Closing the Gaps: Finance Pathways for Serving the Missing Middles
This report was originally posted by the Aspen Network of Development Entrepreneurs and highlights five alternative approaches for providing finance that meets the diverse needs of each SGB segment and investor.
Diversity in SGB Finance
Small and growing businesses have a diverse range of business models and a diverse range of unmet financing needs. This report identifies five alternative approaches for providing finance that meets the diverse needs of each SGB segment and investor. It also highlights critical actions that ecosystem stakeholders can take to help support these approaches as well as newly emerging ones that together can help fill the financing gaps within each SGB segment.
The good news is that the financial actors supporting SGBs have grown in both depth and breadth in recent years. New SGBfocused funds have emerged to serve this historically underserved segment, and more traditional finance providers, such as private equity funds and commercial banks, are increasingly realizing the potential of SGBs to drive both profits and impact. Moreover, recent research on the four SGB segments or “families” has brought their diverse characteristics and needs into sharper focus. Each segment reflects a distinct level of innovation, risk, and growth potential. Briefly stated, the segments are:
- High-growth ventures
- Niche ventures
- Dynamic enterprises
- Livelihood-sustaining enterprises
Despite these developments, however, the gap between the financing that SGBs need to grow and what is available to them from existing providers remains massive. The International Finance Corporation (IFC) estimates that the micro-, small-, and medium-sized enterprise (MSME) finance gap in emerging markets is approximately US$5 trillion and that 41% of formal MSMEs have unmet financing needs.3 The SGB subsegment within MSMEs, a group of businesses characterized by their growth potential, face a $930 billion financing gap annually.4 This gap exists for many reasons, but one big driver is a misalignment between the products, strategies, and expectations of different SGB finance providers and their investors and the impact and financial return that different types of SGBs can provide. This is why understanding the characteristics and needs of the different types of SGBs, at different growth stages, is critical to develop and deploy appropriate products as part of well though-through investment strategies. This report identifies alternative approaches or “pathways” for providing finance that meets the diverse needs of each SGB segment and investor. It also highlights critical actions that ecosystem stakeholders can take to help support these approaches as well as newly emerging ones that together can help fill the financing gaps within each SGB segment.
Five Alternative Approaches for Closing SGB Finance
Gaps Global trends are driving innovations in how capital is deployed to SGBs, particularly with respect to financial products, capital structures, financing strategies, and operational models. Of these, our research shows that the biggest strategic differentiators among SGB finance providers are financing products and operational models. In analyzing the decisions different providers make within each of these categories, five alternative approaches emerged that can address SGB financing gaps and reduce risk. The approaches are differentiated by how they innovate on traditional finance models to meet the needs of both SGBs and the limited partners buying into these approaches. The alternative models being used are as follows:
Enhance the value of equity investment through sector expertise and non-financial support
Catalyze impact and follow-on investment by blending finance to support harder-to-serve businesses or markets
Adapt products, partners, and approaches based on specific SGB needs and local market context
Systematize internal knowledge and processes to keep due diligence and investment costs low
Digitize the investment process to automate decision-making and achieve a radically lower cost to serve
The executive summary excerpt and full report are available to read or download below.