Last week the Growing SMEs event was held in Kigali, Rwanda, where entrepreneurs, investors and industry experts discussed the issues surrounding starting and growing a business. The event – hosted by the Rwandan Development Board, JCI Rwanda and Dutch-based NGO BiD Network – saw entrepreneurs from Rwanda, Burundi, Liberia, Uganda, Tanzania and Kenya present their businesses to investors and seek advice from experts.
Randall Kempner is the executive director of the Aspen Network of Development Entrepreneurs (ANDE), a global network of organisations that propel small business entrepreneurship in emerging markets. At the event he asked all the entrepreneurs to stand. “Now, please stay standing if you think access to finance is your biggest challenge,” asked Kempner.
While a few entrepreneurs sat down, the large majority remained standing.
“I think you are wrong,” said Kempner. “Let me try to explain why. ANDE looks at emerging markets all around the world and we hear all the time that the biggest issue [entrepreneurs face] is capital. And we think it is an issue but we think there are two other access issues that are even more important. One of the first is access to talent. The second is access to markets, and then it is access to capital.”
Many entrepreneurs view access to finance as their biggest limitation in business, but finding investors willing to fund their business is even more difficult if they have a poor team, do not understand their consumers, and do not know how to get their products to market.
Access to talent
“You may be the best entrepreneur in the world, with a brilliant idea for a business. You’re a charismatic leader, you are able to be a brilliant strategist, but there is no way you can do it alone. You cannot build a successful growth company without having a great team,” Kempner emphasised. “And having a great team and finding the right people to fill out that team is incredibly difficult in most emerging markets.”
He added that finding a strong middle and upper management team means competing against larger companies who can often offer a manager a more stable job with better pay than the average startup can. “It’s really hard to build that team given those circumstances.”
Local skills might also be scarce and an entrepreneur could fill positions with expats, but Kempner said that is not really what an entrepreneur wants. “You want your colleagues from your countries, from your communities, who are going to stay in your country and your company for a long time,” he told the audience.
Access to markets
Kempner said an entrepreneur might have the best team in the world, but asked how far a company can grow if it lacks market access. These barriers could be physical, caused by infrastructural challenges.
“The roads don’t work, you have high energy costs, electricity goes out every once and a while, you have uncertain internet capacity, you have tariffs and business regulations. Even a great team can’t carry all of your products across the world,” said Kempner.
“But I think even more than the physical barriers, you often have information barriers. The best companies in the world are the companies that understand their customers the best.”
However, in many African markets it is difficult to find industry or market research reports in order for companies to gain a better understanding of the needs of their consumers.
“So you are responsible for generating your own customer information, and doing all of the hard work that it takes to really segment your buyers and understand their needs,” explained Kempner. “And that is incredibly hard in places where information doesn’t flow.”
He added that most entrepreneurs under-invest in customer understanding and research
Access to finance
Kempner said entrepreneurs who have a great team, understand their target consumers and have built a solid business model, are now investable. However, many still face the challenge of access to finance. He explained that in Africa, angel and venture capital investors are scarce, especially those that invest in early stage companies.
“Very few of you live in a country where there is a stock market and it’s very hard to exit. So you face significant challenges on the equity side. But even those aren’t as important as the ones you face on the debt side,” continued Kempner.
“Most banks in most emerging markets don’t exactly roll out the red carpet for small and medium enterprises. Unless you happen to have a ranch and two houses and three cars to give them as collateral, they don’t want to make a loan. Around the world McKinsey has done a study and they think there is an US$850bn credit gap for small and medium enterprises… and the worst region in the world in terms of the number of companies trying to access credit finance, and [lacking] the ability to do so, is sub-Saharan Africa.”
An entrepreneur in the audience agreed that a startup has a better chance of being funded by an investor if it contains a strong team and understands its market.
However, he pointed out that it is a bit of a “chicken or egg” story, explaining that most entrepreneurs need finance in order to conduct adequate research on the needs of their consumers and pay salaries of skilled employees to retain them.
“If you have that money, fine. Otherwise access to finance also prevents you from knocking out those first two challenges,” the entrepreneur commented.