The ‘missing middle’ funding gap - let’s act to solve it!

Melanie Hawken, founder & ceo, Lionesses of Africa

Talk to Africa’s high-growth potential women entrepreneurs about the ‘missing middle’ funding gap and they will tell you that it’s a reality - and a real barrier to growth. It’s a much talked about challenge that is in need of tangible action to find effective, impact-driven solutions. That’s why at Start-Up Night Africa in The Hague on 11 July 2023, I was privileged to host a panel discussion on this important topic with representatives from the finance community, government, and importantly, women entrepreneurs in growth mode from across the African continent.

My fellow panelists included Stephen Collett, Deputy Director General, International Cooperation, Ministry of Foreign Affairs; Melissa Basque-Roux, AG Coordinator, AFAWA, African Development Bank Group; Huib-Jan de Ruijter, Co-Chief Investment Officer, FMO - Dutch Entrepreneurial Development Bank; Chilufya Mutale, co-founder and ceo, Premier Credit in Zambia;  and Yvette Dickson-Tetteh, founder, Pure & Just Company in Ghana.

Our panel discussion got underway with the recognition that although Africa’s high-growth potential women entrepreneurs, such as those featured at Start-Up Night Africa, are open for business, open for investment, and open for collaboration, one big barrier stands in their way. Getting access to investment is still really challenging - as is getting access to new markets and partnerships, but particularly opening the doors to growth funding. Our discussion started by gaining the perspective and shared experiences of  two of the women entrepreneurs being showcased at the event, both of who are currently in business fundraising mode.

Yvette Dickson-Tetteh, founder of Pure & Just Company in Ghana, said: “One of the things that my company has really struggled with, and I think it's representative of the situation for a lot of companies, is this kind of ‘missing middle’. In the startup phase you can get a lot of grants maybe between $25,000 or $50,000, and then there's this massive jump suddenly to needing to ask for $1 million plus. We've really struggled with a way to bridge the gap between starting up as a business and then being able to really get the financing and the business to have some traction to keep growing.”

Speaking about her fundraising experiences and success to date, Yvette added: “We've actually been really fortunate this year to be awarded a grant through the Belgian partnership facility, which has been fantastic. It's a matching grant, so we do have to bring something to the table. But it's about €200,000. And for us, that's a really great ticket size because it allows us to scale up our processing. But at the same time, we still need to go and get some more funding. So there's opportunity, but it can take a while to find it.”

“One of the things that my company has really struggled with, and I think it's representative of the situation for a lot of companies, is this kind of ‘missing middle’. In the startup phase you can get a lot of grants maybe between $25,000 or $50,000, and then there's this massive jump suddenly to needing to ask for $1 million plus.”

Chilufya Mutale, co-founder and ceo of Premier Credit in Zambia, shared her fundraising experiences, although from a different perspective as a fintech business. She said: “The biggest challenge is in access to finance for us as Premier Credit. The process really takes a long time when it comes to raising funds and the people that are very willing to give you funds have very onerous conditions in terms of their cost of funding - it’s very, very high. And because we are a lender, that effectively becomes difficult for us to provide affordable financing to SMEs because of the high cost of the funds.”  Chilufya also gave her insights on the challenge of the ‘missing middle,’ adding:

“When we look at Development Finance Institutions, the preference traditionally has been to finance the commercial banks that then on-lend to you the SMEs. So that creates a big missing middle. And that big bridge has to be reduced by financing directly the SMEs that need the funding the most. It's been a challenge for us. We've been raising this series around for close to a year. We've only been able to secure a few term sheets and we're still really looking for development finance institutions that can provide affordable capital and debt.”

