Investor profile GroFin: Why 30% of SMEs survive their first three years of operation

The photo is of La Decouverte, a Rwanda based venture in Healthcare/Retail.

If you require between USD $50.000 to $1.5 million in finance there are few places you can go. GroFin strives to be the exception to the rule and is working to unlock the SME segment.

No entrepreneur who manages an SME plans to fail. However, it is the failure to plan that often leads to business failure. Thorough planning, making sure of the viability of the entrepreneur and business, identifying potential risks, developing risk mitigation plans and appropriately structured finance are critical. GroFin works to increase the success rate of SMEs. It is here that GroFin adds real value to entrepreneurs and their businesses. We spoke to Guido Boysen, the CEO, to find out more about their experience, lessons learned and view on the marketplace.

What makes small business so hard to service as a financing institution?

“The Small and Medium Enterprises (SMEs) sector is difficult to finance because of high failure rate. More than 70% of SMEs fail during their first three years of operation. In our experience the main three challenges which both financiers and authorities need to resolve are;

1. Access to appropriate business finance or capital: SME businesses are traditionally difficult to finance. Most often they do not ordinarily have the collateral required to approach a traditional security based financier for a loan – or as a start-up, do not have a track record to point to amongst other challenges. The net effect of this is to remove much of the security net that traditional lenders look for in mitigating risk.

2. Access to business services and assistance: Although they are often experts in their field, many SME businesses lack the resources and expertise to successfully grow or start their business. This results in productive inefficiencies. Businesses of this nature need to be assisted on an individual level, which is something that traditional lending institutions cannot afford to do as their approach is more of a commoditised and mechanical i.e. one-size-fits all.

3. Access to an enabling environment: Despite positive moves made by local governments, the business environment remains best suited to large corporations. This impedes SMEs entry to markets, information and support structures and affects their ability to compete and succeed. Secondly SMEs by nature tend to be more sensitive to the economic environment. This leaves them vulnerable to external challenges and heightens their risk as an investment.”

How does GroFin tackle this challenge?

“1. Access to Finance: GroFin addresses this challenge through its pioneering Viability approach. We have two distinct steps in our process.

2. Access to business services and assistance. Our philosophy is one of investing in a business as opposed to lending to a business.

3. Access to an enabling environment: As part of the business support we provide, we link our clients to technical service providers and potential clients in their industry.”

Have you found a sweet spot and what are the kinds of businesses GroFin looks to finance?

“There are sweet spots regarding sectors going through upswings or where the trends are positive, but these sweet spots differ dependent on the country. Our vision however is to support a wide range of businesses across different life cycles and we are not limited in the sectors we invest in bar the one or two sub-sectors that are outside our mandate such as primary agriculture (as detailed above) or investing in NGO’s, self-help groups and co-ops or providing R&D or seed capital. While we choose not to invest in primary agriculture owing to the specialist nature of the market, we do however support any controlled agricultural businesses and have a number of clients who package or process agricultural produce.”

The GroFin Network

From the GroFin perspective, what is the ingredient most lacking in applicants?

“Objectivity. Many entrepreneurs approach us after having spoken to family and friends, making their business plan more subjective than objective. By nature entrepreneurs and business people tend to be very passionate about their ideas and as a result can be over-optimistic and often understate potential risks or challenges. With our diverse experience in the sector, we are able to offer a valuable sounding board in these situations with our pre-finance business support. Sometimes through this process we raise flags that, at the time, prevent us from financing an applicant initially. However, our advice gives them the opportunity to address these potential weaknesses in the business and return to make a successful application.”

GroFin recently announced additional funding, can you explain?

“GroFin is a fund manager, meaning we invest money in SMEs through a number of funds on behalf of various DFI’s, investors, and corporate foundations. Until recently we had $260 million in funds under management across the group. However, thanks to new commitments from some of our investors, this has increased to $323 million which we see as further endorsement of our model and allows these organisations to access and support the SME sector in a proven and sustainable way. It also means that we are able to continue to scale the GroFin business to new markets and our footprint includes; Kenya, Tanzania, Uganda, Rwanda, Nigeria, Ghana, South Africa, UAE, Oman as well as in our offices opening in 2012 in Jordan and Zambia.”

Do investment institutions, development banks, etc… do they see the potential in GroFin, or do they still need convincing the segment can be serviced successfully?

“Development institutions and development banks (amongst others) have long recognised the potential and impact the SME sector holds but the challenge is in developing scalable and commercially sustainable models to service this sector’s needs.”

What do you think of VC4Africa?

“Being an entrepreneur or business owner in the SME sector can be a lonely pursuit. Many SME’s are isolated and deprived of an active network of contacts and access to the latest opportunities and ideas. VC4Africa provides a crucial enabling environment for entrepreneurs to network, affording them access to information and opportunities. We completely support the contribution the platform is making to supporting SMEs, as these businesses hold the most potential to make a positive impact on job creation and building of social infrastructure.”

What is your message to fellow VC4Africa entrepreneurs and investors?

“There is great courage involved in starting a business. With the opportunities your business brings also comes its own unique challenges and pressures. Planning properly can help you deal with many of these. When you start your business, try where possible to build systems and process that will support the bigger business you have in mind – it is often very difficult to retrofit these to a fast growing business. Focus and don’t take on too much as the entrepreneur. A step-by-step approach usually works best. Don’t be afraid to partner with people in areas in which you don’t have expertise. However, always make sure you pick the right partners.”

GroFin is a unique organization and we hope their work helps to pave the way for others to follow. We look forward to following the progress and to working together. And if you would like to join the VC4Africa investor network, please see the registration form and get in touch!