Businesses need money to grow and our focus is in sub-Saharan Africa where increasingly, development experts are seeing private sector job growth as the key to the continent’s future.

Most discussion about access-to-capital centers on increasing the availability of debt.  ”More loans to more businesses” is the mantra. We believe this a partial answer at best, access to debt is necessary but insufficient for business growth.

Our experience in sub-Saharan Africa is that businesses are under-capitalized.  Most are “businesses of one” with a solo entrepreneur at their heart.   The local business environments they operate in, though improving, remain somewhat chaotic and idiosyncratic and many businesses succeed by being opportunistic within narrow customer bases.

In these scenarios, balance sheets whipsaw, with less-capitalized businesses the most unstable.   Interest rates are in the 30% neighborhood for most business loans, making stability a prerequisite to lenders.  Conclusion?  Businesses need to add investment capital.

Milken writes “there is no optimum capital structure — X percent equity and Y percent debt — that can be applied to different organizations, or to the same corporation at different points of time. Just as you can’t make real money by putting a dollar bill on a copying machine, you can’t successfully copy the financing technique that once worked for a particular company and transfer it to another time or another company.That’s why I have always said that finance is a continuum with infinite variations and hybrids. It takes deep understanding of a company, its environment, and the financing tools available to build sustainable growth that will reward shareholders and create jobs.”

An entrepreneur’s own resources only go so far and friends and family can only be turned to so many times. Growth requires fuel from outside money, but where from? If this money comes from outside a country’s borders (denominated in foreign currency) this introduces new risks — exchange rate risks — that can pose real dangers to balance sheets. Better is local money. It is there – wealthy people live in every African country but few invest in businesses. They invest in land, in real estate, and they offshore much of their wealth in foreign banks.

We are thinking about how to encourage angel investors in sub-Saharan countries to put their money to work locally, taking equity positions for a percentage of a business.

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