(Photo by iStock/RichLegg)
The COVID-19 crisis has caused unprecedented loss and disruption around the world. Among its many victims are a critically important creator of inclusive economic growth and high-quality jobs in low-income nations: small and growing businesses (SGBs).
Roughly 40 percent of these emerging-market businesses—a growth-oriented subset of the larger micro, small and medium-sized enterprises (MSMEs)—face potential failure in the next six months due to the crisis, according to data collected from members of the Aspen Network of Development Entrepreneurs (ANDE). Beyond the distressing stories of individual businesses shutting down, the broader economic consequences would be devastating: Recent evidence from the World Bank estimates that high-growth firms account for about half of net new jobs in emerging markets.
While it is impossible to ensure every SGB in emerging markets survives this crisis, many will needlessly fail without access to the mentorship, networks, and other tools and services provided by international development organizations, which include capacity development organizations (CDOs) like technical assistance providers, incubators, accelerators, entrepreneur networks, and researchers.
Evidence shows that CDOs can be particularly effective at supporting SGBs amid a crisis. During Nicaragua’s 2018-2019 social conflict, for example, small businesses participating in TechnoServe’s Impulsa tu Empresa program were nearly twice as likely to stay in business as non-participants across the country, and a forthcoming academic study on the program shows that participants estimate they would have experienced an additional 26 percent decline in revenue if not for the program.
Yet these CDOs themselves are also at risk of failing due to COVID-19, just when SGBs need them the most. Nearly one-quarter of the CDOs that are members of ANDE reported a “high” or “existential” organizational risk due to COVID-19, and more than one-third have already downsized, with undoubtedly more layoffs to come. Part of their precarious financial position is due to funders. For the past 10 years, they have pushed CDOs to shift their focus away from grant funding and toward fee-for-service models. These struggles are particularly acute for CDOs based in emerging markets, who often lack access to government aid or broader social safety nets.
If these CDOs fail, entrepreneurs will be left without support that is critical to the survival of their businesses, from Gauteng to Myanmar. With the COVID-19 crisis threatening to break already strained SGBs and CDOs, funders should rethink what a CDO financing model looks like and consider three categories of action:
Flexible Funds | Many grants to CDOs include significant restrictions on how the funding can be used. However, the most urgent financial needs of CDOs today are operational concerns like payroll and rent. Many funders have recognized this; for example, 40 major US-based and international foundations have committed to more flexible funding to help grantee partners meet emergency needs prompted by the COVID-19 crisis, and Inside Philanthropy is proposing the same approach. Funders that have already provided restricted grants to CDOs should consider making those grants unrestricted so each organization can determine how best to maintain liquidity and adapt their programming to the crisis.
Urgent Funds | Many CDOs have developed business models that minimize the use of grant funding, putting them in particular peril given the inability of SGBs to pay for services. It has created a critical need for new money to cover urgent short-term needs—primarily helping CDOs to avoid laying off experienced and knowledgeable staff members while allowing them to continue to support SGBs. Financial support must be of sufficient size to slow CDO staff hemorrhages and be quickly approved and disbursed. Impact monitoring should also track metrics that organizations are already generating, rather than requiring new ones, so to avoid slowing the process down or diverting attention away from the needs of the CDOs.
New Programs | CDOs also need funds to create new programs that help SGBs navigate both the immediate crisis and post-crisis market conditions and opportunities. In the short term, this might mean new programming to help SGBs diversify their funding sources, provide emotional support to staff, manage cash, and access funding related to COVID-19. Further down the road, SGBs will need help to adjust to disrupted or permanently altered supply chains, collect and make sense of information on changing markets, change products or services to fit new customer segments, and repurpose existing assets to take advantage of new opportunities.
Initial Responses
The good news is that many SGB-support organizations, particularly CDOs, have quickly adjusted their programming and developed new services to help SGBs respond to the COVID-19 crisis. More than 80 percent of ANDE members have already changed their existing programs, and more than 70 percent have developed new ones. The African Management Initiative (AMI), for example, has launched a suite of programs through their COVID-19 Business Survival Bootcamp; programs range from cash-flow forecasting to meditation sessions focused on people's well-being. In the future, AMI plans to provide tools for leading in a crisis.
Other programmatic changes CDOs have made include moving content and programming online and leveraging existing web platforms. Impact Hub in Mexico, for example, has turned its extensive support programming into a series of virtual events. MicroMentor is using its existing online mentorship platform to connect entrepreneurs to mentors with experience guiding entrepreneurs through crises. However, it is not feasible or effective for many organizations to simply shift their programming online, especially in the short term. Roshan Paul of the Amani Institute, an organization that builds entrepreneurship skills around the world, recently spoke to ANDE members about the limitations of going digital: "Our impact comes from the quality of our high-touch, in-person experiences. We can move some aspects of this online, but in the end there are certain crucial connections that are extremely difficult to replicate in a webinar-type setting.”
The responses to COVID-19 from CDOs such as AMI and Impact Hub are helping SGBs make the tough changes for navigating the current crisis and adapting to the new world that emerges upon its end. But these CDOs' survival is far from guaranteed without additional financial support. We encourage funders to move quickly and creatively so this core pillar of the SGB ecosystem can focus on what is does best: developing, deploying, and scaling programming to strengthen the resilience and growth of SGBs, the most important economic sector in emerging markets.
The research for this article was supported by the Mastercard Center for Inclusive Growth as part of the Aspen Partnership for an Inclusive Economy.
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Read more stories by Matthew Guttentag, Mark Pedersen, Kusi Hornberger & Alekhya Sure.