How are emerging market entrepreneurs leveraging technology and changing development paradigms? Why are the rewards of funding innovative new ventures in emerging economies worth the risks, and what makes these investments succeed? How can investors, policy makers, and the private sector in general help find and groom transformative high-growth enterprises?
(Credit: Elis Alves, Flickr Creative Commons)
The difficulties faced by Small and Medium-sized Enterprises (SMEs) in getting finance, especially in the developing world, have been well documented. The causes are equally well known. First, traditional bank financing (secured or cash-flow based) is often not available due to the lack of adequate collateral or the opaque modus operandi of many SMEs. Also, financial markets may not be sufficiently well developed to facilitate traditional private equity (PE) financing of SMEs. A typical private equity (PE) firm or fund requires controlling positions in a company it invests. But in Sub-Sahara Africa, most small businesspeople are both owner and operator of lifestyle businesses and have little interest in letting go of control of their company. Another constraint to the traditional PE financing model is the lack of exit channels such as a well-functioning initial public offering (IPO) or merger and acquisition (M&A) market.
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| Manothip met her first customers at an entrepreneurship fair for young people in Laos. |
How does one turn a creative idea into a profitable business? In my case, it started with a bag.
A financial crisis is a difficult time to start a business. Credit is tight, demand is low, and the future is uncertain. Even in recovery periods, entrepreneurs may be skittish about making the enormous sacrifices necessary to launch a new enterprise and lenders may be unwilling to lend to new borrowers. New data from the Entrepreneurship Database – a collaborative effort between the Bank's Development Economics Group (DEC) and Doing Business - provide an interesting look at the relationship between new firm creation and the recent financial crisis and ongoing recovery. The main indicator is new firm entry density, defined as the ratio of new registrations of limited liability companies to the working age population. The data show that new firm entry density (“entry density”, for short) dropped sharply in response to the 2008-09 financial crisis but by 2011 had recovered to pre-crisis levels in many economies.
New firm entry density over time: Percent change in entry density as compared to 2004 levels (Source: Entrepreneurship Database, 2012)
While it’s International Women’s Day tomorrow, many of us at infoDev are trying every day to make women, specifically women innovators, central to our strategy of supporting high-growth entrepreneurs in developing countries. But this is easier said than done as women are notoriously under-represented in tech-related industries and even more so in the area that I work in – clean technology – which is largely manufacturing and therefore male, dominated.
I recently attended one of the largest renewable energy forums in the Caribbean attracting investors, experts and entrepreneurs from around the region. As I looked around the room, I spotted only a handful of women. And this is not an isolated case. I see this scenario play out whenever I meet climate and clean energy entrepreneurs at events like this around the world.
Note: This blog post is adapted from a much longer discussion by the author under the same title that was published at Tekedia on January 7, 2013. You can read that blog post here. Small sections of this article are identical to segments of the original article.
The problem in brief
Africa is experiencing a boom in entrepreneurship due to proliferating Internet and mobile computing technologies. Simultaneously African startups face the often life-threatening impediment of inadequate access to seed and early stage venture capital. Fortunately, a number of developments in other parts of the world point to the contours of an approach to solving that problem in a manner that necessarily starts out small, but that can eventually be scaled in a meaningful way.
A normative definition that I use as a recovering angel investor myself is that an angel investor actively helps a seed stage startup succeed with both mentorship and capital in exchange for those intangible benefits of mentorship and a return on investment. In World Bank parlance, then, they automatically provide both investments and technical assistance with no agency costs; a great recipe for solving multiple problems (funding capacity, entrepreneurial capability and access to early stage finance) in a cost effective way. Knowing that 318,480 of them invested $22.5 billion on 66,230 ventures in the US and achieved 27% annual returns forms the basis of our hypothesis that angel investing could work well in the developing world.
Just a few weeks ago, I launched a new World Bank report on gender in Pakistan – Is the microfinance sector in Pakistan serving women entrepreneurs? The report highlighted some troubling patterns which emerged from a review of the microfinance sector there, mainly that most women borrowers are actually acting as loan conduits for the men in their family, that much of the sector is engaging in de facto discriminatory practices, and that women who are actually running businesses in Pakistan have little interest in using microfinance products, because the products offered are unsuitable for their business needs. These are pretty counterintuitive findings, and have us questioning whether these observations are specific to Pakistan, or if these practices are more widespread.
As a follow up to that work, our team was given a great opportunity to organize a session at the recent FPD Forum on Supporting Women Entrepreneurs Around the Globe: Challenges and Opportunities. We saw this session as a way to raise the profile around this important agenda (beyond Pakistan), and ask some very important questions about how the Bank is supporting women in the private sector, what the key challenges to reaching this market segment might be, take stock of what we’ve learned about the impact of our work to date, and hear about the innovative work others are doing in this space.
The social and economic challenges of the Middle East and Northern African (MENA) region are all very well-known: the region has the world’s highest general unemployment rate (10 per cent – versus a global average 6 per cent) and the lowest female labor participation (26 per cent in the MENA region versus 52 per cent on average in the rest of the world). But recently, there are signs that this is changing.
Take for example last month’s ‘pitching contest’ by young entrepreneurs at the ArabNet conference in Lebanon, where 40% of the pitches came from women – a much higher percentage than is typical at similar conferences in Europe. And there are testimonies by female entrepreneurs like May Habib, founder of the Dubai-based Arabic translation service Qordoba.com which uses a lot of freelance female workers in the region. She mentioned in a recent interview that the internet has transformed women's opportunities. "More flexible work options, freelance, home-based work, low capital requirements; you can see why starting a company on a small scale is a much more viable thing for women to do than get a corporate job”.
