Micro Venture Capital investments filling value-chain gaps in agriculture

This Entry has been submitted.

Micro Venture Capital investments filling value-chain gaps in agriculture

Tanzania
Project Summary
Elevator Pitch

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

Cheetah Development helps villagers form cooperatives, establishes enterprises in value chains, and uses social linkages to develop a health payment system to health care.. Cheetah invests in the ‘Missing Middle’ of SME financing between $5,000- $500,000. Profit from these enterprises then drives human development.

About Project

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

Cheetah Model invests in ideas of the local people to help them unlock their own resources. In essence, Cheetah is leveraging local existing resources of the poor to provide the finances to lift them up. Therefore, the Cheetah Model is not aid but an investment requiring loan repayment. Repayment is key to teaching profitability that creates sustainability of the businesses whose solution is crucial to solving local value-chain problems. A requirement of profitability creates the discipline to resolve all of the value chain problems related to that business. Therefore, investments create projects that really work. Because 80% of all Tanzanians are farmers, Cheetah’s focus is to fill the structural breaks in the agriculture value supply chains, creating sustainable businesses that can help more people with relatively fewer investment dollars and PERMANENTLY change their income by orders of magnitude. Cheetah’s innovative model combines local investment, institutions of higher education, local management and ownership, outside investment, as well as coaching to create a profitable and sustainable business development approach. Beginning in East Africa this model can revolutionize the economic growth strategies in third world countries.. Across history, cultures and geographies, human development has always naturally followed economic development. Therefore, it is not surprising that the enterprises that Cheetah is investing in have already begun to create human development initiatives, like quality healthcare, childcare, and AIDS/HIV education.
Impact: How does it Work

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

Bottom-up dividends: Cheetah is working in three different areas representing about 15 villages. Over 1,300 family units have joined together to form potato, tea and corn cooperatives in these areas. This represents about 1/3 of the population and is expected to double rapidly. The groups are self-organized, bottom-up efforts responding to the vision of mobilizing their own resources and their own ideas. This substantially reduces organizational costs, increases participation, and drives commitment to high levels. When compared with similar but top-down organizational approaches in the same region, Cheetah is achieving 20x the participation rate. Value-chain dividends: All of Cheetah’s projects are focused on value chain gaps, which are the key to bringing economic opportunity to those in rural poverty, increasing agricultural output and addressing issues of hunger and food security. Human development dividends: Cheetah’s work recognizes the natural link between economic and human development at every level, building it in to create innovations that are uniquely sustainable, leverage up the impact of existing efforts, and deliver real life change to families.
About You
Organization:
Cheetah Development Inc.
Visit website
About You
First Name

Russell

Last Name

Myers

Your Organization

Cheetah Development Inc.

Country

, MN, Dakota County

About Your Organization
Organization Name

Cheetah Development Inc.

Organization Phone

405-979-0177

Organization Address

906 East 1st Street

Organization Country

, MN, Dakota County

Organization Type

Non-profit/NGO/Citizen-sector Organization

The information you provide here will be used to fill in any parts of your profile that have been left blank, such as interests, organization information, and website. No contact information will be made public. Please uncheck here if you do not want this to happen..

Your solution
Country your work focuses on

, IR

If multiple countries, please list them here. If your solution targets an entire region, please select it below
Region(s) your solution focuses on:

Africa.

Range of turnover in your target firms, in USD

$1-5 Million.

Average turnover in USD of your target firm

1,500,000

Number of employees in your target firms

25-49.

Average number of employees of your target firm

5

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

The size is $5,000-$500,000 with the average $300,000 with the range between $75,000 and $500,000

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?

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.

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

Entrepreneurial dividends:
Cheetah is developing a bicycle factory for cargo bikes. Bikes are shown to increase the income of families by 4X. The opportunity is to build bikes of high quality. Cheetah’s bike will be made locally and can carry up to 500 kilograms, impacting the agricultural value-chain. This project inspires:
1. private investors in Tanzania
2. local entrepreneurs joining as employee-owners
3. Tanzanian bank investment
4. support from western entrepreneurs
5. product design assistance from world-renown bike designers
When an entrepreneurial project demonstrates impact, it attracts widespread interest and support. This means that the investment to be place is highly ‘subsidized’ by expert assistance, product design, factory layout for efficiency, international sourcing for parts, etc.

Diversification dividends:
Cheetah creates a chain of stores to supply food processing equipment and related training. Starting with six home canning locations (or villages) we project 50 women-owned business per retail location in the first harvest year. This diverse impact includes:
1. develops a distribution solution by expanding the chain of stores for the region, a key value-chain problem
2. delivers food packaging materials of all types, which are in short supply and a shortfall in food value-chains
3. addresses the feast/famine cycle by preserving food for consumption in the dry season
4. transfers technology to an expanding array of food preservation/processing technologies like canning, smoking, drying, cheese and butter making, etc.,
5. germinates micro-businesses that will eventually need larger investments and be able to make substantial impact
In addition, this work is directed towards women and widow-headed households-assisting the poorest segment of society. The diversification is societal and business, enhancing the health of both.

