In this post, we highlight an interview of Siemens Stiftung’s newest report “How Digital Solutions May Enhance Social Financing” with Huseyin R Demirhisar, CEO, Co-founder and Managing Partner of the BiD Network.
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.
Siemens Stiftung: And there is a big gap in this regard. So maybe you can tell what you do at the BiD Network and how you help enterprises get investment ready, and how you help investors as well.
Huseyin: Our job begins with sourcing impactful and promising enterprises. Let’s say that we receive 100 deals, after a quick scan we eliminate a significant amount and come down to 60. Then, we sign a non-disclosure agreement ensuring data confidentiality. This helps us collect their data in confidence and do the first analyses on the existing data. Out of these 60, only 25 pass our key requirements. After that, we do a quick investment-readiness scan and identify the technical assistance needs for the selected enterprises. Then, we check whether they are interesting for our investment network and we try to focus on the ones where we feel that we can bridge the financing gap quicker to avoid frustrating experiences for both sides. Finally, we sign the contracts with approximately only 15 out of those 100 companies in the funnel and we begin to work with them to bridge those gaps identified during the investment-readiness scan. We prepare their investment documentation, and this is a process of transforming their raw data into meaningful information required for financing. Once they are investor ready, we enable them to access a tailor-made list of investors. We also spend quite some time training them on how to pitch themselves and articulate their business in a more effective way. Finally, we also support in building the entrepreneurial ecosystem in the geographies we operate and, many times, we also connect entrepreneurs with partners and other service providers depending on the gaps that they have to fill in attracting funding. All of these activities reduce the investor’s risks and transactional costs significantly and create a mutually-beneficial outcome.
Siemens Stiftung: What about matchmaking platforms? Where do you see limitations there? Some existing solutions seem to work well, some not so much.
Huseyin: Most of those platforms work over one in-vestment instrument. There are platforms for debt products only, or others that focus on donations, grant-making or equity only. There are few that offer different models but then there are also limitations in terms of how much can I trust a platform and the data uploaded there. If a platform is not supported by strong offline support services like what we are doing, I doubt that it will achieve its long-term objectives. Secondly, there are jurisdictional issues limiting standardization of legal investment requirements.
Siemens Stiftung: Coming back to your first point concerning the diversity in the market. Do you think that the market is too fragmented and that this is an obstacle for platforms to gain traction?
Huseyin: Yes, that’s one of the reasons. The other is that most are not catching up with new technologies like blockchain, and coin technologies, for example. Technology is moving fast, so to believe that the investment space and the matchmaking space will not be affected by that is quite naive I find.
Siemens Stiftung: Thank you for the interview, Huseyin!