Siemens Stiftung: Huseyin, do you see a funding gap when it comes to financing social entrepreneurs?
Huseyin: While global interest in impact investing has grown dramatically over the past several years, there is still a certain funding gap in the market and there are reasons for that. At the earliest stage, the risks are highest and that’s a very well-known fact. Second, small- to medium-sized enterprises are commonly perceived as having high financial risk due to high transaction costs. Due diligence on a company that is looking for USD $50,000 takes the same amount of time as due diligence on a company with a three-year track record. In many cases, it’s easier to conduct due diligence on a well-established company because they have the right management accounts, related information available, and you can also test their data against the market. Third, the key constraint related to accessing working capital financing for SME / SGBs are the terms of commercial financing, in such entrepreneurs lack the high collateralization and securitization required by financiers.
Fourth, there are challenges due to the geographical constraints. Institutional or individual investors are more willing to put money into social enterprises in the developed world. For example, in Germany, local entrepreneurs are usually able to raise funding because there is capital available due to a mature investment environment. Because angel investors in Africa are scarce and, if they exist, their priority is finding opportunities with potential for high returns and quick turnaround, it makes it even more difficult for African entrepreneurs to raise capital.
Siemens Stiftung: How do impact investors find their investees and how do social entrepreneurs find investment opportunities according to your experience?
Huseyin: Most of the entrepreneurs reach investors through personal contacts, references, in-vestment events and rarely by way of inter-net research. The most important success factors are good networks and having the business documentation ready, including a proper investment memorandum support-ed by clear financial projections and auditable historical data. The ones who have those three have an advantage to others regarding access to capital.