A persistent lack of equity in the small and medium enterprise (SME) sector — also referred to as the ‘SME equity gap’ or ‘SME access-to-finance gap’ — is the most pressing issue in the Central and Eastern Europe (CEE). The region is critically lacking the right level and type of financial resources: bank financing is typically unavailable to the region’s SMEs and only 35% of European resources for social enterprises (SE) are spent in CEE. Venture philanthropy investment level in the CEE region is 65 times lower than in Western Europe while SE and impact intermediaries source more than 75% of their budgets from donors, a form of financing that often excludes early-stage financing. All this stifles the growth of the region’s key sectors and serves as a major barrier to proliferation of region’s startups and scaling of the its SMEs in the key digital economy sectors.
Steering the regional economies towards the digital frontier requires new sources of intelligent capital and patient financing for the region’s small and medium enterprises (SME) and social enterprises (SE) in its impact arena. Funding opportunities for the startups in most of the CEE region are very limited, and in many areas altogether non-existent. In more developed ecosystems, public funding serves to bridge the gap, but with the CEE countries’ fiscal constraints and policies this approach has so far had little or no meaningful impact. This lack of equity for seed- and early-stage financing is especially detrimental for the development of startups in the region and affects their survival rate.
The region’s SME equity gap needs to be urgently addressed and a source of patient capital provided to the key digital transformation sectors’ innovative SMEs and SEs whose products and services respond to the needs of their communities or resolve complex societal challenges.
New venture and impact intermediaries in the CEE region should be developed and launched to offer early-stage intelligent capital and patient financing for the region’s SMEs and SEs. New financial instruments are required to provide guarantees, debt and equity, and to reduce transactional costs of investing into the SME sector.
The region’s ability to reach the digital frontier depends on navigating and transitioning towards new models of production and innovation. This requires intelligent financing and structural support from regional, national and EU stakeholders.
A continued European contribution should include making all its existing instruments, funds, facilities, programs and its toolbox accessible to all countries in the CEE region, regardless of their EU membership status.
The region’s governments should contribute by developing programs to enable regional guarantee facilities, promote debt and equity investments and co-investments, and to enable deployment of early-stage venture and impact investment funds.
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MIF Ventures is an impact-focused investment firm whose goal is to combine top-tier environmental, social, and financial returns. Manages MIF II Impact Venture Fund that provides intelligent capital to impact-driven SMEs and social enterprises to help them accelerate their product roadmap, scale globally and improve targeting social issues to deliver better outcomes.
This story has been developed with Mozaik Foundation.