Summary - Please click on links for more details

Poor people in developing countries overwhelmingly turn to the private sector for their vital services. They buy health, education, finance and services from small and medium enterprises. Many of these enterprises have strong social ideals ('SMSEs' - Small and Medium Social Enterprises).

Yet, since SMSEs receive no external support now, they are not reaching their potential. SMSEs would benefit from both investment (loans, capital investment, consolidation funds and risk reduction funds) and business development funding (for training, entrepreneur development or subsidies). The right combination of investment and support can lead to rapid growth and may catalyse a step change in the provision of social services, creating more efficient mechanisms which learn and improve by themselves, as well as generating jobs. Working with SMSEs is a good strategy for social investors, foundations and donor agencies.

But investors and funders need to overcome two major obstacles. First, they must learn to predict which SMSEs will be successful, which is difficult since the market is complex. Secondly, they must innovate their business model to reduce high transaction costs.

The linked document investigates these issues and proposes solutions. It also gives a number of project ideas for investors and grant funders, drawing upon detailed investigation of SMSEs in a town in Sri Lanka. It should be useful for anyone supporting social enterprises or social services in developing countries. Please pass on the link to anyone who may be interested.

The document shows that, to be a success, agencies should:

build-up expertise in a sector and invest in experiments
innovate to differentiate from local investors and lenders
work with local banks and networks to reduce transaction costs
combine investment with business development funding, investors and funders should work together
plan to scale up - the demand and potential impact is very large

This document can be read as a text document, or you can use the hyperlinks to jump to issues of particular interest.