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Addressing Critical Funding Gaps for East African Technology Enhancing Access to Finance for Technology Entrepreneurs in East Africa: Gaps Analysis in Rwanda, Tanzania, Uganda, and Ethiopia 8977_East_Africa_Cover.pdf iii 6/6/14 11:55 AM 8977_East_Africa_Cover.pdf ii 6/6/14 11:55 AM MAY 2014 Enhancing Access to Finance for Technology Entrepreneurs in East Africa: Gaps Analysis in Rwanda, Tanzania, Uganda, and Ethiopia 8977_East Africa Report.pdf i 5/30/14 2:06 PM © 2014 International Bank for Reconstruction and Development / The World Bank Mailing Address: MSN I9-900 1818 H St. NW, Washington D.C., 20433 USA Telephone: (+1) 202- 458-4070 Website: www.infodev.org Email: [email protected] Twitter: @infoDev Facebook: /infoDevWBG Some rights reserved. This work is a product of the staff of infoDev / World Bank. Note that the World Bank does not necessarily own each component of the content included in the work. 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Rights and Permissions This work is available under the Creative Commons Attribution 3.0 Unported license (CC BY 3.0) http:// creativecommons.org/licenses/by/3.0. Under the Creative Commons Attribution license, you are free to copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following conditions: Attribution—Please cite the work as follows: Enhancing Access to Finance for Technology Entrepreneurs in East Africa: Gaps Analysis in Rwanda, Tanzania, Uganda, and Ethiopia—World Bank. License: Creative Commons Attribution CC BY 3.0 Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. All queries on rights and licenses should be addressed to infoDev, The World Bank, MSN: I9-900, 1818 H Street NW, Washington, DC 20433, USA ; email: [email protected] 8977_East Africa Report.pdf ii 5/27/14 1:29 PM About infoDev infoDev, a global trust fund program in the World Bank Group, supports growth-oriented entrepreneurs through creative and path-breaking venture enablers. It assists entrepreneurs to secure appropriate early-stage financing; convening entrepreneurs, investors, policymakers, mentors and other stakeholders for dialogue and action. We also produce cutting-edge knowledge products, closely linked to our work on the ground. This report was made possible thanks to the support of the Government of Finland. The study was executed by Economisti Associati and commissioned by infoDev / World Bank. For more information, please visit www.infodev.org iii 8977_East Africa Report.pdf iii 5/27/14 1:30 PM Table of Contents Main Abbreviations and Acronyms. .v Executive Summary . vi Main Text 1. Introduction . 2 2. Financing of Innovative Firms: Supply Side . 6 3. Financing of Innovative Firms: Demand Side . 22 4. Conclusions and Recommendations . 34 Annexes Annex A: List of Persons and Entities Interviewed. 40 Annex B: Basic Features of Investment Funds . 46 Annex C: Profiles of Selected Investment Funds . 50 Annex D: Basic Features of Banks Analyzed. 66 Annex E: Profiles of Selected Innovative Firms . 68 Annex F: Review of Legal Aspects in Ethiopia . 76 Appendix: Investment Areas Open to Foreign Investors . 80 iv 8977_East Africa Report.pdf iv 5/27/14 1:30 PM Main Abbreviations and Acronyms AECF Africa Enterprise Challenge Fund AfDB African Development Bank AGF African Guarantee Fund for SME BA business angel CB capacity building CFP crowdfunding platform CGS credit guarantee scheme DFI development finance institution ICT information and communication technology IFC International Finance Corporation IFI international financial institution ITES information technology–enabled services M&E monitoring and evaluation MSME micro, small, and medium enterprises R&D research and development SME small and medium enterprises TA technical assistance TOR Terms of Reference VC venture capital Exchange Rates (currency units per one US$, end of year) 2011 2012 Ethiopian birr (ETB) 17.35 18.18 Rwandan franc (RWF) 604 631 Tanzanian shilling (TZS) 1,582 1,579 Ugandan shilling (UGX) 2493 2680 All dollar amounts are U.S. dollars unless otherwise stated. Symbols Used in Exhibits ~ means approximate value .. means not available – means not applicable 0 means zero or a quantity less than half than the unit shown In all tables, totals may not add due to rounding. v 8977_East Africa Report.pdf v 5/27/14 1:30 PM Executive Summary concerns the financing instruments used, many funds make investments that do not involve, or only partly involve equity. Many of them use debt and/or hybrid financial instruments, combining features of both debt and equity financing. The Introduction type of instruments used appears to correlate to Access to finance is generally recognized as a investment size. Thus, classical equity tends to be major impediment to the development of micro, at play in larger deals; vice versa, smaller deals small, and medium enterprises (MSME) in the are realized through debt/hybrid instruments. East Africa region. The task of the assignment Informal Sources of Risk Capital. Risk capital may was to identify, quantify, and qualify the financing be available in the form of angel investment and gap facing high-growth entrepreneurs in East crowdfunding. In recent years, angel investment Africa, with special attention paid primarily has become increasingly popular in East Africa. to entrepreneurs active in (i) information and However, the available evidence suggests communication technologies (ICT), including that, with the partial exception of Kenya, angel IT-enabled services; (ii) climate technology; and investment in the three sectors considered is still (iii) innovative agribusiness activities, as they are in its very early stages, with some more positive the three innovative sectors where the problem signs being shown in Uganda and Tanzania, of accessing finance is particularly acute. The where angel networks are becoming a little Study involves the analysis of elements underlying more formalized, with the two other countries the seed and early stage financing gap in four still lagging behind. For its part, although countries: Ethiopia, Rwanda, Tanzania, and crowdfunding is becoming increasingly popular in Uganda. East Africa, its uses seem to be almost exclusively limited to philanthropic activities, with the commercial use of crowd investment remaining The Supply Side largely unexplored—only a handful of local Investment Funds. There are 19 funds currently business ventures have received funding through operating (or about to start operating) in at least some U.S. and European crowdfunding platforms. one of the four countries covered by the Study and Concomitantly, opinions on the very possibility whose target investments at least partly coincide and appropriateness of using crowdfunding as an with the $50,000–$1 million range. About half investment strategy are fragmented. of these funds are regional in scope, with the Debt Financing. Despite difficulties, bank lending remainder almost equally split between those remains the main source of external funding pursuing country-specific and global operations. available to MSME. The present analysis is The majority of them have a squarely commercial informed by the assessment of a diverse set of orientation, though noticeably as many as a third 12 banks. Based on both primary and secondary of them are impact funds. About three-quarters sources, it appears that banks are interested in of the funds reviewed are sectorally agnostic; MSME lending: while still constrained by a series only four have a clear sector focus. While being of obstacles, SME loan portfolios are nonetheless the specific focus of only a handful of the funds growing across the board. On average, MSME analyzed, the three sectors considered still attract account for anywhere between 35 and 50 percent a non-negligible share of investments of about of the total loan portfolio, with higher values in half of the generalist funds considered. In terms Uganda and Rwanda and lower values in Tanzania of deal size, many funds generally engage in large and Ethiopia. Several banks have been setting up transactions (that is, $500,000 and above). As ad hoc SME units to come to terms with lending vi 8977_East Africa Report.pdf vi 5/27/14 1:30 PM needs of this client stratum. Obstacles to lending software and ITES segments. Within ITES, the concern the poor quality of business proposals, business process outsourcing (BPO) subsector the informality of clients, and the lack of quality is rapidly expanding,
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