Funding is not a Cure-All When it Comes to Scaling Refugee Enterprises
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Why Funding is not Cure-All When it Comes to Scaling Refugee Enterprises
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By Bathsheba Asati, Research Associate, Botho Emerging Markets Group
May 29, 2022
African start-ups raised over $4.6 billion in investments in 2021, with some reports indicating that an average of $1million was raised every two hours. These figures represent an increase of over 200% from 2020. However, despite this growth, inequalities in the distribution of investments continue to abound, with founders from marginalised communities, such as forcibly displaced people, struggling to secure financing for their businesses.
Africa is home to 36 million forcibly displaced people, representing over 45% of the number of forcibly displaced individuals globally. Employment opportunities are very limited for most young Africans, as only 3 million jobs are created annually, yet more than 10 million people enter the job market each year. Therefore, for many forcibly displaced people, entrepreneurship is the only available option to create an income and regain self-reliance. Many stakeholders, including humanitarian, development, and donor organisations, have created dedicated funds for forcibly displaced communities. Still, entrepreneurs from forcibly displaced backgrounds struggle to grow and build sustainable businesses.
While increasing the amount of funding for refugee businesses is an important solution, other interventions are needed to ensure entrepreneurs from these backgrounds can build long-lasting and successful businesses. Specifically, there are three areas that refugee-focused organisations must address to effectively support refugee businesses: 1) Providing technical assistance, 2) Expanding the funding options offered, and 3) Advocating for an enabling ecosystem.
Providing technical assistance
Most of the funding for refugee-founded organisations targets formal businesses; yet, many refugees operate their businesses informally. Founders from refugee communities face challenges at multiple levels when it comes to registration and obtaining the required documentation to formalise their businesses. For instance, refugees in Kenya go through long and unpredictable processes to obtain their refugee identification before they can register their businesses.
To impact refugee entrepreneurs at scale, stakeholders must think beyond funding to offer technical assistance and operational support to these businesses. One area that requires immediate and urgent attention is in supporting unregistered and informal businesses to obtain the required documentation to formalise their entities. In addition to formalisation, many businesses also need advisory support to become investment-ready. This can include training on developing business plans, or on accounting and bookkeeping. By providing this kind of support, donors and humanitarian organisations will create a pipeline of refugee businesses with the structures and resources to absorb large amounts of funding, grow, and scale.
Expanding the size and types of funding
Reports show that the average African start-up seed round is about USD 1.5 million, with limited funding opportunities for businesses with ticket sizes below USD 1 million. Investors generally prefer larger ticket sizes, as this reduces administrative costs and leads to higher returns on investment. Unfortunately, most African start-ups do not have the capacity to absorb USD 1 million in their seed round; in refugee contexts, the situation is worse.
To address this issue, a few donor organisations have created smaller ticket sizes for refugee businesses. For instance, the IFC, as part of the Kakuma Kalobeyei Challenge Funds, provides a minimum grant of USD 15,000 to refugee enterprises and has recently funded forty businesses in Kenya. While increased funding for refugee enterprises is a welcome development, funders should explore structuring their grant financing options as part of a larger financing scheme that includes debt and equity options. Under such a structure and based on their performance, entrepreneurs can transition from relying wholly on grants to absorbing equity and debt financing. Access to debt and equity financing will enable these entrepreneurs to build a track record of success, which they can then use to raise funds from a diverse set of stakeholders, including the private sector.
Advocating for an enabling ecosystem
Even with technical assistance and expanded financing options, many refugee businesses are unable to grow because of the contexts within which they operate. The majority of refugees in developing countries live in areas with poor digital and physical infrastructure. Furthermore, 66% of refugees live in countries with limitations around freedom of movement, which makes it challenging to access markets and products outside their immediate settlements. This means that refugee entrepreneurs must rely on their host communities to access products and markets outside the camps and settlements, which in turn increases the cost of doing business. Finally, many host countries do not have clear or accessible policies that allow refugee entrepreneurs to register their businesses and obtain the full benefits of a formal business.
Operating under the restrictive conditions mentioned above will hinder the ability of businesses to enter new markets, build valuable partnerships, and grow to be profitable. It is, therefore, important that donors work with other stakeholders - including governments and the private sector - to create holistic solutions that address these ecosystem-level barriers to successful entrepreneurship for refugees. Given the limited available employment prospects, refugees will continue to turn to entrepreneurship as a key income-generating activity. To enable these entrepreneurs to achieve their full potential, refugee-focused actors must create comprehensive solutions that address the wide set of challenges that refugee businesses face. Doing this will enable refugee entrepreneurs to contribute positively to their communities through increased market activity, job creation, and generating revenues for national and county governments.
Bathsheba Asati is a Research Associate at Botho Emerging Markets Group