Opinion

Youth and finance: What is needed to help start-ups access investment?

Telly Valerie Onu

Unlocking access to finance for youth agripreneurs in the ACP

There are many opportunities and ways for youth to get into agriculture or offer agri-related products and services to solve problems along the agricultural value chain. However, in starting an agribusiness or agro-related enterprise, young people are often missing the necessary business skills and business support. In addition, one of the biggest challenges for young agripreneurs in the ACP is the difficulty in accessing finance. Lending to start-ups entails significant costs due to their high risk rating, especially in the agricultural sector, causing financial institutions to shy away from investing in this area, which leaves a significant gap. Regardless of the business idea, entrepreneurs need to be able to validate their business model and ‘de-risk’ their enterprise in order to increase their chances of obtaining finance.

Across the ACP, we have lots of agribusiness start-ups, and a growing number of Agtech (agricultural technology) start-ups, which have been supported to develop their ideas through incubation or accelerator programmes. However, the reason they are called start-ups is because they have yet to learn how to monetise, validate and test their business model. One of the top reasons that start-ups fail is due to weak, unproven business models, so we need to teach young entrepreneurs how to innovate and tweak their existing business models to become more sustainable.

Training start-ups to become investor ready

Financial literacy and education are key to developing sustainable business models. Start-ups are often too busy trying to develop and grow their business to put financial systems in place and keep good records. This is really critical because, at some point, they will need to access finance from investors or traditional financial institutions and these potential financiers need to have historical records of the company’s financial transactions. Programmes therefore need to help start-ups become ‘investor ready,’ by supporting them to develop business models, and ensure they have market traction through testing and validation.

In addition, these programmes can support entreprenuers by encouraging them to document their journey and providing them with the necessary tools to produce records, which can be supplied to potential investors. There are a lot more programmes that are now being created specifically focused on ‘investment readiness’ or ‘finance readiness’ to help start-ups understand how investors think, how financiers operate and how to better articulate their value proposition.

Filling the gap in financial education

In the ACP ecosystems, a major gap still exists when it comes to support for investor readiness, unlike in Europe or North America where there are a plethora of such programmes. But one can also argue that there are not enough private investors or business angels (people using personal wealth to support start-ups) that sufficiently understand agriculture, particularly the AgTech sector, to invest within this ecosystem.

Nevertheless, we are just beginning to see an increase in foreign direct investors coming to look for new investment deals to diversify their portfolios and increase return potential in the ecosystem. While this is a good opportunity for start-ups, we – in the financial support sector – have a responsibility to ensure that our entrepreneurs are market ready and in a position to pitch a fundable venture to investors, as well as negotiate terms to close an investment. Additionally, start-ups need to be viewed as a new asset class that generate returns worth investing in to unlock more wealth building opportunities.

Fostering an enabling environment

Policymakers also have a role to play in creating a facilitative environment for start-ups to thrive. Start-ups can generate significant socio-economic impact through job creation and technological advancement, not to mention having a direct impact on the GDP of countries. It is therefore in the interest of governments to engage and invest in youth entrepreneurship. Some enabling policies that can be encouraged include: simplifying the business registration process; subsiding tariff rates for start-ups wishing to acquire equipment and goods; and the specific allocation of government budgets for building the business capacity of youth. Creating an enabling environment for innovation will also support the emergence of alternative funding opportunities that facilitate start-ups’ access to finance.

For international donors, capacity building is a very resource intensive process and, while I am all for projects, sometimes a 3-year project just ticks a box and doesn’t allow for true capacity building and knowledge transfer across the whole ecosystem. So I think that international donor organisations have potential to do more in terms of better coordinating with other stakeholders and actors within these ecosystems to unlock financing and financial support mechanisms which can contribute to longer term start-up programmes.

The Technical Centre for Agricultural and Rural Cooperation (CTA) is a joint international institution of the African, Caribbean and Pacific (ACP) Group of States and the European Union (EU). CTA operates under the framework of the Cotonou Agreement and is funded by the EU.