East Africa Agribusiness SME Accelerator

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East Africa Agribusiness SME Accelerator

Project Summary
Elevator Pitch

Concise Summary: Help us pitch this solution! Provide an explanation within 3-4 short sentences.

Agribusiness SMEs, that will create jobs and markets for poor people in Africa, typically struggle to access finance. Despite an increasing supply of capital from interested financiers, the “missing middle” remains. The East Africa Agribusiness Accelerator (the “Accelerator”) is a scalable model supporting small growing agribusinesses to be able to access finance.

About Project

Solution: What is the proposed solution? Please be specific!

A basic structural inefficiency exists whereby donors and governments are committed to the reduction of rural poverty, but local capital markets, seeking opportunities for relatively low risk commercial returns, especially in the face of local high nominal interest rates available from the public sector, look elsewhere. Even the philanthropically backed development finance vehicles like GroFin and Business Partners International (BPI) are tasked to “act on commercial principles” and avoid higher risk options like agribusiness. And yet, there are many businesses with good growth and impact potential, if only their challenges could be addressed. This “missing middle” can only be closed with a purposeful intervention that enables the burgeoning supply of capital for SMEs in East Africa to identify demand and have access to a facility that can build the quality of that demand. Most equity-style funds (like African Agriculture Capital, African Agriculture Fund) and loan guarantee schemes (like Stanbic-AGRA) have technical assistance resources available. The incentive to use those scarce and limited funds, however, is to reserve them to support investees/clients post-financing. The risk in using them for pre-finance business strengthening is that they will be wasted on businesses that do not become investees/clients. The Accelerator needs grant funding to prove that such a pipeline identification and strengthening intervention can consistently ensure that its clients become financeable. By establishing such a track record, there will be a significant incentive for the financiers to then pay fees to the Accelerator and shift it to a more commercial basis over time.
Impact: How does it Work

Example: Walk us through a specific example(s) of how this solution makes a difference; include its primary activities.

The Accelerator’s screening criteria include a strong emphasis on social impact. Businesses will not be supported unless they have the potential to procure from at least 1,000 small farmers. In addition, as they expand they will be creating jobs – and by setting a minimum of 5 jobs, we are targeting small growing businesses that are larger than micro-enterprises. Through the three successful clients in the pilot program, the Accelerator has already positively increased the incomes of at least 12,500 farmers, or around 75,000 people, in the cocoa, cotton and small vegetable sectors. As businesses can grow successfully under the Accelerator program, they will become role models that other investors and entrepreneurs will be tempted to emulate and replicate – laying the foundations for scaling. As an example, one of the Accelerator’s client was a new entrant in a cocoa industry that exhibited monopsonic characteristics. Through the technical assistance provided under the Accelerator, the client was able to enter the market with a strong enough presence to upset the monopsony. As a result, farmers are now receiving an additional 33% in income by selling cocoa to the exporters, and 100+ new jobs have been created in the form of local cocoa-buying agents.
About You
Organization:
TechnoServe
About You
First Name

Simon

Last Name

Winter

Website
Your Organization

TechnoServe

Country

, DC, Washington

About Your Organization
Organization Name

TechnoServe

Organization Phone

+12027854515

Organization Address

1800 M St NW, Suite 1066S, Washington DC 20036

Organization Country

, DC

Organization Type

Non-profit/NGO/Citizen-sector Organization

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Your solution
Country your work focuses on
If multiple countries, please list them here. If your solution targets an entire region, please select it below

Kenya, Rwanda, Tanzania, Uganda

Region(s) your solution focuses on:

Range of turnover in your target firms, in USD

Less than $1 Million.

Average turnover in USD of your target firm

$600,000

Number of employees in your target firms

5-24, 25-49.

Average number of employees of your target firm

20

Specify the size, average and range of expected loans or investments in each target firm

$300,000 to $2 million in financing, both debt and equity, both working and fixed capital

What stage is your solution in?

