VC4Africa applies for the G-20 SME Finance Challenge on Ashoka Changemakers

Today we submitted our application for the G-20 SME Finance Challenge on Ashoka Changemakers. This is an important effort looking for the best models worldwide that catalyze finance for small and medium enterprises (SMEs). And where else could we need this more than in Africa? Given it fits the VC4Africa vision perfectly we had to apply. Please see our application and feel free to leave thoughts, ideas, questions or criticisms. We know that this is a long process and we have to learn and adapt along the way. You can contact me at ben@vc4africa.com.

Summary:

VC4Africa.com is a platform for crowdsourcing the due diligence process. Also for sourcing resources (financial and otherwise) for entrepreneurs and their projects. We use PlanCruncher.com to boil business ideas down to one page, members actively discuss projects and score them, our algorithm ranks the best projects in a dynamic Digg.com like feed so we can accurately connect them to investors.

Name Your solution

Crowdsourcing the due diligence of African Ventures

Describe Your Solution

VC4Africa.com is a platform for crowdsourcing the due diligence process. Also for sourcing resources (financial and otherwise) for entrepreneurs and their projects. We use PlanCruncher.com to boil business ideas down to one page, members actively discuss projects and score them, our algorithm ranks the best projects in a dynamic Digg.com like feed so we can accurately connect them to investors.

Region(s) your solution focuses on:

Africa.

Range of turnover in your target firms, in USD

Less than $1 Million.

Number of employees in your target firms

Fewer than 5, 5-24.

Specify the size, average and range of expected loans or investments in each target firm

MICRO VENTURE capital (MVC) financing is more effective than micro credit financing (MCF) in improving developing economies. According to a recent research report by Goldman,Sachs & Co, MVC financing has a 10 per cent higher return, a five per cent lower default rate, 10% less overhead. The cost structure for MVCs is flexible while the cost structure for micro credit banks is fixed.

We are looking to establish a revolving fund that will invest seed capital in tranches. This allows us to continually assess progress and boil down a strong portfolio. This ‘fail fast’ approach sees: 50 investments at 5K — > to 25 investments for 10K — > to 10 investments for 15K. At this stage we look to connect the invested company to the private sector and re-invest any profits into new entrepreneurs.

What makes your innovative solution unique?

Due diligence is one of the limiting factors for those interested in investing in Africa. It simply costs too much to find genuine entrepreneurs with a solid business idea and plan. As a result, most existing funds seek larger deals and better margins. At the same time, MicroCredit is limited in its ability to support high growth businesses and leaves most entrepreneurs with potential standing on the sideline.

VC4Africa works to leverage the power of the crowd, the idea that anyone anywhere in the world should be able to positively contribute to the development of African businesses in some meaningful way. We essentially lower the barrier to entry and successfully engage thousands and eventually millions of people in a process that celebrates Africa’s potential. We also believe that crowdsourcing intelligence generates better results while facilitating invaluable interaction and knowledge exchange.

We make use of PlanCruncher.com to create a standard one-page summary of a business plan for a start-up company that is looking for external investment. Entrepreneurs do this by choosing icons that represent some of the standard answers that a business plan must provide. We integrate these one page ideas with aggregated content from social networks like Linkedin, Facebook and Twitter to measure the depth and commitment to the business. The summary of information allows members to engage the entrepreneur in meaningful dialogue, asking questions, exchanging knowledge, making connections and scoring the project in the process. Each user develops a reputation. Our algorithm aggregates the sites activity and qualifies the input that is needed to rank the projects per country, stage of investment and sector. The output is a dynamic Digg.com style feed that sees the best projects rise to the top of their respective field. We then actively work to connect the best ranked projects with capital. Progress is monitored and tracked by the community needed to reach additional rounds

How does your proposed innovation leverage public intervention in catalyzing private SME finance?

