local financial institutions, perceived the

risks as too high. What E+Co did in these transactions (and over one hundred others) was to

fill the gap in the market. This led to modest but positive financial returns on investments and

impressive positive impacts for people and the planet. E+Co‟s investment strategy focuses

on two complementary investment stages economically focused, growth oriented

investments and developmentally focused, early stage investments. It also provides pre- and

post-investment services.

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The Gap in Leadership:

Business or People Who Should Invest In What?

Business investors invest in businesses while entrepreneurs invest in people. The need for

human capital development and the scarcity of leadership has today made investing in

people good business for investors. Some new models of funding as already seen in this

material have adopted a two pronged approach of investing both in the business and in the

people upon who‟s shoulders rest the responsibility of providing leadership to the business.

The history of companies that have grown from start-up to scale-up, large cooperates and

multinationals are incomplete without the stories of the people behind the companies.

Result from our survey of enterprises showing the percentage of task performed by business owners

themselves and the need for people development.

In the stock exchange market for example, one of the factors that drive investment still

remains the management team behind the companies. A small and medium scale enterprise

starts out with the drive of an individual, who as an entrepreneur will generate revenue by

commercializing his solution, raise capital and also provide direction for the people that get

on-board in his company.

These responsibilities are huge and cannot be dissolved just by an MBA or the demand and

viability of the business solution. It requires survival instinct, clarity of purpose and a

compelling vision that will not just need people to drive it but that also has the ability to drive

people. These are all roles and attributes of leadership.

Leadership is not just a measure of ownership because as much as it requires the

commitment and input of the owner, the smartest business owners are people who find

security in attracting and working with smarter people.

Why leadership?

Leadership is present where result is present but beyond result, it is leadership that gets the

organization through the tough times and temporary setbacks. One of the findings as will be

highlighted later from our survey of enterprise across Africa, South-East Asia and some

developed economies is that as much as many entrepreneurs recognize access to finance

0 20 40 60 80 100 120

Marketing

Product Development

Financial Operations

Innovation/Technology

Personnel & Administrative

Day to Day operations

Percentage

Task Performed by business owners

Perform Yourself (%)

Employees Perform (%)

Contracted Out(%)

17

as a challenge, they have however not captured any vision to scale their companies beyond

the SME level.

This assertion verifies the fact that no matter how much access to finance that is provided for

the man who sets out with a vision to provide organic food for his community; he will never

grow to become a Microsoft.

In a featured article on Forbes written by Todd Warren on the 5 essential attributes of

entrepreneurial leaders, Vision and dissatisfaction with the norm was the first among the five

qualities.

As we dive into innovative financing and the readiness for enterprises to absorb investment

when made accessible, we must establish clearly the difference between ownership and

leadership.

A business owner is merely a legal title that is conferred on an individual by law after

registering or buying an existing business but business leadership is a process and a set of

qualities and skills. Ownership need not be learnt but leadership can and must be learnt. The

earlier entrepreneurs realize that these are two different things, the more room they create to

absorb finance and for manoeuvring the limited existing access to same.

Ravi Kiran shares the experience drawn from working with business owners and some clogs

in the wheels of an organization that has entered its growth stage.

Leadership Tests That Confront Entrepreneurs before Scale

As the business starts entering a high-growth stage, it creates special challenges that must

be confronted by the owner-leader for the first time since the start of the business.

1. A new power structure emerges, as new people who didn't 'grow' with the owner from

day one start joining the company, some at levels very close to that of the leader.

2. New situations present themselves and decisions become riskier and carry more

impact, either positive or negative.

3. The business path and pace need to be first defined and then explained to people

and it has to come from the top.

4. The apparent feeling of loss of control by owner-leader comes with growth and

increase in number of employees.

5. The owner's perspectives becomes subject to challenge, particularly if he has been

able to attract high-performing talents.

6. Tension between new innovators and old operators appears to tear the company

apart by creating an unhealthy competitive atmosphere rather than a complementary

work environment.

These lead to anxiety that often becomes too big for the owner, as his 'ownership privileges‟

clash with his leadership responsibilities. As he feels disturbed by this newly established

order, that has been created, he starts retracting, finds fault with the hard-driving approach

of some new employees and wants harmony to be restored. This harmony is what places a

lid on the organization.

Some new employee, adapt to the old ways but most of the time, the high performers that

will bring the required disruption to take the company to the next level leave. This is the

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biggest mistake an owner-leader can make, by not growing his leadership to understand and

hold on to high-performers as well as developing the people that have been around to learn

how to grow themselves and accept change.

For companies however, that meet the leadership requirement to scale to a larger size, the

challenge of financial access can be addressed through these innovative financing methods

and many others.

In a space where the two drivers of financial capital and human capital are fundamental

requirement to optimize growth, the companies that survive the problem of lack of resources

are those that have first, survived the problem of resourcefulness, because it takes

committed leadership to be resourceful and resource-full.

19

Annexure

References Used for this Study Afolabi Michael Oluseye. 2013. Growth effect of Small and Medium Enterprise

(SMEs) Financing in Nigeria.

Anirban Ghatak. 2013. A Study on The Bank Financing of SMEs in India.

Association of Chartered Certified Accountant (ACCA).2014. Innovations in Access

to Finance for SMEs.

Fung Global Institute (FGI) and Oliver Wyman. 2013. Asia Finance 2020 - Framing a

New Asian Financial Architecture.

