Financing Challenges for Growth-Oriented Entrepreneurs in Africa

While Africa has a long history of sole proprietors and family-owned businesses, progress on growth-oriented entrepreneurship has been slow and difficult.  In a 2013 report on “Accelerating Entrepreneurship in Africa: Understanding Africa’s Challenges to Creating Opportunity-Driven Entrepreneurship”, the Omidyar Network argued that the greatest challenge facing African entrepreneurs was the state of entrepreneurial assets.  For example, with respect to financing, estimates published by the International Finance Corporation indicated that up to 84% of Africa’s small and medium-sized enterprises (SMEs) were un-served or underserved and the Omidyar Network comments that the cost of funding for the SMEs was prohibitive. 

The main sources of capital for African SMEs have been retained earnings, credit cards, loan associations and investments from family and friends.  Venture capital and other types of equity funding remained relatively scarce in Africa and the report pointed out that in order for venture capital to be successful in Africa local entrepreneurs would need to demonstrate that they were motivated to building profitable businesses that would generate sufficient returns for investors to justify the risk that they would be taking in providing capital.  However, investors found most of the proposals from African entrepreneurs to be flawed and complained that the entrepreneurs failed to demonstrate that they were capable of engaging in rigorous business or that they understood the target market well enough to identify and develop a high quality and realistic business idea.

Omidyar Network made the interesting point that many African entrepreneurs run into difficulties in raising funds to grow their businesses because they have problems accessing new markets for their products and services.  Before investors decide to provide capital to support growth they need to be sure that the entrepreneur will be able to increase revenues and profits by successfully identifying and developing multiple product distribution channels.  Another problem for entrepreneurs during the capital raising process is their failure to completely understand the requirements of potential funders and their inability to effectively communicate the value and potential of their business ideas in the documents and reports they provide to funders.  Omidyar Network suggested that funders need to explain their requirements more fully to entrepreneurs and entrepreneurs needed easier access to service providers who could assist them in packaging their documentation and improving their “financial pitch”.  Finally, the lack of viable exit opportunities for investors in African SMEs is a significant issue that makes it difficult for entrepreneurs to sell their business ideas; however, Onidyar Network pointed out that African business owners could address concerns of investors by being more open to potential buyouts by multinational corporations or private equity funds.  

For more information on financing for entrepreneurship in developing countries, visit the Finance page of the website maintained by the Growth-Oriented Entrepreneurship Project.  In addition, qualified readers interested in being involved in the preparation of a new publication relating to high-growth entrepreneurship in developing countries should contact Alan Gutterman at agutterman@alangutterman.com.  Participants will be asked to serve as country experts and provide initial and continuing reports on the state of growth-oriented entrepreneurship in their countries.

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