1. THE FINANCING OF SME IN THE ICT/ICTE SECTOR Findings from an infoDev Study Roberto Zavatta

2. INTRODUCTION Objective and Nature  Overall objective: assess the existence of a financing gap for SME in ICT & ICTE sector and identify possible support measures  Review factors on both supply and demand sides of the SME financing market ECONOMISTI ASSOCIATI

3. INTRODUCTION Sector Coverage  ICT activities (software development, IT- related consulting, interconnectivity services, production, sale & servicing of IT equipment)  ICT-enabled activities (Business Process Outsourcing – BPO, remote testing, design and R&D activities) ECONOMISTI ASSOCIATI

4. INTRODUCTION Geographical Coverage  Latin America (Argentina, Brazil, Peru, Dominican Republic)  Sub Saharan Africa (Kenya, Senegal)  Asia (India, Philippines)  North Africa (Morocco)  Eastern Europe (Ukraine) ECONOMISTI ASSOCIATI

5. INTRODUCTION Widely different situations in terms of  Size of ICT/ICTE sector (India over US$ 20 billion; Kenya at most US$ 50 million)  Sector composition (software development vs. providers of interconnectivity vs. call centers)  Market Orientation and Business models (outsourcing vs. own product development; local vs. international market) ECONOMISTI ASSOCIATI

6. KEY FINDINGS Banks reluctant to lend: the usual SME financing problems, but more severe..  High risk profile: innovative character and high perceived rate of failure  Informational asymmetries: banks scarcely understand what ICT firm are doing  Lack of tangible collateral (and whatever is tangible becomes quickly obsolete or has no resale value) ECONOMISTI ASSOCIATI

7. KEY FINDINGS Equity financing is available at a varying degrees across countries  Seed Financing: available in India and Latin America (one small fund in Morocco)  Specialized Funds: only in larger countries and for investments beyond a certain size  Generalist Funds: sometimes invest, but don’t get involved in small deals (where “small” varies across country) ECONOMISTI ASSOCIATI

8. Is There a Financing Gap?  In general no absolute scarcity of funds but a mismatch between supply and demand, especially for initiatives in the US$ 100 – 1,000,000 range  Constraints also on the demand side (with “wrong” expectations, inability to interact with financiers, unwillingness to accept realistic terms & conditions for equity financing) KEY FINDINGS ECONOMISTI ASSOCIATI

9. KEY FINDINGS Financing Gap Amount Time Early Stage Development First Expansion Second Expansion Problem areas: banks do not lend and money required too small for VC Mixed picture: limited seed financing but sometimes amounts compatible with existing sources No major constraint: banks start lending and VC are willing to invest ECONOMISTI ASSOCIATI

10. KEY FINDINGS Qualification - Problems comparatively less severe in certain ICTE activities (e.g. call centers)  No jumps in financing needs (more “linear” relationship)  Expansion programs typically based on contracts already on hand  Telecoms and suppliers of IT equipment are ready to help with supplier credit ECONOMISTI ASSOCIATI

11. Attitude of generalist venture capitalists is generally positive towards ICT sector, but smaller deals are deterred by “transaction costs” ISSUES AND RECOMMENDATIONS ECONOMISTI ASSOCIATI  Proposed a “TA facility” to cover preparation & monitoring costs incurred by fund managers for smaller deals (say, below US$ 1 million)  Tactical approach, trying to make the most out of what already exists

12. In any event, in several countries the equity culture remains undeveloped, and efforts must be devoted to expand bank lending ISSUES AND RECOMMENDATIONS ECONOMISTI ASSOCIATI  Proposals for the establishment of credit guarantee funds (Morocco, Ukraine), ideally with a “mutual guarantee” element  Enhance bankers’ understanding of ICT economic & financial fundamentals (e.g. centrale risques)

13. When dealing with financial institutions high tech SME are not much better than their “brick and mortar” counterparts ISSUES AND RECOMMENDATIONS ECONOMISTI ASSOCIATI  Capacity building for intermediary organizations (ICT sector associations, business incubators, generalist associations)  More than just “business planning” and “application filling”: real coaching is needed

14. THANK YOU FOR YOUR ATTENTION Roberto Zavatta Economisti Associati rzavatta@economistiassociati.com ECONOMISTI ASSOCIATI