The Problem:
In emerging economies, with few jobs available, most turn to informal entrepreneurship (especially youth). In Kenya, the informal sector accounts for 77% of total employment. It is the fastest growing sector of the economy and the major creator of jobs and growth. It is a hugely exciting place full of talent and energy!
However, despite being the key driver of the Kenyan economy effective support for micro entrepreneurs passionate to grow is very limited.
Loans from banks and microfinance do not allow businesses to scale because of the strict terms, required security and high interest rates. Informal sector entrepreneurs have no ability to take risks and test innovative ideas. Many entrepreneurs also lack the vision to think big, but start small. This ensures that micro-enterprises remain micro and huge potential for development is lost.
Crucially, not everyone within this sector wants to be an entrepreneur. In fact most want a job. However there are a special few that want to be entrepreneurs and dream of growing sizeable businesses that can create employment for the rest. We call these ‘high potential entrepreneurs’. And we believe that helping them grow from micro to SME is the best way to alleviate poverty and and improves the lives of the entrepreneur, their family and the community.
At the same time, many investors want to invest in growing SMEs in East Africa and other emerging market. However, they all complain about a lack of ‘deal flow’. There are simply not enough investable businesses to invest in.
Therefore, these businesses need to be created.
Our Solution (what we do now):
Our answer is to work with these ‘high potential informal entrepreneurs’ to create these businesses by providing tailored support and investment for the entire business journey.
We currently do this in 2 stages.
In Stage 1, we bring young volunteers from around the world to work with informal sector entrepreneurs. We train these volunteers in the latest thinking in entrepreneurship. Working with entrepreneurs, they draw on tools like the BMC, and follow the Lean Start-up Process, to test ideas designed to grow businesses. After two months of iterating, entrepreneurs pitch to Balloon for financial support. We support the ideas which have demonstrated evidence that they are likely to grow and create impact (around 50% of pitches). Critically, we provide unsecured interest free loans up to $700 thus allowing the entrepreneurs to take risks and focus on growth. We already do this.
In Stage 2, we take the very best entrepreneurs from Stage 1 and bring in young professionals (e.g. from Bain & Co. and Citi) to support them to grow even further. The journey is similar to Stage 1 except the analytical tools used are more complex and the ambition even higher. At the end of the process, the entrepreneurs receive access to large amounts of low interest loans up to $3000. We already do this.
Our current funding for Stage 1 and 2 comes from contracts for running enterprise programmes. For example, we are a delivery partner for the DFID funded International Citizen Service programme contract worth £2m+ per annum for Balloon. We also run programmes with businesses like Citibank and several universities. From these programmes we crowdfund our investment pot.
Our Solution (what we propose):
From here, the best entrepreneurs will graduate to Stage 3 – our micro venture capital fund. At this stage they will receive intensive support from global and local experts sourced from our Balloon network. These experts will have a track record of designing and delivering change. Balloon will invest $15,000 in quasi-equity in the business and together the entrepreneur and the team of experts will work together to invest this money and grow the business.
Over time through revenue sharing the investment will be returned at a multiple of 4x and the funds will be recycles to support other entrepreneurs to scale. With a conservative projected business success rate of 50%, and making 10 investments per year, gross profit will be $150,000 per year. Our projections are to make 10 investments per year per location and we currently work in 8 locations in Uganda and Kenya. Therefore, that is 80 investments per year and a gross profit of $1.2million. This makes the fund profitable and scalable.
After proving the concept with Amplify, we will raise investment from successful local Kenyan business people, African diaspora and other angel investors and high net worth individuals in the UK. We have tested this and approached various individuals and their feedback has been positive. They are keen to invest because it ticks both their passion for business and their desire to create a better global society but they want to see evidence of viability first. We have also approached other impact investing funds like Global Partnerships who are willing to co-invest if we discover high potential micro entrepreneurs. On our advisory board we have individuals like Peter Olds (http://www.weil.com/people/peter-olds) who have significant expertise raising funds who are already committed to helping us do this.
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