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Building the SMEs of Tomorrow - Micro Venture Capital (MVC) for the Informal Sector

Support exceptional informal sector micro entrepreneurs to grow from micro to SME (10+ employees) through intensive support and investment.

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EXPLAIN YOUR IDEA

In emerging economies, with few jobs available, most youth turn to informal entrepreneurship. 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. However, despite being the key driver of economic development, micro entrepreneurs receive little support to grow. Loans from banks and microfinance are not well designed to support businesses to scale because of the strict terms and high interest rates. Informal sector entrepreneurs thus have little ability to take risks and test innovative ideas. Most micro-entrepreneurs also lack the vision and knowledge to think big, but start small. This ensures that micro-enterprises remain micro. A huge missed opportunity! THEREFORE, we will find micro entrepreneurs with the passion and ideas to scale and offer them 2 years of intensive support focusing on strategy, marketing, record keeping and operations plus investment of $15,000 (quasi-equity). Our investment is returned through revenue sharing (at a 4x multiplier) while the entrepreneurs grow their business up to 100x and scale from micro to SME creating much needed jobs. With a 50% success rate, 10 investments annually will return $150,000 per year in gross profit making this viable. Scaling across Balloon’s 8 location, that's $1.2m and 80 SMEs annually. This is a uniquely designed fund for micro entrepreneurs, recognising the intensive support required to grow.

WHO BENEFITS?

Here we see Apollo. He sells cow feed supplement. Balloon has supported him since 2014 to grow his revenue 15x and employ 3 extra people. Hi product is exceptional but he struggles to market the business and expand. We will recruit micro entrepreneurs like Apollo, aged 18-35, with exciting ideas and vision, located in 2nd tier towns/cities like Nakuru, Eldoret, and Kisii. These entrepreneurs will increase profits, create good jobs for youth and rapidly accelerate economic development.

TELL US MORE ABOUT YOU

Balloon Ventures is a growing social enterprise founded in 2011. We work in Kenya, Uganda, Ghana, and the Philippines. Since 2012 we’ve worked with ~2,500 entrepreneurs and invested $350,000+ through 0% interest loans. We have 32 full time staff.

WHERE WILL YOUR IDEA BE IMPLEMENTED?

  • Kenya
  • Uganda

EXPERIENCE IN IMPLEMENTATION COUNTRY(IES)

  • Yes, for more than one year.

EXPERTISE IN SECTOR

  • I’ve worked in a sector related to my idea for over a year

HOW HAS YOUR IDEA CHANGED BECAUSE OF BENEFICIARY FEEDBACK?

Firstly, this idea is driven by entrepreneur feedback. Several businesses (a bakery employing 12 staff, a sugarcane juice producer, a successful poultry farmer) are asking us what is next! They are desperate to grow, have massive potential, and trust Balloon to partner with them to do this. Secondly, through conversations, observation, and 200,000+ hours of work with micro entrepreneurs we see a pattern of challenges blocking growth including: effective financial management, repeatable processes for hiring staff and delegating, impactful marketing strategies, clear focus and vision. We also know that risk capital largely doesn’t exist. This feedback has been included leading to our combination of education, consultancy, and investment. Thirdly, our thinking around recruitment of entrepreneurs has evolved greatly. We believe there are ~2% of micro businesses with the potential to scale. Therefore we are designing a rigorous selection procedure including psychometric testing (using META Profiling), interviews, peer review and due diligence visits. Selected entrepreneur will then work with us for 6 weeks as we conduct a full feasibility study. If they pass, we will invest.

HOW IS YOUR IDEA UNIQUE?

There are many microfinance institutions and banks looking to support micro enterprises - but they focus on repayments and ignore growth. There are some incubators and accelerators focused on growth - but they ignore informal sector micro entrepreneurs operating outside of the big cities. This is the first programme focused specifically on supporting informal micro businesses to grow to SMEs. Therefore, there is huge untapped potential. Balloon is uniquely placed to deliver this because: * annually we work with 750 micro entrepreneurs in urban centres outside of Nairobi. Therefore we have a large pipeline from which to discover the most exceptional. * we build trust with these entrepreneurs and in the communities over years allowing us to take risks and make unsecured investments. * annually we recruit 700+ volunteers including partnerships with corporates like Bain & Co & Citibank. Therefore, our brand and track-record attracts the most talented volunteer business consultants which reduces our overheads and provides income. * we are experts in creating entrepreneurship learning experiences, drawing on the best from lean startup, design thinking, and management.

