A growing number of nonprofit organizations are working to help small and growing businesses in developing countries expand as a way to improve the standard of living for local residents—a topic that will be discussed here at the Skoll World Forum on Social Entrepreneurship.
One of the challenges in that work is that the needs of the business owners and of investors don’t always line up. But a type of financing in which investors receive a percentage of the business’s revenue has the potential to help solve that, says Randall T. Kempner, executive director of the Aspen Network of Development Entrepreneurs, in Washington.
“In most emerging markets, company owners are very reticent about giving up ownership stake—51 percent ownership stake—to anybody,” he says. “In places with uncertain governments, the radius of trust is rather small. Typically it's family and family only.”
From the investors’ perspective, the ways in which they can realize a return on their investment are more limited than in developed countries, says Mr. Kempner. Often the countries don’t have stock markets, so the company can’t hold go public, and there usually aren’t a lot of potential buyers – either corporate or individual.
What’s more likely to happen, he says, is that the company’s management will buy back the investors’ stake in the company at a predetermined price.
Royalty-based financing is promising because it makes deals more attractive to both investors and company owners, says Mr. Kempner.
For investors “it gives you a payment stream that allows you to get a return, but you're also not having to wait five or 10 years to do it,” he says. “So it serves the investors' need in that way, while maintaining the owner's equity on the investee side.”
But Mr. Kempner cautions that financing is not the only challenge that businesses in developing countries face.
“Most of the businesses that we're trying to support are not in a place where you or I or an investor would want to invest in them tomorrow,” he says. “They need some additional support to build their management team and to build their strategy.”
Since the Aspen Network of Development Entrepreneurs, which includes international-development organizations, foundations, and social-venture funds, was founded two years ago, it has grown to 115 members. The organization has released a new report detailing its members' work.
Photo courtesy of the Aspen Network of Development Entrepreneurs