Operating for 1‐5 years

Innovation
How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Many public institutions are deploying capital into SME finance vehicles in East Africa, such as the IFC which has contracted Business Partners International to manage a Kenya SME fund, a range of public donors that are putting money into the hands of the African Agriculture Fund (AAF) the EU and IFAD that are supporting the technical assistance facility for the AAF, and others that are deploying capital for loan guarantee schemes (such as USAID’s Development Credit Authority (DCA)). The pilot project’s donors (Rockefeller Foundation and Grassroots Business Fund (GBF)) had observed that there was a large amount of undeployed capital held by banks and developmental financing institutions, and that there were also a large number of smaller agribusinesses seeking capital, but that the market was failing to clear. Through this program, the Accelerator will help public donors to utilize these funds for their intended purpose, by identifying opportunities and preparing SMEs for financing—in effect, helping the market to clear.

Without a grant to support a full scale implementation of the East Africa Agribusiness Accelerator, for reasons provided in question 7 above, it will be difficult to prove the case that this market failure can be addressed. We proposed to use success in the G20 SME Finance Challenge to approach a range of public donors to contribute to the support of the scaling up of the East Africa Agribusiness Accelerator into a full-fledged initiative to run for a period of three years. Success in East African Agribusiness Accelerator will lay the foundation for development agencies to use the model as a basis for adaptation and replication into other high-risk sectors and other regions of Africa and the broader developing world.

What barriers does your proposed solution address?

Asymmetry of information, Informality, Lack of collateral, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, High transaction costs for financial intermediaries to serve SMEs, Lack of financing to women entrepreneurs.

If you checked any of these barriers, describe how your solution addresses them

a) Lack of SME access to skills / knowledge / markets -- The Accelerator pilot identified the lack of access to skills, knowledge and markets as a primary inhibitor to growth. Deficiencies include the inability to define and quantify value propositions, understand revenues and expenses, conduct marketing research (local and export opportunities), develop strategic plans, manage supplier relations, and access and manage finance. The Accelerator will work with SMEs to address the gaps necessary to become investment-ready.
b) Asymmetry of information – Often capital seekers do not know how to approach and meet the requirements of financing institutions. The Accelerator’s support for SMEs helps them address this hurdle by providing such information and helping the investees meet institutional requirements. In its process, the Accelerator, with the trust of the financing institutions, is able to solicit their feedback and use it to help the entrepreneurs strengthen the businesses to meet the financiers’ requirements.
c) Informality – SMEs in the region often lack appropriate systems and controls. Many times the distinction between an entrepreneur’s personal assets and business assets is unclear. In addition, the lack of access to technology prevents SMEs from understanding the true economics behind the business (i.e. cost of production of goods). Failure to implement and adhere to formal systems prevents SMEs from capitalizing on growth opportunities and assessing risks. The Accelerator will help entrepreneurs shift from informal business operations to more formal systems and controls, enabling more strategic decision-making based on business performance.
d) Lack of collateral – By assisting the SMEs to strengthen the predictability of their cash flows (i.e. strengthening the expected demand), brokering relationships with key buyers, and helping to install quality management and certification systems, the Accelerator will lead to the financiers placing less reliance on very high levels of collateral, and relying to a greater extent on reliable cash flow forecasts.
e) High transaction costs for financial intermediaries to serve SMEs – Identification of potential deals, as well as preparation of the target investments to receive financial injections, often drives the costs of a financial institution’s deal generation activities. The Accelerator will reduce transactional costs by providing a source of deals and working with target SMEs in preparation for investment capital (as discussed in (a) above).
f) Lack of incentives and financial products tailored to SMEs – financial institutions often assess SME risk using existing lending products that are not tailored to agribusiness SMEs. In this context, the repayment risk is often magnified. The Accelerator will work with financial providers to design lending products that meet the needs of both the lender and borrower—creating the incentives and products within the financial institutions.
g) Lack of financing to women entrepreneurs: The Accelerator can provide specific support to women.