WHY DO YOU THINK THAT THE PROBLEM YOUR IDEA SOLVES FOR HAS NOT BEEN SOLVED?

Firstly, investing in micro businesses is very high risk. The entrepreneurs need intensive support to grow. The scalability of most businesses is limited. There is limited track record. And the due diligence costs are high compared to these returns. Our multi stage model overcomes these barriers. Secondly, the focus of investors is very centred on Nairobi and also on industries like tech and renewable energy where there is real excitement because of the potential for large breakthroughs. Thirdly, there is a mentality block - the informal sector is written off. These entrepreneurs are perceived as solely subsistence, incapable of growing something large. Therefore they are ignored.

WHAT ARE SOME OF YOUR UNANSWERED QUESTIONS ABOUT THIS IDEA?

Through Amplify funding to prototype, we will make several smaller investments of around $10,000 combined with intensive support, provided by local experts and international volunteers. With this we can test: 1) If the range and nature of support provided is correct and adequate 2) If our selection processes find the right entrepreneurs 3) If we can grow micro businesses rapidly in a short space of time 4) If revenue sharing works and funds are returned to Balloon proving the fund’s financial viability With this evidence, we will be able to iterate and raise additional larger funds to launch this at scale across all our communities in Kenya and Uganda.

IS THIS IDEA NEW FOR YOU OR YOUR ORGANIZATION?

Balloon is building a graduation programme providing support for the entire business journey. Currently we operate Stage 1and Stage 2 programmes. At Stage 1 volunteers (aged 18-25) work with micro entrepreneurs (startups or 1-2 employees). Entrepreneurs then pitch for a $700 (max) 0% interest loan. At Stage 2 volunteers (experienced business professionals) support small businesses (2-4 employees). Entrepreneurs then pitch for a $3000 (max) 0% interest loan. We do this at scale in Kenya and Uganda and have invested $350,000+ in ~1100 businesses. Evaluation shows Balloon startups grow to $28 profit per week and existing businesses grow profits by 48%. The MVC is our Stage 3 programme and the logical extension of the model. This is our first time doing quasi-equity investments, however, we already have a team of 5 staff managing our loan portfolio. Repayment rates are 80% which is high considering loans are unsecured and focus on innovative ideas. Therefore, we already have the foundations to manage an investment fund. We have also identified entrepreneurs ready for the MVC and prepared them agreeing terms. Therefore, we are ready to begin prototyping.

WHO WILL IMPLEMENT THIS IDEA?

Josh Bicknell (CEO) will project manage. Included in the team will be Dr. Andreou, (Lead for Impact) Support in Kenya will come from Gibson Weru (Country Manager), Bruno Okello (Loans Manager). Our Loan Officers and Programme Coordinators will support in identifying high potential entrepreneurs. Volunteer business consultants will join from Bain & Co on 6 month externships. Balloon also has an active network of advisors and investors (CDC, Actis, Partner Capital, Cass Business School).

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. 

SHARE ONE SENTENCE ABOUT THE IMPACT YOU WOULD LIKE THIS PROJECT TO HAVE FIVE YEARS FROM NOW, AND ONE QUESTION YOU NEED TO ANSWER TO GET THERE.

IMPACT: We will have successfully grown 500+ micro enterprises to SMEs, each employing 20+ youth, proving the massive potential among some micro entrepreneurs in the informal sector and the viability of this approach. QUESTION: How to overcome the increased government regulations and costs as informal businesses formalise and the demands on entrepreneurs change greatly.

MY ORGANIZATION'S OPERATING BUDGET FOR 2015 WAS:

  • Above $1,000,000

MY INTENDED BENEFICIARIES ARE:

  • Within 50 km of where our team does most of its work

HOW LONG HAVE YOU AND YOUR COLLEAGUES BEEN WORKING ON THIS PILOT PROJECT TOGETHER?

  • Between 6 months and a year

WHY ARE YOU INTERESTED IN JOINING AMPLIFY'S PORTFOLIO OF INNOVATORS?

This is a highly innovative and difficult idea. Many don’t believe it can be done. Joining Amplify will give us the technical and financial support to prototype this idea and build proof of concept. Secondly, many people overlook the informal sector and only see subsistence entrepreneurs. We want to challenge these mindsets and partner with Amplify to show the true potential of this sector. Finally, we can’t do this idea alone. Amplify will provide the platform to build these partnerships.

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