This document discusses ways to fuel the growth of small and medium enterprises (SMEs) in developing countries. It notes that SMEs represent a large portion of GDP but receive little capital investment. The "missing middle" refers to lack of access to financing for SMEs between microfinance and large banks. Challenges to investing in SMEs include high costs, risk of losses, and immature markets. The initiative aims to increase capital flows to SMEs by creating investment platforms and channels to provide broad exposure for investors and support the SME ecosystem. The approach involves screening and evaluation tools, demonstrating models that profitably match SMEs to finance, and identifying vehicles to increase liquidity and returns for investors

1. Fueling the Growth of Small and Medium
Enterprises
Linda Segre & Swati Mylavarapu
Silicon Valley Microfinance Network
August 26, 2006

2. SMEs: Underrepresented in Developing Countries
60%
50%
Percentage of GDP
40%
30%
SMEs Micro
20%
10%
Micro SMEs
0%
High Income Countries Low Income Countries
Up to ~$3.6 Trillion of GDP is “lost” in
developing world every year.
Source: The Brookings Institution: Policy Brief #159, Asim Khwaja.
*SMEs are defined as businesses with fewer than 250 employees
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3. SMEs are the “missing middle”
Small
Micro and Large
Enterprises Medium Firms
Enterprises
• Short-term debt • Collateralized
• Small $ amounts
• Joint liability
? debt
• Some risk capital
for large firms
• High transaction
costs
Microfinance Banks & Private Equity

4. Challenges to profitable SME investing
Cost of
Investing:
Gross Expensive relative
Gross to deal size:
Returns to Returns to
Company: Investor:
Losses/Defaults:
•Nascent Limited upside • High transaction
High loss rate
markets due to: costs
• Capturability
• Nature of
• Lack of
intermediaries
• Limited risk mgmt tools
= Net Returns
capital (i.e., • Less developed
debt) enterprises and Too low to
markets promote
• Governance
substantial
investment
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5. SME Initiative - What we want to achieve
Capital markets SME
SME
SME
Banks/Private sector SME
SME
SME SME SME
Pension funds SME SME
Investment SME SME
SME SME
Sovereign wealth funds Channels SME SME
SME SME
Foundations
SME SME SME
SME SME SME
SME SME
SME SME
Wealthy diaspora SME SME
SME
SME
Development finance SME
• Drive increased flow of institutional capital to SME sector via
information exchanges and investment platforms
• Provide broad, diversified exposure to emerging and developing
markets for investors via investment channels
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6. Increase flow of risk capital to SMEs
Small
Micro and Large
Enterprises Medium Firms
Enterprises
• Lower transaction costs
• Increase liquidity - enable exits
• Support thriving eco-system
• Successfully invest in sector
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7. Our Approach
Screening Structures,
Supporting Exits
& Models, &
Growth
Evaluation Platforms
Research & Policy
Create evaluation Demonstrate and Invest in private Identify new Expand
Objectives
tools that enable scale models that sector approaches vehicles that community
investors to cost profitably match that profitably serve increase liquidity focused on
effectively find and SMEs to finance SMEs and returns for scalable SME
evaluate SMEs and improve biz investors growth and
success enabling policies
• Create entities to • Test and validate • Introduce • Create ways to • Create baseline
develop and scale local brokerage commercial securitize SME data
Strategies
products for models models for SME portfolios
• Fund new
profitable SME services (e.g.,
• Demonstrate that thinking on SMEs
financing accntg, audit,
equity can produce
payroll, etc)
• Fund experiments profitable
that leverage info investments
networks
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