Many entrepreneurs have great ideas and solid business plans. That said, most private capital remains risk averse. In unlocking Africa’s investment potential its important we get the ball rolling and start producing more success stories. Case studies that exemplify the opportunities and potential, but also serve as a road map for others. More importantly, VC4Africa works to establish a pipeline of interesting business opportunities and make them accessible to an international network that might be able to assist them in some meaningful way at whatever stage of development they might be.

For this purpose VC4Africa seeks to establish a revolving fund and would invite public sector support. The monies that go into the fund are used to kick start the investment process for the entrepreneurs with the best and most sound business ideas as determined by the community. We are looking to establish a revolving fund that will invest seed capital in tranches. This allows the VC4Africa community to continually assess progress and boil down a strong portfolio. This ‘fail fast’ approach sees 50 investments at 5K — > to 25 investments for 10K — > to 10 investments for 15K.

Our fail-fast approach ensures the evolution of a viable pipeline ready for private sector investment. We aim to get many ventures going with the best businesses making it through to the final round. Through this process the investments have developed enough of a track record, have shown their merit and progress, to successfully connect them with the private sector in a position to add the additional network, expertise and growth capital needed to successfully transition them into the SME market. Any profits made by the fund are re-invested into new entrepreneurs with the objective of becoming sustainable.

In this way we work to lower barriers to entry by facilitating the due diligence process, using the web to facilitate interaction and establish a track record of interactions and progress that accurately illustrates the businesses potential.

These are the steps we need to take if we are going to successfully engage private sector capital. At the same time the crowdsourcing approach leverages a world wide network, serves as a learning platform that creates awareness, knowledge and experience needed to engage new people in the process of supporting and building viable African companies.

Companies that do not make it to the final round still benefit from this process. They connect themselves with an international network and can learn from other entrepreneurs, their process and experience, along the way. Some ventures will take longer to establish themselves and can still make use of this program at later stages when they are ready. Simply opening up the discussion, making these processes transparent and accessible, ensures a win win.

What barriers does your proposed solution address?

Asymmetry of information – The platform is open source and the information is available to all members. We make use of the Creative Commons license needed to essentially unlock the knowledge and resources previously locked away for an elite few. Crowdsourcing information further builds a collective knowledge needed to make the subject accessible to everyone.

Lack of SME access to skills / knowledge / markets – The crowdsourcing approach taps into the idea that anyone anywhere in the world can contribute in some meaningful way i.e. offering their skills, knowledge, network or capital. Connecting an entrepreneur to a global network increased the chances they find the right partner or connection needed to grow their business. Also connecting entrepreneurs with other entrepreneurs facilitates learning and knowledge exchange. Our VC4Africa meetups ensures that this process is not only online but also offline. We have had meetups in Kigali, Kampala, Nairobi (2x), Johannesburg, Lagos, Tunis, San Francisco, Atlanta, Washington DC, New York, London and Amsterdam.

Unavailability of financial products tailored to SME needs – The missing middle remains elusive to most existing capital. Crowdsourcing solutions is one strategy for effectively closing this gap. A revolving fund supported with public finance helps to initiate this process and build a viable SME pipeline for the private sector.

Lack of institutional capacity of financial intermediaries – We crowdsource knowledge from across the world and in the interest to support this process on a peer to peer level. This approach serves to aggregate knowledge and experience.

High transaction costs for financial intermediaries to serve SMEs – the Due diligence process is expensive and hinders the investment process. Opening it up and crowdsourcing the process reduces the cost and we believe generates better results.

Provide empirical evidence of your proposed solution’s success/impact at present

– We have 10.000 members consisting of entrepreneurs and investors dedicated to building businesses on the continent

– As VC4Africa we believe it is important we meet ‘offline’ as we do ‘online.’ For 9 months we have been using the BarCamp model (an international network of user generated conferences – open, participatory workshop/events, whose content is provided by participants) to organize our very own series of VC4Africa Meetups. Already we have hosted VC4Africa meetups in Johannesburg, Abuja, Kampala, Nairobi (2x), Kigali, London, Washington DC, San Francisco, New York, Atlanta, Amsterdam and Tunis. We like this open format because it means that anyone can participate.

