Now that I have given a little bit of background on social enterprise and impact investing, I can better describe my work this summer. For those of you who don’t know already, I am spending the summer in Nairobi, Kenya as a part of the Frontier Market Scouts program, run out of the Monterey Institute of International Studies in California. The program began with a week of classes in Monterey at the beginning of June and follows with placements around the world with various partners.
In my case, I was placed in Nairobi to work with two groups. First, there is Village Capital, a US-based non-profit impact investing group. Village Capital focuses on enterprises that are post-income (i.e., they have already sold at least one item/service), aiming to improve funding for enterprises in the so-called “missing middle.” As seen in the charts below, in high-income countries, small and medium enterprises (SMEs) are common, but in low-income countries, there are relatively few SMEs. This is significant because in developed countries, SMEs provide about half of GDP and more than half of all employment. The resulting gap of SMEs in developing countries is referred to as the missing middle.[1]
One of the reasons why this gap exists is because financing can be very hard for SMEs to find. Microfinance institutions (MFIs) abound in developing countries, and even where there are no MFIs, microenterprises may be able to raise enough money from friends, family, or, if necessary, the local moneylender, to start a microenterprise. But to move beyond this stage, more significant capital is required, roughly $50-250K. While this amount of funding can be more easily acquired in the US, through banks, venture capital, and other means, for entrepreneurs in developing countries, there are significantly fewer options. For potential investors, the cost of vetting businesses of this size, in markets unfamiliar to most larger investors, often makes loans of this size unprofitable. So something else is needed.
Village Capital has an innovative solution to the problem. It forms groups of 12-15 entrepreneurs to go through a program together which provides mentoring, practical business skills/knowledge, and networking. But most importantly, at the end of the program, the entrepreneurs evaluate one another, and the two best entrepreneurs receive an investment of $50K (they also evaluate each other throughout the program). Essentially, the program democratizes entrepreneurial capital. The entrepreneurs evaluate each other along the same lines that investors would, so the program also does the vetting for the investor at a much lower cost.
In order to effectively carry out such programs around the world, Village Capital always partners with a local impact investor. This is where Growth Africa comes in. Growth Africa is a business consultancy and impact investor here in Nairobi with extensive experience and networks. At the end of this summer, the program will begin, facilitated by Growth Africa. In all cases, half of the investment capital is provided by Village Capital and the other half by the local partner.
So this summer I am working for both Village Capital and Growth Africa. I arrived in the thick of recruiting season, shortly before applications for the program are due. Currently we are still focusing on finding the best entrepreneurs possible for the program, mostly leveraging Growth Africa’s extensive network to do so. Once the applications are all in, we will begin the process of reviewing them, interviewing entrepreneurs, evaluating their businesses’ potential – including social impact, profitability, and ability to scale – and selecting semi-finalists. Then these semi-finalists will make a last pitch, after which the finalists will be selected.
The program will begin in early August, though unfortunately I will not be here for the conclusion of the program, as it is spread out over several months. So while I am here I will be helping get the program started, continuously looking for more entrepreneurs for future programs, working with entrepreneurs in the program, and, I’m sure, learning a ton about what makes a good social enterprise, both from the business side and the investor side. Hopefully that gives you a better idea of what I’m doing here, and for those of you interested in this topic specifically, I will plan to talk about things I learn as I go along.
[1] Entrepreneurial Finance Lab Research Initiative, Center for International Development at Harvard University, http://www.hks.harvard.edu/centers/cid/programs/entrepreneurial-finance-lab-research-initiative/the-missing-middle
Filed under: International Affairs Tagged: entrepreneurship, impact investing, MFIs, microfinance, Nairobi, social enterprise 
