Africa’s economic powerhouse is facing a funding gap
Africa is powered by small- and medium-sized enterprises (SMEs). The continent’s 125 million formal and informal SMEs account for 90% of Africa’s private sector businesses. In many countries, they produce 80% of consumer goods and generate up to 80% of employment. With numbers like these, you’d think that SMEs would be seen as Africa’s greatest economic asset. But long trapped between microfinance and commercial banking, many of these businesses fall into a USD 331 billion financing gap that prevents them from scaling and realising their true potential.
Closing this funding gap is not only essential for enabling Africa’s economic transformation, but it will also empower the continent to better utilise one of its crucial assets: a fast-growing population. Africa’s working-age population will grow from 883 million in 2024 to 1.6 billion in 2050 – around a quarter of the global workforce. Creating meaningful employment for these workers requires millions of new jobs. Governments and large corporations simply will not be able to absorb this need; SMEs are Africa’s linchpin for creating large-scale employment at speed, creating new opportunities for inclusive growth.
Impact investing as a bridge to success
These SMEs and mid-stage companies are crucial for building a more inclusive economy, but they won’t thrive unless we can collectively overcome the growth capital funding gap – the systemic barriers to financing that are standing in the way of them achieving their ambitions.
At Goodwell, the growth capital funding gap is our sweet spot. For decades, our Africa-focused funds have aimed squarely at these types of companies, working to shrink that funding gap. Our role in the investment space has long been that of first mover, looking to locally led companies and daring to see the potential where traditional investors were only willing to see risk. In doing so, Goodwell helps to galvanise support for growth capital funding, proving business cases and acting as a catalyst for other investors to get on board.
Origen Fresh is an example of one such story. A Kenyan agro-processing business in our uMunthu II portfolio, they buy lower-grade avocados from smallholder farmers and turn them into high-quality avocado oil, reducing post-harvest waste and increasing farmer income. The company’s model expands opportunities for women and youth across East Africa by linking smallholders to processing and markets. Origen Fresh could have fallen into the growth capital funding gap, but their evolution beyond early startup constraints was spurred on thanks to strategic operational upgrades and further funding catalysed by Goodwell’s investment.
Initially operating at small scale with a focus on buying and processing lower-grade avocados, the company attracted impact investors to enable its expansion from crude oil production to refined avocado oil, unlocking higher value markets and better margins. This transition expanded Origen’s customer base and strengthened their financial viability, helping the business to grow its processing and farmer networks. With the support of like-minded investors, Origen has soared over the funding gap, gained momentum, and crossed the threshold to become of interest to commercial investors, like the local Kenyan banks.
Initially called East Africa Foods, this Tanzanian firm was created by Elia Timotheo, an entrepreneur well-versed in local agricultural challenges. Stunned by the vast amount of food lost between the field and the final consumer, he set out to improve the agricultural supply chain to increase the quantity and quality of fresh produce that made it to market. Long before other investors understood this company’s potential, Goodwell provided the initial influx of capital in 2020 to enable them to make significant supply chain improvements, such as introducing refrigerated transport and cutting out middlemen to increase offtake prices for farmers.
Now trading under the name EA Foods, the company recently expanded to Kenya, works in grains as well as fresh produce, and has a range of storage facilities to further enhance food quality and accessibility.
How to close the growth capital funding gap
These portfolio companies are just two examples of how Goodwell has enabled inclusive businesses to overcome systemic funding gaps over the last two decades. However, until now, we’ve primarily done so using private equity, which is not the only – or even perhaps the best way – to address these fast growing companies’ diverse funding needs.
Blended finance, for example, has proven quite effective. It strategically combines concessional capital from development institutions with commercial funding, de-risking investments for commercial players whilst making capital more affordable for SMEs. Credit guarantee schemes are also gaining traction; they partially cover lender losses (typically 50-75%), making it viable for banks to lend to companies otherwise considered too risky. For businesses with variable cash flows, revenue-based financing may seem more attractive, providing capital in exchange for a fixed percentage of revenue until an agreed cap is reached. Equipment financing and leasing is also a particularly effective approach for manufacturing, agriculture, and transport ventures, supporting businesses in acquiring machinery which can then be used as financial collateral.
Based on Goodwell’s experiences working with businesses consistently excluded from the current banking system, we know there is a real impetus to offer growing businesses a wider range of financial instruments, customised to their specific situations.
A new fund to bridge the financing gap and drive green transformation
Goodwell’s next fund will specifically set out to offer a diverse range of instruments to impactful mid-stage East and Southern African businesses, from convertible loans and revenue-based financing to redeemable preference shares, loans with equity kickers, and subordinated loans. Our new Growth Capital Fund (GCF) will target high-potential businesses making direct contributions to Africa’s sustainable, green transformation. To do so, this fund will focus on sectors with the greatest potential for intersectional impact.
Goodwell’s mission is to provide high-quality basic goods and services to underserved communities, and we believe that offering tailored support to local businesses is the most effective way to do so. Of course, impact investors can’t address the growth capital finance gap alone. We need to be supported and bolstered in our endeavours by governments, policy makers, commercial lenders, and the wider investment community.
The stage has been set, and the players are in the wings: Africa’s story is no longer the tragedy once portrayed by external coverage, but that of an innovative, and motivated continent. Local entrepreneurs and high-potential businesses stand ready to deliver decent livelihoods, climate solutions, and a more inclusive society. All that’s needed is the right support, and it’s up to us as investors to play our part.
