Exploring a new model for accelerating Small and Growing Businesses: Learnings from the USAID PACE Investment Readiness Program
By Nicole DeMarsh, Andreas Zeller, Annie Roberts, Irene Hu and Cynthia Gathaara
Impact investors have placed more than $1.5 billion of capital in East Africa and see particularly strong opportunities in Small and Growing Businesses (SGBs), for which access to capital is one of the most challenging constraints to growth. However, investors face a major challenge to identify SGBs that are positioned to grow.
To address this challenge, USAID, through the Partnering to Accelerate Entrepreneurship (PACE) initiative, Open Capital Advisors (OCA), and five SGB-focused impact investors collaborated to create the PACE Investment Readiness Program (PACE IRP). PACE IRP was meant to catalyze private investment into early-stage enterprises and foster financially sustainable acceleration in Kenya, Tanzania, Uganda, and Rwanda over a three-year period beginning in October 2014.
Our goal was to screen 60 high-potential SGBs from a newly sourced pipeline of 100 businesses that presented additional opportunities for investors. From these, the investor partners would select 15 SGBs for tailored pre-investment support focused on reaching “investment readiness,” with the aim of catalyzing five investments into these businesses totaling $2.17 million. The investor partners shared the cost of this catalytic support in exchange for a right of first refusal to invest after our pre-investment support, in hopes of showing long-term sustainability for this type of support to bridge the gap between investors and non-traditional early-stage SGBs.
We exceeded the original goals of PACE IRP, screening 63 high-potential SGBs from a newly sourced pipeline of 222 businesses, many of whom had not actively considered outside investment. From these, our investor partners selected 15 SGBs for tailored pre-investment support, and our work catalyzed investments in six PACE IRP-supported businesses totaling $2,288,000 in early-stage capital disbursed. We also provided more than 7,000 cumulative hours of tailored support to our 15 selected SGBs, helping to address their biggest challenges in order to prepare for growth and investment.
The impact of PACE IRP extended both to our investor partners and the SGBs involved, as well as the early-stage ecosystem at large.
For investors, access to the pre-screened pipeline of 222 new SGBs was cited as one of the most important benefits of their participation, given all investor partners were based outside East Africa, and had historically struggled to build a pipeline from afar. They also improved their understanding of the SGB landscape in East Africa, which informed subsequent strategic decision-making and fundraising.
For SGBs, our team supported critical changes in their operating models that helped address their largest challenges to scale, with all 15 supported businesses growing revenue over the project period by more than 50% on average. In addition to the six businesses that received investment during the implementation period, three are engaged in ongoing discussions with investors to place capital; three are organically growing through re-invested profits at present, without additional capital; and three are implementing OCA-developed growth plans. These results demonstrate the potential of tailored pre-investment support to increase the pool of investible businesses, particularly in the most challenging demographic: early-stage SGBs in emerging markets.
The benefits of improved operating models also helped enhance the impact of SGBs on their communities, with operational growth increasing revenues to communities by over 50%, and employment opportunities increasing by 48% over the project period, highlighting the role of small businesses as engines of economic growth in their communities.
In addition to creating impact for early-stage investors and entrepreneurs, PACE IRP provided broad visibility into the early-stage ecosystem in East Africa, creating an opportunity to identify data-driven trends relevant to all stakeholders supporting early-stage businesses.
One of the key learnings identified from PACE IRP is that there is value in expanding the investment pipeline. We committed approximately one-sixth of our PACE IRP team time to expanding the investment pipeline across East Africa. With a larger pipeline of more than 220 SGBs, our investor partners were able to refine their investment criteria around focus sectors, geographies, impact metrics, etc. throughout the investment process. However, most SGBs’ lack of formal documentation articulating a business overview, strategy and track-record presented a key challenge for investors. This finding suggests an opportunity for investors to adopt a persistent, personalized approach (in-person meetings, on-site visits, follow-up calls etc.) to sourcing and due diligence in East Africa, in order to tap into valuable channels for investment outside of the urban centers and the common circuits of incubators and accelerators that produce most of today’s deals.
Another crucial lesson from PACE IRP is that a distinction emerged between SGBs with near-term potential for scale and those, typically older, that may not be as interested in immediate scale but required both support and time to grow and evolve established operations over time. In either case, investors preferred businesses that could demonstrate market proof points (revenue, number of users, or customers reached, etc.), regardless of the strength of the entrepreneur’s experience, product, or vision. As such, in order to attract investment, entrepreneurs can benefit from focusing their efforts on proving their ability to gain traction by generating revenue as soon as possible. A clear impact story also attracted investors, but fragmentation in the definition and measurement of impact continues to present challenges for both investors and businesses alike. More flexible definitions of impact could unlock more SGB opportunities for investors.
Lastly, through PACE IRP, we saw that capacity-building support tailored to meet the specific needs of the SGB proved critical both before and after investment. Lack of investment-ready SGBs has often been cited as a key factor hampering deal flow. Notably, we identified common skill gaps from our pipeline of SGBs in: financial modeling that meets investor expectations, accurate identification and segmentation of customers and markets, and an actionable growth strategy. These gaps both highlight key areas for support and reflect common challenges in sourcing appropriate skills in East Africa. Additionally, many investors found that the provision of ongoing technical support to businesses after investment enables them to consider a greater range of pathways to scale, thereby unlocking greater value for their investments. This could be done by dedicating time to regular calls and mentorship extending far beyond the board level; by consultants who can dedicate time and resources over longer periods; or by embedded talent supplied by direct hires or by short-term external secondments.
The overall goal of PACE IRP was to develop and test a new model to improve investment readiness for early-stage SGBs, catalyze investor capital, and enable growth. The program provided us with a unique opportunity to gather a number of learnings that we believe can advance the early-stage ecosystem through future projects. To learn more on how stakeholders can engage effectively with early-stage SGBs in East Africa, check out our recently published report sharing key lessons from the PACE IRP: Supporting early-stage entrepreneurs in east Africa: Learnings from the USAID PACE Investment Readiness Program. Learn more about PACE here.
Nicole DeMarsh is an Associate Partner, Andreas Zeller is Managing Partner, Annie Roberts is a Partner, Irene Hu is a Principal, and Cynthia Gathaara is a Business Analyst at Open Capital Advisors.