Small businesses are characterised by productivity deficiencies which hinder growth and limit profitability and incomes. In addition, they struggle to access the finance they need. Their lack of collateral is able assets and weak or mixed financial performance make them too high risk for traditional financial service providers such as commercial banks. Their returns are too low to attract investors. And, whilst micro-finance institutions tend to lend to them (their primary clients being subsistence micro-enterprises), the loan amounts are below what is required, the interest rates are high, terms short and inflexible, plus there is no provision of the crucial aspect of technical and managerial support. Arguably, the technical and managerial support, in the form of ‘simple’ business practices like accounting, staff management, marketing, etc. are even more important than access to finance.
Balloon Ventures is currently targeting formalising SGBs with 5-20 employees and monthly revenues of USD 3-10K in ‘bread and butter’ industries that have proven business models. Balloon Ventures believes that these businesses, if provided the right mix of business development support, can, potentially, grow to fill the missing middle of SMEs and become the engines of good job creation. This assumes significance since such informal enterprises form the vast majority of the enterprise-base and the overwhelming employment source in developing countries.
Balloon’s innovation is to deliver intensive, long-term, in situ, best practice management support(up to 500 hours over 3 years to each beneficiary business) along with flexible long-term credit. For comparison, competing providers offer less-intensive, mostly off-site, group-based and much shorter-term training, for either non-employer subsistence micro-enterprises or for larger dynamic enterprises. Businesses pay for this service with Balloon’s goal to make the model financially sustainable and scalable. Balloon’s thesis is that this combination of investment plus business support makes a currently unviable segment, viable. GIF is supporting testing of this mode land codification of learning such that other players in the market may take up a form of Balloon’s model.
GIF’s funds are being used to:
To test market viability of a credit plus management support model for SGBs, as well as document and share lessons learnt. Also, to enable Balloon Ventures to meet a target number of investments, expected return on investment and its business plan assumptions. The company’s service offering should additionally contribute to productivity improvements for beneficiary businesses.
To date Balloon Ventures has provided 25 businesses with intensive, tailored capacity building support on management best practices, alongside flexible loans, driving growth and creating jobs. The vast majority of beneficiary businesses are in the agri (value add), manufacturing, hospitality and education sectors. The average annual turnover is 110K USD. The best performers saw a doubling in revenue during the first six months of 2020.
A number of Balloon’s beneficiary businesses have been impacted by the COVID-19 pandemic. As a result, the majority of gains in terms of jobs created over the previous year were lost. Fortunately though, none of the businesses stopped operating. In response, Balloon Ventures has put in place supportive measures such as payment holidays. Balloon is currently back to investing at a pre-COVID rate of two or more investments per country per month.
Chang-Tai Hsieh and Peter Klenow, The life cycle of Plants in India and Mexico, Quarterly Journal of Economics, Vol 129, August 2014, Issue 3 (http://klenow.com/HsiehKlenow_LifeCycle.pdf)
The Missing Middles: Segmenting Enterprises to Better Understand Their Financial Needs, 2018, Collaborative for Frontier Finance [https://www.frontierfinance.org/missing-middles]