Impact
Provide empirical evidence of your proposed solution's success/impact at present. If your project is in the idea phase, please provide evidence that speaks to its potential impact

TechnoServe launched the Accelerator pilot program in early 2009 and ran it till early 2010 with support from Rockefeller and GBF. Under the pilot program, the Accelerator team helped raise $750,000 in reduced-rate debt financing for two clients in Tanzania and Uganda and $100,000 in start-up capital for one client in Kenya. The Accelerator’s first focus client was a cocoa bean exporter from southwestern Tanzania. They sourced from over 11,000 smallholder farmers. The entrepreneur was a small-scale business export between five and ten tons of beans a year. The Accelerator introduced them to GBF, helped navigate GBF’s due diligence process and developed a taste profile for the beans from expert purchasers in Italy, France and the US. In the fall of 2009 the company received its first firm order for 350 tons of beans, and received $350,000 in financing from GBF. After the investment was made, further post-investment consulting in both supply chain and cash management was provided.

The Accelerator’s second client was a cotton gin miller based in central Uganda. With revenues exceeding $1 million annually, they sourced from over 1,000 smallholder cotton farmers. The entrepreneur was struggling with the high cost of capital and extremely competitive economics of commodity cotton lint. He proposed the development of a production line for medical cotton wool, to be sold regionally to hospitals, pharmacies, and NGOs. The Accelerator designed and implemented a consulting intervention, created a financial model for the new business line, developed a business plan, and conducted research into the local market for the product and created a local sales database with over 100 leads. In the winter of 2009 the client received a firm commitment for a $400,000 reduced-rate debt facility from Uganda Development Bank, relying heavily on the end products of the Accelerator’s interventions to reach their decision. The production line will come online later in 2010, and the company should be able to dramatically increase profitability while doubling the number of impacted smallholders.

The Accelerator’s third focus client was a Nairobi-based exporter of green beans and snow peas to UK markets in small volumes, sourcing from around 500 smallholder farmers. The two entrepreneurs had previously worked as an accountant and a business consultant respectively. The Accelerator introduced the firm to a number of potential financiers. An introduction to GBF proved fruitful. As of May 2010, GBF has confirmed a $100,000 seed investment, an amount that is slated to grow over time.

The Accelerator has brokered relationships with financiers for two additional SMEs, as well as provided strategic and marketing advise that have led to additional markets. The two remaining clients are in the midst of the initial due diligence processes to secure additional capital.

How many firms do you expect to reach?

Based on the results of the pilot program, we believe we can help six to twelve clients per year raise financing over the first three years of the program. The average client should impact around 5,000 farmers.

What is the volume of private SME finance you aim to catalyze?

In the first three years of the Accelerator, we aim to mobilize approximately $25 million in capital.

What time frame will be required to reach these targets?

While the project is scoped to last for three years, we see a need for the Accelerator as long as the challenges persist to facilitate capital into the SME space. In the third year of this proposed project, potential continuation will be evaluated by measuring capital market maturity (including the knock-on impact of the Accelerator itself, i.e. whether it stimulated any replication), general interest in agriculture investments from the development space, and the extent to which the population has urbanized. If it is to continue, we will explore financier receptivity for moving it into a more commercial model.

Does your solution seek to have an impact on public policy?

