Country & City Insights

Endeavor Insight: In emerging market finance, cash is king

Endeavor Insight releases an interactive financial dashboard here.

In most of the world, debt is winning—by a large margin. A recent Endeavor Insight study, surveying the overall financing landscape across emerging market economies reveals a predominance of debt financing over equity. This trend is especially true across Endeavor countries in Latin America and in the MENA region. The US and Israel, considered “benchmark” countries in terms of entrepreneurship, stand out with the most amount of equity as a portion of financing at 2% and 3% respectively. While the importance of debt capital cannot be underestimated, it doesn’t necessarily drive the creation of an entrepreneurial ecosystem. Nascent ventures are rarely credit worthy and seldom have sufficient cash inflow to be able to service debt.

Clearly, to jumpstart the engine of entrepreneurship and create a thriving ecosystem of game-changing, high-impact entrepreneurs, there is a pressing need for smart capital and equity financing, in particular, to bridge the immense financing gap for early-stage ventures. With that said, though, equity financing is crucial for all periods of a company’s life cycle.

At the early stage, cash strapped entrepreneurs, oftentimes bootstrap from friends and family and max out credit card limits to attempt to meet their capital needs. These methods are rarely enough. It is this capital gap which high net worth individuals, or individuals with substantial liquid assets can help to fill. By taking the risk of investing in new and innovative ventures, these individuals are offering the first significant influxes of capital for many entrepreneurs. Indeed, this early injection of capital has the power to single-handedly change the trajectory of these ventures and the ecosystems of which they are a part. But, more equity investors must also be coupled with greater, more dynamic investment. Venture capital funds must grow their investment as the venture develops. Moreover, a robust partnership between fund and entrepreneur has the potential to imbue entrepreneurs with the credibility necessary to negotiate better terms from institutional lenders in later stages.

At the growth stage, as ventures are seeking to scale by expanding their capacity and market reach, growth equity can play a crucial role as an alternative to bank loans. This option is especially important when entrepreneurs are operating in overleveraged environments characterized by high interest rates.

At the late stage, when a venture is able to sustain itself and generate income, equity through public offerings casts a wider net for financing, and enhances a venture’s visibility, and accelerates its ability to become a significant player in the ecosystem.

The US and Israel, often considered “the gold standard” for entrepreneurship, show the best balance of equity by stage. Nevertheless, even in these countries, as a proportion of overall financing, equity constitutes very little. All of this begs the question of policymakers: could providing incentives to potential equity providers be the key to unleashing the power of high-impact entrepreneurship?

To learn more about access to financing in emerging markets, visit Endeavor’s Financing Dashboard.

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