Investing in Youth Entrepreneurs: De-Risking a Risky Business
This post was written by Fiona Whitefield and was originally posted on Chemonics' blog, Connections.
Every year, the World Bank brings together youth entrepreneurs to share their projects and ideas at the World Bank Youth Summit. At this year’s gathering, one critical question was repeatedly discussed: What is the most important thing the World Bank Group should do to support young people? The youth entrepreneurs responded with a resounding consensus that, in comparison to their older counterparts, they lack access to the capital and investment opportunities that would help them scale their businesses.
While there are a variety of social and cultural factors at play, startups are inherently uncertain and therefore make for risky investments. Young entrepreneurs present an even greater risk to investors than their older counterparts, because young entrepreneurs often do not have the same experience, industry connections or major assets to provide as loan collateral — even if they possess the skills and motivation. However, entrepreneurs, and youth entrepreneurs in particular, drive economic progress through job creation, competition and innovation. As a development community, we need to continue to improve on how we engage youth entrepreneurs by building an inclusive system that supports them through both financial and non-financial means.
Youth Entrepreneurs Need Stepping Stones to Traditional Finance
An effective solution to bridge the gap between youth entrepreneurs and capital will need to reduce the risks associated with financing younger entrepreneurs and ensure that they have fair access to the capital and resources they need. To gain access to large amounts of capital, youth entrepreneurs must demonstrate that they can manage their businesses and generate returns on investments. Not every form of capital can be effective in supporting young borrowers, and it is important to provide options that don’t impose unnecessary financial burdens on youth. Instead of jumping to large sources of funding, entrepreneurs can work with small amounts of capital, which can come in various forms, to develop a track record of success.
Small grants and investments are examples of sources of funding that can enable entrepreneurs to launch their businesses. For instance, Fatuma Namatosi is one of the leading pumpkin producers in Uganda. Yet, Fatuma founded her company, Byeffe Foods Ltd., with just $140 in her pocket through a small grant from the Uganda Feed the Future Youth Leadership for Agriculture Activity. She was able to purchase equipment and gain the credibility necessary to establish partnerships with large customers and other farmers. The small amount of funding enabled Fatuma to scale Byeffe Foods to where it is today: earning $640,000 in annual revenue and employing 20 young adults with similar entrepreneurial spirits.
Another example of a financial solution to help entrepreneurs learn to effectively use capital is savings and credit groups, which provide both a small source of funding and a support network for entrepreneurs. If youth entrepreneurs can effectively use the funds to grow their businesses, they can apply the experiences and skills gained to generate support for additional funding. These savings and credit groups, as well as other options for entrepreneurs to gain access to small amounts of capital, can serve as stepping stones to institutions with larger lines of credit. The development community needs to diversify the funding options available to entrepreneurs and recognize the steps youth entrepreneurs need to take in order to build credibility.
Non-Financial Support Increases the Likelihood of Success
Non-financial support is necessary to ensure that entrepreneurs are building not just credibility in the eyes of lenders and investors but the skills that will help them ultimately grow and scale their businesses. Mentorship and educational support, in combination with access to capital, can be a tailored and effective way to provide entrepreneurs with the necessary skills and expertise to execute their business operations. Experts in the field can help entrepreneurs build technical skills, improve business operations and anticipate challenges.
One example of educational support is the USAID Moldova Competitiveness Project, which has partnered with ZIPHouse to provide training, mentorship and accelerator resources to startups working in Moldova’s fashion industry. Organizations such as ZIPHouse, while not directly providing capital, increase entrepreneurs’ likelihoods of success and their potential to provide returns on investments.
Building entrepreneurial abilities and resilience is not just about possessing expertise but also the soft and life skills necessary to help youth entrepreneurs pivot their ideas and adapt to new situations. In the very uncertain field of entrepreneurship, developing these skills is key for a founder to understand the risks surrounding his or her business and effectively mitigate them over time. Non-financial support for youth entrepreneurs should focus not just on supporting them in growing their businesses but in building the skills that will drive future development.
What Can the Development Community Do Now?
There are a variety of different solutions to help support youth entrepreneurs, and no one solution can be universally applicable. Yet, an important first step the development community can take is to push financial institutions to recognize non-traditional financial and non-financial support as ways of formally de-risking businesses, similarly to how they currently recognize guarantees and collateral. Recognizing that entrepreneurs need to take smaller steps to first build their credibility before taking on larger investments or loans, financial institutions and the development community need to play a hand in supporting youth entrepreneurs through the entire process of developing and scaling a business.
Most importantly, we need to continue to improve on how we bring youth entrepreneurs into the conversation so that we have the full picture of how investors, lenders and the international community can better support them in leading the enterprises that will build a better tomorrow.
Fiona Whitefield interned with Chemonics’ Economic Growth and Trade Practice.