Underdeveloped finance

I have an interest in microfinance (that’s a long term goal for IncMind: to serve even the smallest businesses). There was some interesting data in a recent report by CGAP.

Specifically, they say that in East Asia 27% of people have loans from friends or family, and only 9% of people have loans from a ‘formal financial institution’ (i.e., bank).

There are good parallels with the market for early stage business financing. There are a tiny number of formal institutions who specialize in financing early stage businesses, i.e., venture capitalists (banks do it indirectly through credit cards and mortgages).

What happens in these underdeveloped markets? People turn to friends or family for finance. So if you’re looking for early stage finance:

  • your first place to turn should be friends and family
  • second should be high net worth individuals and family offices
  • only a tiny minority will get financed by venture capitalists

After all, early stage financing is a very underdeveloped market. We should expect it to look and act the same way as other such markets.