February 18, 2019 / 2:24 PM / 3 months ago

A stumbling block to growth trips up companies trying to do good

LONDON (Thomson Reuters Foundation) - Growing up is hard to do. For businesses that aim do good as well as make profit, it’s a sentiment they are all too familiar with.

There is a vast array of philanthropic grants, investment funds, and incubators offering capital and support to get social enterprises off the ground.

But once established, these businesses often struggle to scale up: too small to get investment from larger commercial banks or strategic investors, yet too big to receive startup capital.

This hinterland is known as “the missing middle” and it is a problem social entrepreneurs around the world face.

“I’m the living example of the missing middle,” Kibret Abebe, founder of Tebita, a private ambulance service in Ethiopia, told the Thomson Reuters Foundation.

Abebe sold his house and car to get enough money to start his social enterprise 11 years ago and received funding from the U.S. Agency for International Development (USAID) and Britain’s Department for International Development (DFID) to grow it.

Based in Addis Ababa, Tebita now employs more than 67 permanent staff and has 13 ambulances, with six more on the way.

But Abebe has not been able to secure the necessary capital to expand it further. The possibility of failure is a persistent concern for him.

“I am seeing that most smaller-scale startups are getting acceleration and incubation assistance here,” said Abebe, who is president of Ethiopia’s social enterprise trade body.

“It is very difficult for us to collect professional, relevant data to measure and communicate the impact we are making to convince the investors to invest in us,” he said.

MISSION OVER MONEY

It is not just financial assistance that is missing for social entrepreneurs who want to grow their businesses.

Because they are mostly mission driven, they often do not have the financial education and skills that could help to secure investment, said David Wachtel, senior vice president of marketing and partnerships at Endeavour, a non-profit that helps entrepreneurs who want to scale up their businesses.

“It is not enough to walk in and say ‘we need money’ – they need to understand what investors are looking for,” he said.

“Often that aspect of understanding how to organize your business financially, and get auditing statements and working with investors, is completely alien and new,” he said.

He added the investment community often received social entrepreneurs with a raised eyebrow, questioning whether their primary focus is running a business, rather than achieving their social or environmental mission.

MORE MONEY MORE PROBLEMS

When established social enterprises do secure funding to support their growth it is not necessarily the end to their woes.

“There is enough funding but not the right kind of funding,” said Bonne Chiu, co-founder and chief executive of Lensational, a social enterprise that trains marginalized women around the world as photographers.

Chiu’s business is registered as a non-profit in Hong Kong and London, with a small team of core staff and 120 volunteers. It has a small monetary turnover but a wide reach, having trained 800 women in 22 countries whose photos it sells.

When Lensational receives funding, it is awarded on the condition it goes toward specific items or activies, such as camera equipment or trainer fees, rather than for the overall business. Chiu says this can be restrictive because the business’s needs evolve and change.

“As we grow, the plan we set out when we created the proposal for funding often turns out to be different, as we learn and adapt to changing realities,” she said.

“This means we have to go through a lot of reporting hurdles to justify to our funders or to our accountants why we have changed the way we spend our funding,” she said.

She said there need to be more bold funders who are willing to invest or donate in an unrestricted manner.

“I also think that entrepreneurs need to communicate the challenges they face and be honest with their funders and supporters,” she said.

Location also can hamper the growth of social enterprises. Venture capital, which is a form of investment that helps entrepreneurs scale, is often unavailable to businesses outside of major financial centers, like London or Singapore, said Watchel.

“All of these entrepreneurs, especially social entrepreneurs, face the challenge that they may be in emerging markets that are not popular or sexy with investors,” he said.

Even though Chiu’s business is based in major financial centers - London and Hong Kong - it is still a struggle.

“I see funding for social enterprises that is focused domestically, but not for organizations like us which operate globally,” she said.

Not all investors shy away from the missing middle, however.

The International Fund for Agricultural Development (IFAD) launched a 50 million euros ($56 million) fund last week, targeting small and medium-sized agribusinesses and smallholder farmers in developing countries who are too big to access microcredit.

“It is focusing on the missing middle because this is where the biggest funding gaps exist and where the fund can have the biggest impact,” said Jean-Philippe de Schrevel, founder and managing partner of Bamboo Capital Partners, one of the companies managing the fund.

“These people are often seen as riskier investments, even if this is not the case in reality,” he said.

(This story has been refiled to correct spelling of Bonne Chiu’s name)

Reporting by Sarah Shearman @Shearmans. Editing by Jason Fields. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers humanitarian news, women's and LGBT+ rights, human trafficking and slavery, property rights, social innovation, resilience and climate change. Visit news.trust.org to see more stories

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