Three Challenges in Supporting Small and Growing Businesses Around the World
The Omidyar Network recently partnered with Dutch Good Growth Fund (DGGF) and Dalberg Advisors to devise a classification system for Small and Growing Businesses (SGBs) based on the distinct motivations and financing challenges behind the businesses that traditionally fall under this category. Utilizing the Aspen Network of Development Entrepreneurs’ (ANDE) definition of an SGB as “commercially viable businesses with five to 250 employees that have significant potential and ambition for growth, and that typically seek growth capital from about $20,000 to $2 million,” they divided SGBs into four “families.”
- High-growth Ventures: businesses with high growth potential and large markets. According to Jurgens, these ventures require “staged growth capital — often from venture capital and private equity funds.” Among this class of businesses, we are encouraged to distinguish between “asset-light” (think digital technology) versus “ “asset-intensive” due to their distinct financing challenges.
- Niche Ventures: businesses interested in pursuing other goals other than scaling. Jurgens cites entrepreneurs interested in serving a specific community or addressing a specific environmental or societal issue as examples (social enterprises fall under this category). These businesses are still interested in growth, but operate in smaller markets.
- Dynamic Enterprises: businesses in more traditional sectors, such as “manufacturing, trading, and retail.” Growth among these businesses is characterized by “ increasing market share, reaching new customers in adjacent markets, and making incremental innovations and efficiency improvements.” Multi-generational family businesses fall under this category.
- Livelihood-Sustaining Enterprises: typically small businesses that serve small, local markets.
This new classification system highlights a few problem areas that might inhibit economic growth potential.
- Dynamic and livelihood-sustaining enterprises are often overlooked for high-growth ventures by investors, possibly because they lack access to “entrepreneurship ecosystems and stakeholders focused primarily on start-ups.”
- Prevalence of “risk-return mismatches”: investors often have misaligned financing structures and growth expectations for companies. This mismatch ignores the different needs and goals of different enterprises, succumbing them to the growth models of high-growth ventures.
- The “transaction-cost gap”: among Dynamic and Livelihood-Sustaining enterprises, there is a shortage of affordable lending opportunities because “the cost of providing low-ticket-size working capital financing or mezzanine debt can exceed the income that such products can generate for lenders.”
Some of the solutions posed by Jurgens and his team include expanding the use of nontraditional financing (they cite quasi-equity, revenue-based investing, and mezzanine debt as options) and encouraging local investors to provide early stage funds via seed capital and angel investing, as well as the employment of technology advancements that make financial services more accessible to more businesses.
Contributed by Sughey Ramirez.
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