Finance dividends:
By focusing on the “Missing Middle”, Cheetah is impacting a critical finance gap in the world. Known and studied for over 20 years it is recognized as the primary source of slowed economic development for poor nations (see http://www.gmfus.org/cs/publications/publication_view?publication.id=628). By entering this space, Cheetah reduces risk for others, hence the joining of the Tanzanian Investment Bank. In addition, Cheetah becomes the missing link between microfinance and large venture capitalism. All of Cheetah’s projects involve a microfinance component (supplied by existing organizations) to leverage microfinance returns. In addition, Cheetah creates enterprises that attract major investors. Indeed, some large investors have already begun to follow Cheetah’s progress.

How many firms do you expect to reach?

The 2011 objective is ten enterprises. Cheetah is deploying a franchise model which allows for rapid expansion in future investment rounds.

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

The volume will be around $3.5 million in 2011, growing by orders-of-magnitude in each future round. Cheetah’s ‘start-small approach’ allows for success to be carefully defined to ensure smooth scale-up in future rounds.

What time frame will be required to reach these targets?

All of our projects are ready to be funded and can start immediately. We expect to bring the first enterprises to profitability with a stable repayment position within 18 months.

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

Yes

What would prevent your solution from being a success?

Corruption in health system damages human development aspect could cause a loss of partner trust. However the risk of debilitating corruption is low. Cheetah will provide experienced subcontract management with overseeing the health system model.

Drought or other weather conditions could affects crop production causing delays in repayment or ability to internally finance health insurance. However, 2 of the 3 areas selected are in regions that have reliable, year round rainfall. The 3rd area is experimenting with drought resistant crops to protect investments.

Cooperative profits may be low early in development, causing challenge to insurance affordability. Cheetah is seeking supporting insurance grant in first year to increase cooperative membership and accelerate impact.

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

Required:
• Investment funds are placed in SMEs and require repayment.
• Grants support the investment management activities of Cheetah.
• Microfinance funds assist persons benefiting from Cheetah’s larger investments (existing)
Prefered:
• Guarantee loans support microfinance lending
• Grants support the launch phase of human development activities, such as health care

Cheetah has obtained support from:
• Partner businesses
• Individuals, including private international and local investors
• Public funding sources
• Granting organizations
• Local banks
• Entrepreneurs
• Communities

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

Each investee is selected based on the following criteria:
• Their impact on large numbers of people
• Positive cash flow within one year
• Achieving profitability and complete investment repayment capability within three years

Profitability is the key to sustainability.

In addition, the Cheetah model itself can become self-sustaining. At this developing stage the support expenses are proportionately large. However, as the number of investments increase, scales of economy will be achieved that should eliminate the need for funds to support Cheetah’s investment activities. Cheetah believes that when the third round of investments is in the repayment phase, the model will achieve financial independence.

At that stage, Cheetah will have demonstrated a model that is truly profitable. This may attract traditional venture capitalists into the same arena. If development in disadvantaged nations can be shifted from a primarily aid model into a primarily investment model, then issues of sustainability will be permanently addressed.

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

At the present time, no private funding sources account for more than 10% of our funding, therefore the impact is manageable.

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

Although no partnerships may be ‘critical’ to our success, many will be extremely helpful:
• Local university relationships that provide the army of students lowering our management costs
• Local bank relationships that assist with finance, help vet investments, and provide a pipeline of additional opportunities
• Joint efforts with agricultural groups that can deliver agronomy expertise
• Partnerships with traditional aid organizations that work in human development
• Participation from public organizations and government agencies that are knowledgeable in development subjects

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

In the developed world, the ‘Missing Middle’ finance gap is usually filled by non-institutional sources such as friends, family or personal funds, which are lacking in disadvantaged societies. Cheetah’s innovation is to fill this gap with an institutional model that ‘borrows’ from existing models: microfinance and venture capital. These have demonstrated sustainability – indeed, strong commercial success.

The primary risk to these institutional models is well known: they may make poor investments. We are mitigating this risk by reviewing large numbers of potential investments to find the best. For example, to select our first 5 projects we have reviewed more than 250 business plans, met with hundreds of entrepreneurs and conducted extensive surveys in villages, choosing the strongest candidates. Further, to help identify more candidates Cheetah is running an innovative business plan competition. Partnering with Tanzanian universities, Cheetah is linking business students with entrepreneurs to jointly develop business plans.

Microfinance suffers from an additional problem: When it is the only finance source, it is much more likely to succeed. However, if there is competition then all tend to fail. This probably stems from borrowers being less committed to repayment when there are alternatives and because there is no consolidated credit data. When microfinance is nonprofit or government run, it fails at a 50% rate. When it is a commercial enterprise it nearly always succeeds, often with high rates of return. The difference is believed to be related to management problems, lack of borrower commitment to repayment of such institutions, and lack of repayment enforcement. In summary, the problem is lack of consistent repayment.

To mitigate this risk, Cheetah’s model takes an equity position, standard to the venture capital model. If investees are not repaying, then Cheetah will intervene and take direct control to bring the business back on target.

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

70-90% of people in the developing world are farmers and/or involved in agriculture. Cheetah’s work focuses on this space creating an almost limitless growth opportunity worldwide. We are receiving study of our work through University of California, Berkeley, believing that this model will be adopted by many organizations worldwide.

In addition, Cheetah’s model uses a franchise approach. That is, we are most interested in investments that are ‘replayable’. Once we have learned from a couple of investments we can replay them more efficiently, improving the procedures. Commercial franchises use this model to scale exponentially, which we expect to do in subsequent rounds. The key to the franchise approach is to start small and learn a lot from the first few investments. Then the organization can move forward with much reduced risk because the specific business model has been tested for a geographic cluster.