– We have 23 country incubators where members come together to discuss specific projects and work through business development opportunities.

– We receive hundreds of ideas from entrepreneurs and have connecting thousands of people in the process.

How many firms do you expect to reach?

In the short term we are looking to invest in 200 firms (four rounds). On this initial foundation we believe we can present an accurate investment plan. In the long term we believe we can help thousands if not millions of businesses. We think we can do this because we open the investment system and process to the community. This allows us to seriously scale our work in ways otherwise not possible.

What is the volume of private SME finance you aim to catalyze?

Our first milestone is to facilitate 2.6 million in investment (four rounds) via the revolving fund. There will be secondary effects as entrepreneurs and investors continue to connect on their own terms. Beyond the numbers, and more importantly to the promotion of more investment in the continent, we are looking to generate success stories. We aim to generate examples that serve to inspire others.

What time frame will be required to reach these targets?

We run on a two year plan that would see four rounds of investment. On this foundation we would present an investment plan that would allow us to grow and scale the project to sustainability.

What would prevent your solution from being a success?

Platforms of this sort can be attractive for spam/scammers. We are designing an algorithm that will see each user being independently ranked on the quality of their total input. This process will be used to effectively identify users that should be removed from the system and give users within the community enough information about other members to know how to accurately and productively engage them. Technical strategies aside, building on our strong and dedicated member base is the best way to regulate the community. We have instituted an officers program in which our most active members have stepped forward as volunteers to moderate and manage various aspects of the community. We seek to continually empower members to contribute in this process and take full ownership for the platform.

Describe the social impact of your innovation. Please include both numbers and stories as evidence of this impact


Altoje Computer World

A 30 minute Boda Boda ride to the outskirts of Kampala, towards the east on the main road to Jinja, you end up at Banda Station. There at the intersection of a marketplace and two dirt roads I call Tony. Before I can turn around I see the young man come up to greet me. He is wearing brown leather shoes, slacks and a striped button up shirt. He has a big smile and looks forward to showing me his shop several buildings down the street. I can see that it has several stories, each containing a hallway lined by small business shops on either side. On the ground floor, at the end of the hallway on the right, you find Kampala’s newest software company Altoje Computer World.

The AL stands for Alex, TO stands for Tony and the JE stands for Joseph. I ask why there is an E at the end as opposed to an O. They tell me its because they wanted to include Jesus in the name of the company. So JE stands for Joseph and Jesus. The company was started by five friends who got to know each other during their time at the Makerere University. They finished their studies in July 2008 and graduated from the Makerere University in January 2009. Never able to find a job they decided to try and start their own business. Alex explains, ‘We were searching for jobs but jobs for Uganda is difficult. Why can’t we create our own? We knew it would take years and years to find a job so lets start a company, provide some services and earn a living.’ The jobs that are available aren’t attractive for someone passionate about software. He goes on to say, ‘You could do data entry for 100,000 to 200,000 shilling a month. But this is not the point. We want to build our own business and have a vision now.’ They make sure the shop is always open from 7 am to 7 pm six days a week.

Altoje Computer World was the first investment made by VC4Africa. We are pleased to see the company is making progress and recently launched a new website. http://altoje.ning.com/.

VC4Africa aims to connect innovative entrepreneurs (and their ideas) with access to knowledge, markets and capital. The focus is on entrepreneurs with innovative projects that apply new technology, new media, the web, mobile and green energy. We receive hundreds of e-mails from entrepreneurs looking to develop their business, simply cannot handle each case, and are driven by the need to connect them. Social media is the tool.

List all the funding sources that are required for the sustainability of this solution

The founders of VC4Africa (Ben White, Bill Zimmerman and Bart Lacroix) have mobilized 50.000 in their own startup capital. These initial funds are being used to develop a new website for the VC4Africa community, now +/- 10.000 members. We expect to be live with this new platform by September 2010. Additional capital is needed to grow and scale our activities.