The idea for looking into the issue of microfinance outreach to women in Pakistan had been of interest to the World Bank for some time. Outreach of the microfinance sector to women borrowers had always been extremely low – hovering between 50 to 60 percent of borrowers. Compared to the rest of the region, where we see outreach to women in the 90 percent range in India, Bangladesh, and Nepal, it raised the question as to why similar targets could not be achieved in Pakistan. We reviewed a number of possible explanations, but none of them seemed satisfactory. On top of that, Pakistan is probably one of the most progressive microfinance sectors in the World. The central bank has developed the most enabling regulations possible, Pakistan continues to top the Economist Intelligence Unit list of the most enabling regulatory environment, innovations in branchless banking and new modes of financial service delivery are being incubated here, and the microfinance network in Pakistan continues to be regarded as world class. So, given all the positive attributes around the sector, why was it not possible to more effectively reach this important constituency?
As World Bank Managing Director Caroline Anstey said in her remarks at last Thursday’s event on women in the private sector, women make up nearly 50 percent of the world’s population. Despite this, they are only 40.8 percent of the formal global labor market. This gap represents a vast economic potential that could have the power to create jobs, drive economic growth and transform the global economy as we currently know it—shaky, stagnant and according to some of the data, in recession.
Please watch Women Entrepreneurship to Reshape the Economy through Innovation in MENA, at the European Development Days live on Tuesday October 16 at 11:00 AM cet
Across the developing world, women business owners are far more prevalent at the informal and micro-scale than growth oriented small and medium sized enterprises. Women still face an uneven playing field in education, employment, earnings, and decision-making power.
The Middle East and Northern African (MENA) region faces its own particular set of challenges. In the aftermath of the Arab Spring, the development of strong economies and opportunities for both men and women to pursue a livelihood without barriers is integral to the future of the region. There is an enormous enterprise and job creation agenda to be fulfilled in the Middle East. A recent study by the OECD notes that today, only 27% of women in the region join the labor force, compared to 51% in other low, middle and high-income economies, and only 11% are self-employed, against 22% of men.
Empowering women entrepreneurs is good for development and business. Tune in to World Bank Live on October 11, 2012 10:30 a.m JST. to hear Liberia President Ellen Johnson-Sirleaf and World Bank Group President Jim Kim talk #womenbiz at this year's Annual Meetings.
I’m in Tokyo. The changing colours of the autumn leaves, which would normally preoccupy the nation and its visitors, have been replaced – well, in Tokyo anyway – by fluttering street banners announcing the fact that the city is hosting the 2012 IMF/World Bank Group Annual Meetings. There’s a throng of people – 20,000 is the number bandied about – representing government and private sector delegations from around the world, and they are all here to discuss the status of international economic and financial developments for inclusive growth.
As Director, Women’s Markets, Westpac Group and because of our leadership as a corporation and a country in promoting women’s access to finance, I’ve been invited by the IFC, a member of the World Bank Group, to attend a number of events focused on women in the private sector.
In many developing economies, between 30 and 40 percent of the entrepreneurs running small or medium sized businesses are women.
Cultural and legislative barriers, such as preventing married women from opening bank accounts, or restrictions on women’s work, are becoming less overt in many places. However, women entrepreneurs – be it in first, third or the developing world nations - often find it difficult to raise capital to grow their businesses and for all sorts of reasons.
Empowering women entrepreneurs is good for development and business. Tune in to World Bank Live on October 11, 2012 10:30 a.m JST. to hear Liberia President Ellen Johnson-Sirleaf and World Bank Group President Jim Kim talk #womenbiz at this year's Annual Meetings.
Research has shown that gender equality makes good business sense, and is key to promoting economic growth. But women continue to be excluded from the economic sphere. This is certainly the case in Egypt, which could use an economic boost in a time of transition—especially as millions of fam
ilies that rely on the slumping tourism industry are having trouble making ends meet.
Indeed, our research has found that would-be Egyptian women entrepreneurs face many obstacles. For one, being approved for financing can be a challenge for Egyptian women entrepreneurs. Businesswomen in Egypt are also disadvantaged when it comes to the cost of finance. Banks have stricter collateral requirements for loans to women entrepreneurs, which are perceived as higher-risk. Providing collateral is also an obstacle for many women who are under the guardianship of male relatives and unable to independently manage their assets.
Palo Alto and Bangalore may soon have to make room for Nairobi at the top of the tech startup world. Kenya, the setting for such success stories as M-PESA, is making a name for itself as the center of the “Silicon Savannah
”. This growth is supported by incubators, investment and policy – an ecosystem of actors committed to capturing opportunities in a promising field.
Today, the Climate Innovation Center (CIC), the first of its kind in the world, opens its doors to Kenyan startups hoping to also make waves in climate technology sectors. infoDev’s feasibility studies estimate that such companies can create up to 4,600 direct and indirect jobs over 5 years and over 24,000 within 10 years, but they require substantial support to realize this potential. To this end, the World Bank’s infoDev, in partnership with the governments of Denmark and the UK, engaged with Kenyan entrepreneurs, policymakers and financiers to determine what climate technology ventures need in order to flourish as their counterparts in other industries have done. In short, they seem to be: financing, business advisory services , networks and policies that support innovative entrepreneurship.
