How does your proposed innovation leverage public intervention in catalyzing private SME finance?
Integrated Development Equation (IDEQ). Diagram Attached
1. Developing nations are 70-90% farmers, usually at or near subsistence levels. In order to impact the majority of people, development needs to be focused first on agriculture. The core resource of these people is naturally their crops. Studies of agricultural economics in developing nations consistently report the same problems:
a. Lack of access to markets and fair prices
b. Cycles of abundance and scarcity leading to swings in commodity pricing and cycles of hunger and malnutrition
c. Lack of food storage, preservation, transportation, distribution, etc. which causes the scarcity cycle
d. Limited access to quality seeds and fertilizer
e. Poor agronomy practices
2. The solution to these problems primarily involves repairing value chain problems (a-d above). This requires the establishment of businesses that fill these value chain gaps. There is a shortage of these businesses because of the “Missing Middle” in capital finance and the lack of models to manage the investments effectively. Cheetah deploys its Micro Venture Capital model to address these problems and make investments. The investments are strategically selected to address key value chain structural issues.
3. The value chain repairs enable farmers to convert their crops into cash. Thus, they become ‘cash crops’ for the first time.
4. When there is no cash, everyone must be a farmer because otherwise they will not eat. Once there is cash, things change. A study in the USA in the 1970s suggested that money entering American towns at that time would turn 10 times before leaving. In essence, when the crop is converted to cash, the crop can be ‘eaten’ more than 10 times before it is consumed. The introduction of cash into the local economy means that people that are not strong enough or not inclined to be farmers have alternative ways to create income and thus earn their food instead of growing it. Immediately affected will be women, especially widow-headed households. Once there is money, they could make dresses because their neighbors will have cash to purchase them. In our surveys of Tanzanian villages, we see exactly this trend. As villages move beyond subsistence, local economies develop.
5. When there is no cash, basic human development is not sustainable. An aid organization may build a medical clinic but the people cannot pay to use it. Therefore the support expenses never end. This is true of schools, water and utility systems, etc. Once there is cash, then human development projects become increasingly sustainable. The, farmer’s cooperatives we are working with have a primary objective to provide group health insurance policies to their members. This introduces a payer into the local health care system so that care can be upgraded and be sustainable.
What barriers does your proposed solution address?
Asymmetry of information, Informality, Lack of collateral, Lack of financial capacity, Lack of SME access to skills / knowledge / markets, Unavailability of financial products tailored to SME needs, Lack of institutional capacity of financial intermediaries, High transaction costs for financial intermediaries to serve SMEs, Lack of competition / incentives for financial intermediaries to serve SMEs, Underdeveloped local capital markets (term local currency funding, exit options for SME equity), General barriers to SME development related to investment climate, Lack of financing to women entrepreneurs.
If you checked any of these barriers, describe how your solution addresses them
a) Asymmetry of information –Cheetah works within value-chains and takes a direct stake in creating equity in transactions.
b) Informality –We assist business owners to register. Cheetah managed its own registration process directly (no outside intermediaries) and deeply understands the challenges. This process allows Cheetah staff to be better able to assist investees to register their business.
c) Lack of collateral –Cheetah financing leverages future profits and manage the investment risk by taking an equity stake allowing intervention if necessary to insure business success.
d) Lack of financial capacity – Cheetah fills the ‘missing middle’ – the key gap in financial capacity.
e) Lack of SME access to skills / knowledge / markets –Cheetah provides business preparation in advance of making an investment to insure that a business is ready to receive the investment i.e. accounting, business plan development, market studies, value-chain assessments, etc.
f) Unavailability of financial products tailored to SME needs –Cheetah is exclusively focused on the missing middle - the key gap in financial capacity.
g) Lack of institutional capacity of financial intermediaries –Cheetah is leveraging existing financial institutions to co-invest, support participants in related micro-finance loans, and identify loan guarantees to provide for innovative finance options.
h) High transaction costs for financial intermediaries to serve SMEs –Cheetah’s micro-venture capital model lowers the cost of venture capital investing through innovations not unlike those that lower the cost of traditional loan financing to create micro-finance.
i) Lack of competition / incentives for financial intermediaries to serve SMEs –Cheetah is working with institutions like University of California, Berkeley to study the Cheetah finance model so that others can adopt the model in the future.
j) Underdeveloped local capital markets (term local currency funding, exit options for SME equity) Cheetah uses a model pioneered by SEAF that uses a combination of loans and equity with preferred shares to create exist strategies built into the finance model.
k) General barriers to SME development related to investment climate-The most important barrier is the lack of cohesive value-chains. Cheetah studies value chains and strategically invest on the most structurally broken opportunities that are most likely to 1) have a significant impact on large numbers of people.2) be profitable 3) be sustainable.
l) Lack of financing to women entrepreneurs –Cheetah is pioneering projects like home canning to germinate future canning investment opportunities. Women are targeted for these projects. In addition women are evening represented in all of investments.