Financing the next Silicon Valley

Although we're in the middle of the lazy days of August, infoDev has just come out with an impressive document on just how to create the next Silicon Valley. Entitled Financing Technology Entrepreneurs & SMEs in Developing Countries, the publication takes a look at the missing piece of the puzzle for many tech businesses in developing countries: access to finance. It takes more than a brilliant idea to make a tech business work, and infoDev has identified a lot of constraints on both the demand side and supply side of finance.

Much of the information in this publication is not entirely new. Many of the constraints on the supply side for financing SMEs are relatively well known: informational asymmetries, the high risk of small operations, transaction costs, and limited or nonexistent collateral. The real contribution of this publication is that it synthesizes these known issues with a survey of the state of financing of the ICT SME industry in ten developing countries. The really interesting stuff comes from the demand side - just what kind of companies are out there looking for finance? For example:

• Emart Business Solution (Kenya): Emart Business Solutions is a start-up active in web-design and e-commerce. Currently based in an infoDev-supported incubator, the firm is working at the establishment of a large e-commerce portal, and is looking for financing at about US$60,000.
• PeaceSoft Solutions Corp. (Vietnam): PeaceSoft Solutions Corp. started as a software developer, but later went into internet-based services. The company expanded rapidly, and is currently managing one of the largest online auction sites. In order to secure further growth, the company recently secured a multi-staged VC investment for a total amount of about US$3 million.
• Manobi (Senegal): Manobi is a value-added service provider that pioneered the provision of SMS-based information for farmers and fishermen. Manobi is currently leveraging on its experience in e-marketplace services to develop new opportunities. This would require a minimum investment of US$100,000.

I do have one criticism of the publication, though. In the executive summary, the report correctly points out that the problems are not all on the supply-side of the financing equation. Small businesses also have problems articulating their ideas in investment-worthy form:

One demand side constraint has to do with the poor quality of projects submitted for financing. This also applies to the ICT/ICTE industry, where more than a few business ideas are little more than empty boxes. Second, promoters are often unable to make thebest use of available opportunities irrespective of the intrinsic quality of the projects. Promoters often lack the ability to articulate in a convincing way business ideas. Furthermore, many small entrepreneurs display an unwillingness to ‘waste time’ in dealing with financial institutions.

In my opinion, too little attention is paid to this issue in subsequent chapters. Most of the recommendations in the final chapter relate to dealing with the supply-side of the financing equation. Nevertheless, Financing Technology Entrepreneurs is a useful contribution to the development field. And, who knows, perhaps the key to the next Silicon Valley is contained therein?