How the rise in corporate venture capital can close Africa’s 100 billion US dollar finance gap for SMEs

Africa Rising
This article by Tara Sabre Collier originally appeared on NextBillion and is published with permission. 

If GE, the fourth biggest company in the world, is willing to bet on local SMEs in Africa, it could potentially catalyze other large companies, writes Tara Sabre, impact investing specialist at GroFin Capital, part of VC4Africa’s investor network. This could have major implications for Africa’s venture capital and SME finance ecosystem, which has a funding gap of nearly 100 billion USD.

If it takes a village to raise a child, then it must take an ecosystem to grow and scale thriving businesses. We place a lot of emphasis on the role of financiers, business development service providers, incubators, government and donors to grow this ecosystem in Africa. But what’s really exciting is to see multinational corporations step in and likewise contribute to supporting entrepreneurs, scaling innovations and making local economies more inclusive.

GE recently announced the launch of a 200 million rand (USD 18.7 million) fund for South African small and medium enterprises. This fund is part of a broader pan-African engagement, which will inject more than 5 billion rand (over USD $467,000,000) into the continent. The fund will combine technical and general business development services and financing to build a more competitive cadre of local suppliers long-term.

Early stage to mature SMEs that fit within the GE supply chain will be eligible for training, support and funding. The program will ensure participating companies meet the production standards necessary for GE, thus preparing them to serve other multinational corporates as well. Additionally, the fund aligns with South Africa’s Black Economic Empowerment initiative and localization goals, by targeting black entrepreneurs or those from previously disadvantaged groups. By expanding economic opportunities for entrepreneurs that were previously restricted from accessing capital and networks, it will also be vital to creating inclusive growth in one of the world’s most financially inequitable nations.

The launch of this supplier development fund also coincides with GE’s launch of a Customer Innovation Centre [CIC], also here in South Africa. The 500 million rand facility will be a research and innovation hub to generate better energy, health care, transport and lighting products for South African and African markets. Like the SME fund, the CIC also addresses socio-economic inclusion, focusing on recruitment of black and previously disadvantaged groups. Given that these demographic groups also reflect the majority of South African consumers, their inclusive insights about customer preferences will likely be useful as well. While the CIC’s research and product development are primarily oriented towards better localization of GE products, there’s no doubt that the innovation and technology transfer will end up benefitting industry at large. As with GE’s partnership with Quirky or its Healthymagination fund, these are perfect illustrations of shared value.

For South African entrepreneurs, especially within energy, health care, transport and lighting, it’s a fantastic opportunity to access capital, world-class technical capacity building, and off-take with a global brand. For GE, it’s a strategic business play to gain a long-term competitive edge in Africa. From these vantage points, it looks like a win-win… and if so, it could have major implications for Africa’s venture capital and SME finance ecosystem.

Because even as more SME funds open and early stage venture capital networks increase, it’s worth remembering that the SME finance gap is still nearly 100 billion USD here in Sub-Saharan Africa.

If GE, the fourth biggest company in the world, is willing to bet on local SMEs in Africa, it could potentially catalyze other large companies. Corporate venturing is a very tactical response to the local content requirements in many resource-rich African countries. Since their investment is based on strategic imperatives and not just financial returns, corporate venture investors are well suited to help fill the SME finance gap. They have the specific technical expertise to build capacity. Equally as important, their offtake agreements will actually help boost turnover, thus growing the SMEs. And of course, this makes SMEs more creditworthy, which is also a boon for the SME finance sector.

With a company of GE’s magnitude taking such a strong stance for SMEs in Africa, it will hopefully generate a ripple effect that will draw other major players into the space.

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For more on Corporate Venture Capital (CVC), also see two earlier posts on VC4Africa, featuring CVC expert Sean Obedih: an interview on corporate venture capital trends, and an article with key things to know for startups & corporates.

Photo Credit: Mister-E via Compfight cc