A Multi-Trillion-Dollar Opportunity
Only 15% of the 400 million micro, small and medium enterprises (MSMEs) in developing countries have access to credit. The unmet investment need exceeds $2.5 trillion, in part because physical bank branches are inaccessible, investable ventures have high search costs, and banks, investors, and business ventures do not trust one another.
Digital crowdsourced lending and investment platforms can match SMEs with small investors. In fact, one already exists: VC4Africa connects investors to pre-vetted, seed-stage African start-ups via a digital platform, lowering search costs and trust barriers. Start-ups gain exposure to investors from 159 countries as well as mentorship opportunities. The platform is particularly helpful for start-ups operating outside of Africa’s "Tier 1" cities like Nairobi and Lagos, which have much greater access to local venture capital. In 2014, VC4Africa’s startups received $26.9 million through the platform.
The other iterations of this model could show an SME’s credit history and performance on the platform, and then algorithmically segment its financing needs into bite-sized notes (e.g., $5-$5,000) to distribute to many individual investors. Cost of entry to the platform would need to be low and investors would benefit from diversification, increasing financial inclusivity for both lenders and borrowers. The practice fuses the age-old idea of peer lending with digital technology, making it possible to scale to thousands of users in months or even weeks.