Risk Capital Relay in Latin America and East Africa

The proposed public intervention consists of two elements: a grant for capacity building and awareness creation about SME finance, and a side car fund with soft loans to mobilize more BA investments.

Capacity building:
A G20 contribution to broad, scalable training programs for both entrepreneurs and investors will increase the number of BA investments made in SMEs, thus immediately catalyzing private finance.

Side Car fund:
The BAN movement in Latin America and East Africa is still very incipient and specialists and practitioners alike agree that public support is needed to kick-start the development of an informal risk capital market in the region. A side car fund is an efficient way to recruit new high net individuals for BANs: it allows the public sector to get more involved in financing SMEs, without the public sector having to spend scarce in-house personnel resources (e.g. excellent financial managers who can manage funds for public sector). This way the public sector plays their part in financing SMEs as cheaply as possible; meanwhile they ensure that the investee benefits from the entrepreneurial experience of the Angel group.

A side car fund is also an adequate solution because it rewards on the same terms as the Angel members in any given deal, enabling multiple parties to participate in the same deals, while piggybacking on the pre-screening and due diligence conducted by the group. Furthermore, by providing Angels with a source of additional capital that can allow entrepreneurial companies to grow to revenue and profitability, the companies can avoid the expensive, distracting, time-consuming, and dilutive undertaking of a VC round. Finally, the fund is also an excellent way for Angel groups to expand their network by attracting unaligned high net-worth individuals to test-drive Angel investing. It’s important to stress that the side car should not be seen as a way to provide additional income to the Angel group, but instead bring additional power to Angels’ investments.

Awareness Creation:
Annual regional investment conferences will also contribute to generating awareness regarding SME finance opportunities. It this sense, it should be clarified that these conferences will be joint efforts, involving all parties active in the area of risk capital (In the case of a regional conference in Latin America for instance this would not only include entrepreneurs, investors, and top academic and business institutions, but also the recently established Latin American Business Angel Association).

In the long term the above mentioned three elements will have important positive spillover effects since successful investments made by BAs in SMEs will showcase the attraction of investing in SMEs to other financial entities such as local banks and funds. These spillover effects will help trigger the emergence of informal regional risk capital markets with many different private players.

Asymmetry of information: currently, entrepreneurs that need investment cannot find informal investors, and informal investors that want to invest cannot find qualified entrepreneurs. This proposal brings the demand and offer of risk capital closer together.

Lack of collateral: investments done by BAs focus on uncollateralized finance; the matching fund will provide soft loans.

Lack of financial capacity: our solution provides risk capital to SMEs in the early stages of development, precisely when most needed to further develop their business.

Lack of access to knowledge / markets: Entrepreneurs who gain a BA investment not only get money, but also lots of expertise – this is what makes the BA approach so attractive. BiD Network will build on its experience in this field to improve the market mechanism through which good ideas meet smart money.

Unavailability of financial products: this solution mobilizes local capital for the development of local innovative SMEs. Also, it guarantees a more personal approach where investments can be more easily tailored to the specific needs of the SMEs instead of stiff bank requirements.

Lack of institutional capacity: BAs usually have been successful entrepreneurs themselves. Accordingly, they are an important source in training other BAs. Furthermore, BiD Network works intensively with its local national partners, thereby contributing to local institutional capacity building. These partners will be an important source in stimulating national, regional and inter-regional knowledge exchange.

High transaction costs: BiD Network and its local partners use the internet as their main tool in connecting all stakeholders, facilitating knowledge exchange at a low cost. BiD Network has also developed low-cost due diligence procedures, especially designed for international investments.

Lack of competition / incentives for financial intermediaries to serve SMEs: BA investments fill the gap in initial start-up capital needed for SMEs. Once the investment potential of innovative SMEs has been shown by several BA investment success stories, banks and funds will be more inclined to invest in these businesses, providing entrepreneurs with more opportunities to get suitable financing.

Underdeveloped capital markets: this proposal will kick-start the creation of Latin American and East African risk capital markets.

General barriers: this proposal offers wealthy locals a compelling argument to contribute to the economic development of their own country (while also making a profit), instead of keeping their money outside the country or simply investing it in ‘non-productive’ real estate. Also, by providing fresh funds for high potential, socially and environmentally sustainable SMEs -the most dynamic and job-creating sector in any economy- this proposal helps address the pressing unemployment and poverty problems many emerging nations face.

Lack of financing to women: BiD Network specifically stimulates investment in women’s enterprises through its yearly Women in Business competition.

Barriers to fragile and weak states: in 2011 BiD Network, together with its Dutch partner Spark, will start a special five year program in 2011 focused on stimulating SME development in Colombia, the Palestine territories, Burundi, Rwanda, Liberia, and Kosovo. Through this proposal BiD Network will relay its knowledge on risk capital to these more fragile and weak states.