Second to core funding we are looking to source capital that can be invested in the entrepreneurs with the best ideas as determined by the community. Here we seek 2.6 million needed to establish a revolving fund where any profits are re-invested in new entrepreneurs.

Demonstrate how your proposed solution has the capacity to graduate from dependence on public finance. What is the time frame?

As VC4Africa develops we are introducing revenue generating models that will push us into sustainability. Initially, we are collecting profiles of investors i.e. a detailed brief on their required investment. We actively link entrepreneurs and their business projects to matched investor profiles. For each successful match made we ask for 1.5% from the investor and 1.5% from the entrepreneur. We also have content deals and event deals in place where we receive a commission on each member that takes advantage of these value added services. We run on a two year plan and reach sustainability in 2012.

Demonstrate how your proposed solution will survive a potential loss of its largest private funding source

The initial funding is already secured so this is not an issue we worry about. VC4Africa started as a passion and a hobby. To this extent it will always exist and serve its purpose of connecting entrepreneurs and investors, a process where we are already adding value. Our interest in securing additional support essentially allows us to do more of the same.

The VC4Africa officers program was established in the interest to engage the most active and dedicated members in the process of managing the community. Any member can apply to become part of this revolving program and it ensures the members keep ownership of the project. If for some reason the founders were unable to keep VC4Africa running there are enough dedicated members to keep the platform running.

Please tell us what kind of partnerships, if any, could be critical to the greater success and sustainability of your innovation

We are looking to establish partnerships in the following areas:

1) Content – Information on investing in Africa is limited. Most of it costs a considerable amount of money meaning only a few people and organizations have access. We seek to unlock this information and make it publicly available via the creative commons license. Especially in so far that it concerns entrepreneurs.

2) Expertise – Many of the entrepreneurs in our network have great ideas or businesses that are well on their way. However, in growing and scaling their business they need access to expertise, mentorship and guidance. Organizations and individuals are needed to support entrepreneurs through the business planning process.

3) Capital – The entrepreneurs with the best ideas are deserving of startup/growth funds. At the same time their propositions bring risk. We seek capital that can be used to get the best entrepreneurs past the first few hurdles they need to overcome if they are going to be able to secure additional private funding.

4) Network – We seek partnerships with networks on the ground. Points of contact that can serve as an important and viable interface. Currently we engage country officers.

Are there non-financial issues that could threaten the sustainability of your proposed solution?

Online networks focused on investment often attract the wrong kind of people. It is important we maintain our efforts to mitigate any spam or scamming activities. In the new site we are building a membership ranking program where each user will build a reputation based on the quality of their total input. This system will effectively create distance between users adding value and individuals who might have alternative motives. This process mitigates any unwanted activity and helps members monitor their own engagement. At the same time, we believe the best way of dealing with challenges like this is to keep an active and engaged community empowered to do their own due diligence and policing. To this extent we have implemented an officers program of dedicated individuals active in managing the quality of the site, her members and content. Finally, we continually work to raise awareness of these issues and remind both entrepreneurs and investors of the risks inherent to the investment process. This includes background information, interviews and featured discussions. In the end investing in African projects comes with risk and it is our task to inform our members to the best of our ability about the strategies and tactics they can apply in making sound business decisions.

Please tell us if your proposed solution aims to scale up through a high growth sector, expand immediately to multiple sectors, and/or scale up geographically

We seek to leverage the power of the Internet which gives us immediate international access. At the same time our focus is on entrepreneurs building businesses in Sub-Sahara Africa. Via social networks we are quickly growing our communities in each country and around specific types of business. We do give an accent to new high growth sectors like Internet, mobile and green technologies.

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About zia505

The world is changing right before my eyes. Sometimes I don't know how I will ever keep up. There are so many ideas floating around on this internet. If only I had the means to collect them....

One response to “VC4Africa applies for the G-20 SME Finance Challenge on Ashoka Changemakers”

  1. Manny Zegeye says :

    Which specific report are you referring to when you say ” MVC financing has a 10 per cent higher return, a five per cent lower default rate, 10% less overhead”?

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