The growth of venture capital (VC) funds in Africa over the last decade cannot go unnoticed. Kenya, believed to be the hub of the East African region, plays host to numerous VC funds. Surprisingly though, small and medium enterprises (SME), which most VC funds target, list access to financing as one of their major challenges. How we made it in Africa’s Regina Ekiru had a chat with Rishi Khubchandani, the general manager for the Kenyan office of GroFin, one of the funds operational in the country, on the growing interest of foreign financiers and the impact of alternative financing on African economies.

What do you look for in an SME before you finance them?

GroFin Kenya invests in all sectors. When assessing an SME for finance, the primary focus is first on the nature of the entrepreneur. Are they involved in all aspects of their business and do they possess the commitment and drive to make their business a success? Next, we look at the business’ chances of success. We define success as the business’ ability to generate a profit year on year. Bearing this in mind, we ask entrepreneurs to approach us with a business plan that illustrates how they intend to grow. The list of SMEs and entrepreneurs GroFin has financed is quite diverse and includes a number of schools, franchises, healthcare facilities, manufacturing ventures, hotels, transport businesses, agri-businesses and real estate. We have supported these small and medium enterprises in all stages of development, though we focus on existing business expansions and buying a business. Rescue operations and start-ups are considered with caution and only if adequate own contribution is provided.

SMEs still list access to financing as one of the biggest challenges they face, yet we have seen the establishment of several VC funds, angel investors and even banks allocating funds for SME financing. How can we bridge this gap?

A great deal of SMEs to date have failed in their early stages, owing to a set of unique challenges, which include access to capital, access to business services and an enabling environment.

Many business owners struggle to access the capital required to grow their business as they do not have the collateral or track record required to secure finance with a traditional finance institution. Even if they are backed with the necessary finance, entrepreneurs often lack the education, skills, and access to information required to turn their entrepreneurial spirit into bankable project ideas.

A unique approach is required that not only addresses each entrepreneur’s need for finance, but provides them with the guidance and the business support necessary to formalise and grow their businesses. It is through formalising the business and adhering to a clear business strategy that the entrepreneur can create the platform required to sustain positive growth year on year, creating wealth and employment in his/her community.

Why are financiers all of a sudden interested in Kenya?

What makes Kenya interesting for GroFin, as a fund focused on investing in SMEs, is that Kenya is a highly entrepreneurial nation and has realised strong growth over the past two decades in the SME space. This has largely been a result of entrepreneurial initiative and innovation led by the emerging middle-class seeking solutions to the loss of jobs and lower salaries in the public sector. Over 60% of Kenya’s economy is driven by SMEs and they account for 30% of the country’s employment.

The real challenge to SME growth and sustainability is the lack of management expertise, business knowledge, skills and access to information that, in addition to finance, is needed to help entrepreneurs develop and formalise operations and execute growth strategies that translate into sustainable success. This is where GroFin as an alternative financing platform can provide SMEs with a competitive advantage. GroFin’s focus is on providing both flexible financing options and expertise through ongoing business development support to our investees in order to minimise the risks to their businesses and increase their opportunities for success.

What are the benefits of alternative financing platforms such as GroFin to a growing economy like Kenya?

In a growing economy, entrepreneurs need financing options that are tailored to their needs. Although banks certainly play a mobilising role for starting and growing businesses, alternative financing platforms are able to fulfil the needs of those businesses that do not meet the banks’ criteria. Alternative financing platforms like GroFin are also able to offer extensive support tailored to the size and stage of SMEs.

Lastly, some entrepreneurs have complained that VC funds short-changed them. Some have given up more than a 50% stake. What is a good deal, especially in the case of the entrepreneur?

A good deal is an arrangement where the risk is equally shared between an investor and the entrepreneur. While it would be ideal for the entrepreneur to receive the money at no cost to themselves, in reality this gives them no incentive for their business to succeed. An entrepreneur needs to be prepared to make a commitment, especially if their business is a high risk one. In some cases, this relationship may be imbalanced to favour the financier, who is overcompensating for the risk they are taking. Our advice to any desperate entrepreneur would be to fully research their finance options and understand the commitment they are making and whether this commitment can be sustained by their business. Our new business managers explains this to each of our clients, and we ensure that the interest rate we offer to each client is manageable based on the business’s performance.