Small and growing businesses (SGBs) in emerging markets face a US$930b financing gap, which challenges their ability to grow and sustain their business model. This report uses three variables to identify and distinguish four SGB ‘families’: High-growth Ventures (HGVs); Niche Ventures (NVs); Dynamic Enterprises (DEs); and Livelihood-sustaining Enterprises (LSEs).

High-Growth ventures pursue disruptive business models and target large addressable markets. They play a significant role in job creation. Furthermore, they are a major driver in creating new markets and ways of doing business that advance an economy’s productivity and competitiveness.

HGVs require staged “risk capital” to aid in their growth journey. During maturity, they seek large sums of growth capital from private equity investors and will need access to a sophisticated range of financial products from mainstream financial providers.

Niche Ventures create innovative products and services that target niche markets. NVs provide indirect support for the creation and growth of local supply chains, resulting in income generation and job creation.

NVs often need long-term patient capital to support an innovative product or service development. Since niche markets are targeted, they face higher transaction costs, hence there is a critical need for working capital financing.

To overcome the gap in the market, they may obtain their funding from local sources such as commercial banks, angel investors, and foundations, since these sources are closely embedded in the local markets. An increase in innovative funding mechanisms will bring in capital from consumers who value niche innovations.

Dynamic Enterprises operate in established ‘bread and butter’ industries and rely on previously proven business models. They are a large source and driver of unskilled and semi-skilled job creation due to their size and the labour-intensive nature of their work.

Mature DEs require a stable source of short-term working capital to keep up with large, complex operations. They may require capital expenditure (CapEx) financing to reach medium to long-term growth targets.

To bridge the gap, the number of SGB-focused financial service providers that offer flexible debt and mezzanine instruments needs to be increased. Self-liquidating and alternative financing structures such as evergreen funds will be appropriate sources of financing.

Livelihood-sustaining Enterprises are small, family-run businesses. They are a primary source of basic services and jobs in vulnerable populations, given the absence of a formal private sector in developing economies.

LSEs require basic financing to cover the costs incurred to operate at a basic level i.e., payroll and space rental. Capital needs are limited but may include machinery and equipment.

To bridge the gap, microfinance institutions have become instrumental in providing short-term, microcredit working capital facilities. Community development finance institutions and credit unions are also major providers of working capital.

Integration of technology enables lending models that will drive the cost of providing small loans and working capital driving down.

This segmentation framework provides a roadmap for galvanising new action, and can help advance efforts already underway to help these entrepreneurs find the financial and technical support they need to transform their communities and societies.

1. Missing middle enterprises are drivers of healthy economies; the constraints on their growth have broad implications for societies as a whole. Closing the $930 billion SGB financing gap is critical to unleashing the power of entrepreneurs to contribute to more robust, equitable, and resilient economies.
2. An inconsistency in defining small and growing businesses (SGBs) by stakeholders is one reason for the financing gap. This results in difficulties arising in advancing the conversations between financial service providers, enterprises, donors, Limited Partners, and field-building organisations.
3. The primary cause for the financing gap is the difficulty that financial service providers have when assessing the risk-return profile of SGBs, a consequence of these enterprises’ lack of track record, inability to have a strong financial performance, and the scarcity of information on operations and management.
4. High-Growth Ventures aim for disruptive business models and often target large markets. These enterprises display high growth and scale potential. Such ventures are often led by ambitious entrepreneurs with a high-risk tolerance.
5. Niche Ventures target niche markets and customer segments with their products and services. These ventures have a high but steady growth with limited upside. They are often led by individuals who are highly motivated to grow whilst having a desire to meaningfully impact certain markets.
6. Dynamic Enterprises operate in established “bread and butter” industries such as trading, manufacturing, retail, and services, and deploy a proven business model. These ventures often grow at low to moderate rates; however, the growth is steady. The owners are usually risk-aversive due to their impact on community livelihoods, and they aim to grow beyond their local markets into regional ones.
7. Livelihood-sustaining Enterprises are small, opportunity-driven, family-run businesses. These enterprises often have a low but steady growth rate. Owners of such entities are focused on providing sustainable income and livelihoods for their families and employees. They are low-risk takers and are content with the security and predictability of their business models.
8. The segmentation project has revealed not only how difficult it is to understand the diverse financing needs of enterprises operating in the missing middle, and how best to help them, but also how essential this knowledge is to building more sustainable and vibrant enterprise ecosystems across frontier markets.
9. While the SGB financing gap is formidable and persistent, there is encouraging progress on a range of innovative solutions that meet the needs of diverse entrepreneurs across emerging and frontier markets.
10. This segmentation framework provides a roadmap for the finance industry to help these entrepreneurs find the financial and technical support they need to innovate and contribute to more equitable communities, and resilient economies.