Simply making finance available in the $10,000 to $500,000 deal size was crucial to attracting the interest of Ugandan and South African SMEs since it had never been available before. But other features were also designed into the model to provide tailor-made support to entrepreneurs.
First, finance is offered in local currency rather than US dollars – a feature of other SME funds that in effect puts them out of reach of most SMEs.
Second, we try to offer finance in a form that suits the particular needs of the SME client. Third, collateral requirements are kept low by the ability of the fund managers to lend against the business plan as opposed to only lending to the value of the assets the entrepreneur can pledge as security.
All together now: finance, business support and risk assessment But perhaps the most important and innovative feature of the Foundation’s SME investment funds is that appropriate finance and BDA are jointly provided to clients via the fund manager.
Elsewhere, these are provided separately with entrepreneurs picking up business advice where they can from people usually not experienced in business and in a form that is not useful to their specific needs and interests.
The concept embedded in our funds, is that the managers work first with the entrepreneur to develop a robust business plan. During this, the managers develop an understanding not just of the competence of the entrepreneur but of the particular package of finance and ongoing technical and BDA that will be required to ensure the profitable operation of the enterprise.
So the manager, while applying rigorous financial criteria, can base his risk assessment not just on the value of the collateral but on empirical insight into the prospects for success of the business. So in effect, lending decisions are based on the business plan rather than the value of recoverable assets. And once the deal is completed this means there is a plan of ongoing assistance, tailored to the needs of the entrepreneur as he/she enters the most difficult stage of any business – start-up and early operation.
As our results show, this aspect of the model – though it has had to undergo adaptation to get it ‘right’ – lowers risk considerably in the portfolio, imparts valuable training even to those SMEs that don’t get offered finance, and provides a useful vehicle for local banks to learn about the SME sector, thus changing their own perception of risk regarding the sector.
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I’m going to pile on to Fred Wilson’s post titled Web 3.0 Nonsense where he suggests that Jason Calacanis’s Web 3.0, the official definition is “nonsensical versioning.”