Providing a highly insightful perspective from AFAWA, African Development Bank Group on the subject of how to tackle the ‘missing middle’ funding gap, Melissa Basque-Roux said: “It’s not only woman SMEs facing this challenge, but SMEs in general are really struggling with the missing middle. It’s very difficult to say that we will be financing directly the woman SMEs. That's not a possibility. Our entry points are the financial institutions. So where we can intervene is really to work with them providing the right level of technical assistance, because in fact, when we think about access to finance, we should not think and speak about access to finance in a vacuum. Access to finance, of course, is an issue. But I think most importantly is the level of technical assistance we can provide to financing institutions so they can have products and services that are really tailored to better serve woman SMEs.” She added: “I believe when we think about change, when we think about impact, one of the low hanging fruits is about the technical assistance that can be provided to the financing institutions so they can think beyond the traditional instruments and we can help them develop the suitable products and services that can really help make a difference for the women SMEs themselves.”

“When we look at Development Finance Institutions, the preference traditionally has been to finance the commercial banks that then on-lend to you the SMEs. So that creates a big missing middle. And that big bridge has to be reduced by financing directly the SMEs that need the funding the most.”

Fellow panelist, Huib-Jan de Ruijter, Co-Chief Investment Officer at FMO - Dutch Entrepreneurial Development Bank, acknowledged the challenge of women entrepreneurs getting access to finance on the African continent and recognized the experiences and stories shared by the women entrepreneurs pitching their businesses at the event. He was asked if de-risking lending to women entrepreneurs is actually key to making funding more readily available and easier to access. He said: “There are things being done, and I think particularly the blended finance agenda is really helping. If I look at some of the experiences that we have had as FMO, we recognize we need to move earlier into this whole supply chain of finance. We consider that part of our progression model is to ultimately scale along with the entrepreneurs.”

Speaking about other initiatives to de-risk lending to women entrepreneurs, Huib-Jan added: “We're grateful for the support of the Dutch government, and for the support of the European Commission, for instance, for our Nasira program (Nasira is an innovative financial program that supports young, female, migrant and COVID-19 affected entrepreneurs in Sub-Saharan Africa and countries neighbouring Europe), which really helps banks to share some of the risk that they take. Often it is very much about the perceived risk because I think if you look at the real risk and the history and the data, then it is a fantastic investment. So how do we get those institutions to to realise that? Typically if we start working with them, share some of the risk, they can build some of the experience, get the data. I think that is a very important element in building that ecosystem to get the gender disaggregated data to really also understand much better what the risks are that are involved. So over time, they don't need that kind of protection anymore to be able to invest or lend themselves directly.”

Responding to the need to de-risk women-owned businesses, Yvette Dickson-Tetteh commented: “There really is this heavy burden of assumption about African businesses and women businesses, but especially about African businesses. There is this much bigger perceived risk than there actually might be in reality. So I think it's not all about necessarily money, although we want the money. I think it's important to really emphasize getting people to get real data about what the businesses are and to understand what the real trajectory of the businesses can be. Yes, there's still chance of  a risk, but I mean, that's literally how it works. But it may be much more profitable than people think.”

“Getting access to investment is still really challenging - as is getting access to new markets and partnerships, but particularly opening the doors to growth funding.”

Speaking about the importance of addressing the gender data gap relating to Africa’s women entrepreneurs, Melissa Basque-roux added: “I just want to echo all these points because again, in the absence of data, we only have opinion. And I think for us to be able to make the business case, especially when we go to the financial institutions…we need data.”

Providing his perspective on this important topic, Steven Collett, Deputy Director General, International Cooperation, Ministry of Foreign Affairs, said: “Yes, the missing middle is there. Let’s not deny it, let’s just face it. Let's also face that we, as financiers or donors or development partners, we invest a lot into SMEs. The Dutch policy is to invest about €400 million a year into SMEs, mostly in Africa, and especially to create a sustainable solution for this ‘missing middle’, especially for women and youth. So that's why we invest into AFAWA. We are one of the first investors.”

Our panel discussion ended with a call to action to the audience and the decision-makers in the room to pledge to be part of the solution. They were invited to proactively support Africa’s high-growth women entrepreneurs with much-needed access to finance and access to market opportunities. Lionesses of Africa is playing its part by proactively working to bridge the gender funding data gap through its research partnerships and by creating opportunities for Africa’s women entrepreneurs to raise their voices through data.