International Finance Corporation. 2012. Micro, Small and Medium Enterprise

Finance in India.

UNEP Finance Initiative with WWF & GIAN. 2007. Innovative Financing for

Sustainable Small and Medium Enterprises in Africa. Proceedings from the

International Workshop held in Geneva, Switzerland.

Cover Photo Credit

Internet Metrik Photos

Contact Information

Author is open to input as well as invitation to share insights from this material and his

experience to entrepreneurship and development focused platforms.

For use of any part of this publication, reference and other queries, please contact:

Orjiaustin.kennedy@gmail.com or eastexecutiveofficer1@gmail.com

;

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Internal Survey

Through an in-depth survey conducted, we have been able to validate the data and insights

provided by other sources that have been mentioned in this publication, as well as provide

further insight on the growing need for financial access to business owners.

Outreach mode: The survey was taken by 14 entrepreneurs: 7 entrepreneurs in South-East

Asia and 7 from Africa. Entrepreneurs filled the questionnaire with elaborate responses

about their business models, financial structure and needs, operations and so on.

Here is the questionnaire that was circulated.

1. Region of Operation Asia Africa Rest of Asia Australia Europe North America South America

2. How many years in total has your business been in operation?

Less than 5 years

5 to 10 years

More than 10 years

3. Is the business incorporated?

Yes

No

4. Is the business registered as?

Sole proprietorship

Private limited company

Other (Please specify)

5. Is the business a franchise?

Yes

No

6. When you became the owner, what was the percentage distribution of funding sources?

Percentage (%)

Yourself

Family/Friends

Others

7. What is the percentage distribution of ownership of the business today?

Percentage (%)

Yourself

Family/Friends

21

Others

8. Are you currently employed or involved in any other business?

Yes

No

9. At which stage of development would you say your business is at present? (Choose only one)

EARLY START-UP stage, where your company is relatively young and is engaged in product development with anticipated sales in the nearest future

LATE-STAGE START-UP, where market commercialization of the product is near and there are some initial confirmed sales

SURVIVAL stage, where your company is established in the marketplace, but still not profitable

GROWTH stage, where your company has an established market and is expanding

MATURE stage, where there is a high-degree of stability in your market

10. If you want to expand, which of the following elements are parts of your expansion strategy?

Adding a new product or service

Improving existing products or services

Seeking new domestic markets

Seeking new international markets

Selling over the internet

Expanding advertising and promotion

Adding new equipment and/or operating space

Hiring employees

Seeking additional financing

Seeking professional advice

11. Which of the category of financing will be most appropriate for you?

Micro-financing

Bank loan

Angel investor

Grant money

Others (Please specify)

12. For the eight business functions listed below, please indicate by if (A) you perform them yourself, (B) your employees perform, or are (C) contracted out

Perform them

yourself Employees

perform Contracted

out

Marketing

Product development

Financial operations

Innovation/Technology

22

Personnel and administrative operations

Day to day operations

13. What is the maximum amount that your sales have grown continuously over a 4-year period? (Please provide your best estimate)

More than 200%

100% – 200%

50% – 100%

20% – 50%

0% – 20%

Declined

Do not know

14. By how much do you expect your sales to grow over the next 4 years? (Please provide your best estimate)

More than 200%

100% – 200%

50% – 100%

20% – 50%

0% – 20%

Declined

Do not know

15. How many paid employees and/or contract workers does the business currently have?

Total Number

Contract workers

Part-time employees

Full-time employees

16. Are any of the following factors vitally important in determining whether or not your business succeeds? (Mark only 3 most critical that apply)?

Business skills of employees

Management skills of employees

Skills in using technology

Favourable market conditions

Clear vision for the business

Planning (strategic/business)

Family/moral support

Revenue generation

Good working relationships with business partners

Access to financing

23

Location

Favourable tax, infrastructure & regulatory environment

17. Please indicate whether your business has made use of the following sources of business financing

Banks, trust companies and credit unions

Financing from friends or relatives

Financing from other private individuals

Venture capitalists

Own savings

Small Business Loans Act

Other Sources (Please specify)

18. Are you planning to use the following sources of business financing?

Banks, trust companies and credit unions

Financing from friends or relatives

Financing from other private individuals

Venture capitalists

Own savings

Small Business Loans Act

Other Sources (Please specify)

19. Do you have an audited financial account for your company?

Yes

No

20. Which of the following business technologies do you use on a regular basis for your business operations?

Telephone messaging service

Internet Service Providers-general (i.e. Sympatico, CompuServe, AOL)

Personal computers

Network computer (local area network)

Email

Business website

Suppliers website

Fax machine

21. In which of the following age ranges are you?

Less than 30 years

30 – 40 years

40 – 45 years

Above 45 years

24

22. What was the highest level of education you completed?

Did not finish high school

High school diploma

Bachelor's degree

Master's degree

PHD

Others (please specify)

23. Have you had any business training outside your formal education, such as workshops, or local economic development programs?

Yes

No

24. Prior to becoming a business owner was you ever a paid employee of another business or organization?

Yes

No

25. In total, how many years did you work for employers operating in the same industry as your current business?

0 years

1-5 years

Above 5 years

26. In which of the sector is your business?

Manufacturing

Service

27. What is your current financial need?

0-100,000 USD

100,000 USD – 1,000,000 USD

Above 1,000,000 USD