No

What would prevent your solution from being a success?

a) The depth of the potential pipeline: During the original pilot phase the Accelerator Manager met with over 75 regional agri-processing businesses that were seeking capital expansions of some kind. The majority of these businesses were unsuitable for one reason or another, and the actual potential client base ended up consisting of about 20% of all scouted businesses. It is unclear at this stage to what extent this was the tip of the iceberg, or a more significant section of the potential client base.
b) Availability of capital: while the amount of capital available for SMEs in E Africa is increasing, it is still not that available for agri-SMEs. Should some of the pending mechanisms not materialize this will increase the extent of the challenge.
c) Expectations on success:failure ratios: In advanced countries about 80% of small businesses fail within their first three years. While the Accelerator will be purposefully strengthening the clients, they are operating in a high-risk environment and there will be failures. Realistic expectations are that at least half the businesses will fail – and this should be considered success.
d) The capacity of the financiers to support the businesses post-financing: The Accelerator’s primary focus is on pre-deal strengthening – with the assumption that good financiers will be able to help their clients post-investment. If this is not the case, they will be dependent on finding support from other local development programs – if they can be identified.

Sustainability
List all the funding sources that are required for the sustainability of this solution

Funding for the Accelerator: At this stage we are seeking $1m in annual donor funding for the direct costs and costs of consulting support required to operate the Accelerator for three years. We hope this will come from interested public donors (and possibly private philanthropic funding).

Financing for the clients: As noted above – we expect that this $3m will be able to leverage $25m of investment for the SME clients over the three years. This will be expected to come from a range of local and regional financing vehicles such as AAC, AAF, GBF, BPI, Root Capital, InReturn, and a range of other development financiers. In addition, local and regional development and commercial banks may well supply some of the operating capital required.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

The donor-funded Accelerator aims to stimulate, facilitate and crowd-in private sector development, rather than compete with it by offering comparable services at subsidized prices. Since the Accelerator pilot was conceived in late 2007, private sector players in the form of for-profit hybrid funds and capital facilitators have emerged. These entities are as yet unproven but reflect the significant growth potential of East African SMEs and slowly maturing financial markets in the region, particularly Kenya. Given the emergence of the new entities (if successful), a potential outcome would be for the Accelerator to exit completely after the initial three years.

If the new entities do not prove successful, and the Accelerator can demonstrate its ability to generate revenues in excess of its costs from financiers and from client fees (based on success of the clients reaching certain performance thresholds – the Business Partners model), then a second potential outcome would be to spin it off into a commercial entity. As it is too early to realistically predict the time frame for this exit strategy, a comprehensive analysis of the state of the industry and viability for exit will be conducted in the third year of this project.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

We are not expecting to have private funding in the main for the Accelerator itself – as we hope this will appeal to public donors. However, if the donor is a private funder and removes support within the three years, one option would be to seek to spin the Accelerator off into the commercial model mentioned above much earlier. This would require a more aggressive revenue collection model and would potentially position the Accelerator in the private sector as a competitor of like-firms, which is not ideal.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

The Accelerator depends heavily on 2 types of partnerships:
1. Financiers: the Accelerator team has to work closely with the potential financiers for the SMEs. With TechnoServe’s presence on the ground throughout East Africa, there is good initial momentum. This is complemented through the ANDE network. And the credibility with financiers based on service quality will be critical to the sustainability of the initiative.
2. Technical assistance: The pilot has benefited from a close relationship with TechnoServe and its supply of local experts and volunteer consultants with top class business backgrounds. In time, the Accelerator could benefit from partnerships with a broader range of global and local institutions that can supply a full range of skills required to help with the required business strengthening.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

We are not expecting to have private funding in the main for the Accelerator itself – as we hope this will appeal to public donors. However, if the donor is a private funder and removes support within the three years, one option would be to seek to spin the Accelerator off into the commercial model mentioned above much earlier. This would require a more aggressive revenue collection model and would potentially position the Accelerator in the private sector as a competitor of like-firms, which is not ideal.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

At this stage we would see scale up coming from increased demand for the Accelerator’s services in the region, as evidence of its work is established and spreads. We would also look to replicate it in other regions of Africa alongside improvements in capital supply. We would also like to expand it to other high risk and innovative sectors with strong social and environmental impact, like sustainable energy, eco-tourism, health and nutrition. We would draw the line at sectors that should be relatively easily financed commercially based on proven success, such as information and communication technologies.