A venture capital ecosystem for Jamaica that works

Therese Turner Jones,  GUEST COLUMNIST

Investment finance in Jamaica has generally lacked a structured framework or a systematic approach. Many small firms have accessed growth capital either through personal funds or from friends and family.

Angel investors have always been active, but they are not organised, and funding through this source has been limited depending on the level of access entrepreneurs have to these investors, which in turn tends to be a function of their connections and ability to network.

Private equity funds have financed many medium to large enterprises, particularly in the energy, tourism, financial services and manufacturing sectors, but formal venture capital programmes aimed at the small and medium-sized enterprises (SME) sector have been limited.

SMEs have been widely recognised as being primary drivers of job creation and economic growth. Yet SMEs and early stage companies in Jamaica face growth constraints due in part to limited access to finance. Commercial loans have traditionally been the predominant source of financing for most SMEs.

Many SMEs have insufficient collateral, or are already highly leveraged, or find the loan terms inappropriate for their business needs. Furthermore, commercial banks' aversion to risk, reflected in stringent credit policies and banking regulations, has further exacerbated the low supply of credit to SMEs.

For many small enterprises with viable business models, alternative financing solutions such as micro-finance do not present a viable option, due to the high interest rates, short tenure and the small size of such loans.

Equity financing

Equity financing, which provides 'patient' long-term capital, is a viable financing option for many dynamic, high-potential SMEs. However, the successful deve-lopment of a venture capital (VC) industry in Jamaica needs the existence of a vibrant ecosystem and a continuous financing chain that caters to companies at various stages of development. While the 'science' behind building attractive ecosystems for venture capital is becoming increasingly codified, the challenges involved in creating this enabling environment require initiatives tailored to local conditions.

Early attempts at venture capital programmes - such as the Jamaica Venture Fund and the Caribbean Investment Fund - had limited success due to the lack of many of the key ecosystem elements necessary to sustain these initiatives.

The Jamaica VC industry has also remained underdeveloped because capital that should have been available for entrepreneurial investment instead found higher returns and lower risk in government debt. Market conditions are now more favourable for the long-term development of a local VC industry, given the reduction in interest rates and other supporting macroeconomic policy shifts. The Government is also fully supportive of the process.

A venture capital ecosystem that promotes the development of dynamic SMEs includes the following characteristics: first, a supportive legal and regulatory environment for businesses with well-defined norms for venture capital investment.

Second, a critical mass of investors familiar with this investment class as well as angel investors willing to provide financing to entrepreneurs during the early stages of financing, before they are attractive to VC funds, thereby ensuring the continuity of the financing chain.

Third, networking and connec-tivity among entrepreneurship agents, such as angel networks, incubators, business schools, VC funds and other entrepreneurship brokers; fourth, a critical mass of SMEs with growth potential and good corporate governance standards, and fifth, adequate exit options such as the capital market and strategic buyers such as the JSE Junior Market.

In partnership with the Development Bank of Jamaica (DBJ), the Multilateral Investment Fund (MIF) of the Inter-American Development Bank is providing financing for the first steps in the development of the VC ecosystem in Jamaica.

Multilateral Investment Fund

MIF resources are financing a market study to identify gaps, challenges and opportunities in Jamaica's financial and regulatory landscape, and a proposal to systematically address these challenges. This will form the basis for the development of a strategic plan for the implementation of a venture capital fund.

MIF is also supporting a communication campaign to build awareness and knowledge amongst key stakeholders who will become pioneers in the emergence of Jamaica VC industry.

DBJ's VC conference is the major event in this campaign. Equally important, the MIF is leveraging its experience gained in supporting the development of the venture capital industry in Brazil and Uruguay, as well as promoting knowledge-sharing between Brazil and Jamaica to assist DBJ in the roll-out of the VC programme.

Therese Turner Jones is the Jamaica country representative for the Inter-American Development Bank.