Financing Innovative SMEs in the Caribbean

A major constraint for economic growth in the Caribbean is the lack of innovative enterprises which are likely to be key job creators. Access to adequate finance to launch, develop, and grow is a principal challenge for small Caribbean businesses. Few financing options are available for start-ups and early-stage enterprises, as commercial bank loans are difficult to secure due to collateral requirements, and venture capital and private equity activity is virtually non-existent.

Angel investing – which involves individuals investing their own capital and time in start-ups and early-stage businesses – has the potential to become an effective form of capital for innovative small businesses in the Caribbean.

InfoDev’s Early Stage Financing initiative under the Entrepreneurship Program for Innovation in the Caribbean (EPIC) aims to develop this form of investing as a viable source of financing for innovative enterprises. EPIC is active in CARICOM countries, not including Haiti.

While informal angel investing has been present in the Caribbean (there are groups in the Dominican Republic and Puerto Rico), organized angel investing is a new phenomenon in CARICOM and offers advantages for both investors and entrepreneurs. Structured groups allow investors to benefit from the collective wisdom, experience, and professional networks of their fellow investors while enabling members to share the due diligence workload and to spread financial risk across more investments.

For entrepreneurs, angel groups can be an accessible, transparent and valuable form of capital – and can be one of the only sources of available capital.

Although the initiative is in its early stages, progress has shown that there is a willingness by local individuals in the Caribbean to invest, and that there is significant demand from entrepreneurs. As of June 2017, five angel groups have launched in the Caribbean with support from EPIC. Since their forming, over 50 entrepreneurs have pitched to investors, more than 20 companies have been taken forward for due diligence and investors have closed investments in eight companies totaling approximately US$1 million.

These angel investors are aware that businesses need more than just capital to grow, and that as successful, influential leaders within their business communities they bring much more than their checkbooks to the table, providing mentoring and networking opportunities to entrepreneurs.

infoDev’s LINK-Caribbean Program aims to encourage and enable entrepreneurs to raise private investment.  It is a US$1.6 million project, funded by the government of Canada and delivered through a Caribbean-based partnering agency with a pan-Caribbean reach and strong private and public networks. It will be a focal point for early-stage investing in the region, and will serve as the coordinator for regional angel activity that includes collaboration between all angel groups, including those in non-CARICOM countries.

While the progress of the first angel groups in the Caribbean is encouraging, the organized angel investing community remains at a nascent stage, susceptible to local market conditions. Among the main challenges are the need for higher-quality deals, a limited precedent for private equity investing, investor engagement education for entrepreneurs, and entrepreneur/investor trust.

This story is adapted from the publication What's Happening in the Missing Middle? Lessons from Financing SMEs which looks at different approaches to the SME financing, exploring policies and frameworks to support SMEs, analyzing innovations in SME finance and describing some examples. These lessons provide SME practitioners with guidance for their work with the SME sector, and also inform policymakers about possible interventions and approaches.