IDG fulfills a very specific need; supporting social micro- small- & medium-sized enterprises (MSMEs) cover their risk capital needs. These are often very urgent, real but poorly addressed needs of companies that lie above the microfinance threshold but do not have the institutional strength of large corporates. Filling this Gap – the Missing Middle, or Mesofinance – is IDG’s Our client enterprises are important from two perspectives.

Secondly, social MSMEs are a provider of sustainable and scalable social good. By identifying profitable ways to provide livelihoodservices across education, health, finance, energy or other needs, they are ensuring its continued delivery. By making clients out of recipients, they also empower citizens to demand quality and appropriate products and services, and thereby may markthe beginning of further revenue-generating activities. This convergence of social and business brings efficiencies to the delivery of social services in which they may not have previously existed.

To spot these market opportunities is hard enough. Often they are veiled in centuries of subsidies and tied to the provision of other public goods. Taking advantage of these opportunities is thus often fraught with even more difficulties. Infrastructure, HR, corruption, policy instability, and inflation feature prominently amongst these. Financing routinely tops the list as one of the most serious challenges these companies face. But why is equity the answer to this problem? Naturally debt has an important role to play in financing, but presents two crucial problems. Firstly, banks often require equity or some sort of collateral to even start negotiating with an enterprise. Secondly, the meager cashflow of a start-ups may easily be crippled by routine installment payments.

Thus equity is a crucial part of the answer to the financing question. But why is it so difficult to obtain? The answer lies in the nature of the companies themselves. For one, the size makes them difficult to find, often expensive to examine due to insufficient management practices and also means that potential pay-backs can be relatively low. They are, on the whole, also very risky. Even Venture Capitalists, who deal in bigger deal-sizes, estimate that only 6 in 10 investments make any money at all. As reward for the risk, investors expect adjusted reward, which could be as high as 60% for private equity placements in an Indian context, for instance. Meeting these expectations is difficult in any setting, but in a social context where price may have an adverse effect on impact it is even more challenging.

Few players exist who are willing to bear such costs and risks at the lower reward. Philanthropic institutions are first among these. Several foundations have experimented with this way to do business, among them Ford Foundation and Shell Foundation. More recently institutions like Acumen Fund have started using philanthropic capital to actually make investments in promising enterprises with high social impact. More recently still, for-profit venture funds directed at the social small cap space, such as Aavishkaar, Good Cap, or Bamoboo Finance, have been established to channel funds to entrepreneurs. IDG exists to support these organisations to amplify their impact while enabling the individuals who hold the patient capital to begin with, to make life-changing equity investments.

To find out how IDG can help go to LINK.

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